Why Allowing Pre-Dispute Arbitration Opt-Out Clauses Is Not Effective Consumer Protection

by Jeff Sovern 

One possible alternative to the Arbitration Fairness Act is an approach that permits consumers, when entering into contracts that contain pre-dispute arbitration clauses, to opt-out of arbitration before a dispute has arisen. This approach permits the illusion of consumer protection without the reality. Here are some reasons why: 

There's reason to think most consumers simply don't opt out in consumer transactions. For example, each year, financial institutions bombard consumers with privacy notices informing customers that they have the right to opt out of the sale of their financial information to others. Yet the available evidence suggests that very few consumers have acted to prevent the sale of information about their transactions. See Testimony of John C. Dugan, Partner at Covington and Burling on behalf of the Financial Services Coordinating Council, Before the U.S. Sen. Com. On Banking, Housing and Urban Affairs, Sept. 19, 2002 (“opt-out rates have generally been low, and in nearly all cases under 10 percent.”); W.A. Lee, Opt-Out Notices Give No One A Thrill, 166 Am. Banker 1 (July 10, 2001) (“5% opt-out rate . . . has been circulating as the unofficial industry figure . . . .”); America’s Community Bankers, Wash. Perspective (Supp. Dec. 3, 2001) ("ACB Survey") (60% of financial institutions report that less than one percent of customers opted out). 

Many consumers stay with the default, whatever that default is. As we wrote in our casebook: 

[S]ome evidence suggests that many consumers choose the course of least resistance. An unintentional experiment in automobile insurance in New Jersey and Pennsylvania illustrates the point. Pennsylvania policies provided that consumers could bring a certain claim, but offered them the choice of paying lower rates in exchange for foregoing the right to bring the claim. Approximately 75% decided to keep the right to sue. By contrast, New Jersey policies did not permit drivers to bring the claim, but offered them the right to do so if they paid higher rates. About 20% agreed to pay the higher rates. In other words, most motorists did not deviate from the default choice. Eric J. Johnson, John Hershey, Jacqueline Meszaros and Howard Kunreuther, Framing, Probability Distortions, and Insurance Decisions in CHOICES, VALUES, AND FRAMES 224-40 (D. Kahneman and A. Tversky, eds. 2000). 

The reasons for this tendency to stay with the default are unclear, and may vary in different contexts. My own belief is that one reason is that businesses increase consumer transaction costs in opting out; that is, they make it harder for consumers to opt out. One form this takes is to adopt strategies that reduce the likelihood that consumers even notice that their rights are at issue. For example, in Ting v. AT&T, 319 F.3d 1126( 9th Cir.), cert denied, 540 U.S. 811 (2003), (litigated by co-blogger Paul Bland), AT&T sent consumers a Customer Service Agreement (CSA) containing in bold text a disclaimer that service and billing would not change under the new CSA. The CSA also contained an arbitration clause. The court wrote: 

AT&T's market study concluded that most customers “would stop reading and discard the letter” after reading this disclaimer. AT&T did not change the substance of the letter as a result of its market research -- indeed, internal AT&T documents indicate that the letter was specifically intended to make customers less alert to the details of the CSA. 

In other contexts, we do not have such "smoking guns," but it sure looks like businesses have adopted similar strategies to make consumers overlook what's going on. Returning to the privacy opt-out example, the conclusion seems almost inescapable that financial institutions deliberately printed the opt-out notices in such a way as to reduce the likelihood that consumers would read them. As for how difficult the notices are to follow, see John Schwartz, Privacy Policy Notices are Called Too Common and Too Confusing, N. Y. Times, May 7, 2001 at A1; Mark Hochhauser, Lost in the Fine Print: Readability of Financial Privacy Notices (2001) (“Consumers will have difficulty reading and understanding the privacy notices . . . “); Rob Blackwell, FTC Unveils Stepped-Up Privacy Plan, Am. Banker, Oct. 5, 2001 at 3 (then-FTC Chair Timothy J. Muris calls privacy notices “barely comprehensible”); Mike Hatch, The Privatization of Big Brother: Protecting Sensitive Personal Information from Commercial Interests in the 21st Century, 27 Wm. Mitch L. Rev. 1457 (2001) (Minnesota Attorney General comments that “[t]he notices are dense and impenetrable.”); Confusing Privacy Notices Leave Consumers Exposed, USA Today, July 9, 2001 at 13A (“the instructions are so confusing, many [consumers] unwittingly threw them away”). ACB Survey, (“Of those institutions that reported receiving customer feedback, the majority indicated that their customers did not find the privacy policies useful.”). 

And here's what Julie Williams, the then-Acting Comptroller of the Currency, and someone not exactly known for favoring consumer interests in some other contexts, said about why financial institutions might wish to inflate the transaction costs consumers incur in opting out: 

[W]hen presented with the prospect of lessening burden and saving costs by providing a streamlined, short form privacy notice containing only certain key information – some in the industry seem to balk. Marketing departments get uneasy because simple and straightforward disclosure of a bank’s information sharing policies and an easy means for customers to opt out of that sharing might mean – that customers will actually understand those policies – and decide to opt out!   The tension here is that shorter, focused consumer disclosures can meaningfully reduce regulatory burden, but, if they are done well, they will also empower consumers to make some decisions that a particular bank may not like. 

Of course, maybe we can protect against that problem by requiring arbitration opt-outs to be clear and conspicuous. The problem with that approach is that the privacy notices I mention above are already required to be clear and conspicuous!   The Gramm-Leach-Bliley Act, 15 U.S.C. §§ 6801-6827, and its accompanying regulations, provide a detailed blueprint for increasing the visibility of privacy notices--and they haven't worked. The regulations require that the notices be “reasonably understandable and designed to call attention to the nature and significance of the information in the notice. 16 C.F.R. §313.3(b)(1). Those words are in turn broken down with examples. If detailed regulation hasn't worked in that context, why would we think opt outs would work in the arbitration context? 

Another reason to think arbitration opt outs won't work is the optimism heuristic. If people over-optimistically think they won't get into disputes with providers, they won't pay attention to contract terms, like arbitration opt outs, that govern those disputes. Yet, the evidence suggests that consumers are victimized by just such optimism. See David A. Armor & Shelley E. Taylor, When Predictions Fail: The Dilemma of Unrealistic Optimism, _{HEURISTICS AND BIASES: THE PSYCHOLOGY OF INTUITIVE JUDGMENT} 334, 334 (Thomas Gilovich et al. eds., 2002) (“One of the most robust findings in the psychology of prediction is that people’s predictions tend to be optimistically biased.”); Melvin Aron Eisenberg, The Emergence of Dynamic Contract Law, 88 _{CAL. L. REV.} 1743, 1782 (2000) (stating that contracting parties tend to be “unrealistically optimistic”); Christine Jolls, Behavioral Economics Analysis of Redistributive Legal Rules, 51 _{VAND. L. REV.} 1653, 1659 (1998) (“[P]eople are often unrealistically optimistic about the probability that bad things will happen to them. A vast number of studies support this conclusion.”); Neil D. Weinstein, Unrealistic Optimisim About Future Life Events, 39 _{J. PERSONALITY & SOC. PSYCHOL.} 806, 806, 818-19 (1980); see also Dale Griffin & Amos Tversky, The Weighing of Evidence and the Determinants of Confidence, in _{HEURISTICS AND BIASES: THE PSYCHOLOGY OF INTUITIVE JUDGMENT}, supra, at 230, 248 (“Although overconfidence is not universal, it is prevalent, often massive, and difficult to eliminate ....”); Hillman & Rachlinski, supra note 80, at 454 (“People intending to purchase a product likely will overstate their own ability to assess the reputation and good faith of the person or company with whom they are interacting.”); Dan N. Stone, Overconfidence in Initial Self-Efficacy Judgments: Effects on Decision Processes and Performance, 59 _{ORGANIZATIONAL BEHAV. & HUM. DECISION PROCESSES} 452, 453-54, 468 (1994) (citing studies that demonstrate consumer optimism). For examples of optimistic behavior, see Cass R. Sunstein, Hazardous Heuristics, 70 _{U. CHI. L. REV.} 751, 772-74 (2003) (reviewing _{THOMAS GILOVICH ET AL., HEURISTICS AND BIASES: THE PSYCHOLOGY OF INTUITIVE JUDGMENT} (2002)) (“With respect to most of the risks of life, people appear to be unrealistically optimistic.”). 

There's also the vividness heuristic, under which people pay more attention to "vivid" information--like the features of the product they just bought--than dull information, like contract terms. See _{RICHARD NISBETT & LEE ROSS, HUMAN INFERENCE: STRATEGIES AND SHORTCOMINGS OF SOCIAL JUDGMENT} 45 (1980) (explaining that people process and remember vivid information more than pallid information); Jonathan Shedler & Melvin Manis, Can the Availability Heuristic Explain Vividness Effects? 51 _{J. PERSONALITY & SOC. PSYCHOL.} 26, 35 (1986) (finding that vividness is correlated with recollection of facts); Marie G. Wilson, Gregory B. Northcroft & Margaret A. Neale, Information Competition and Vividness Effects in On-Line Judgments, 44 _{ORGANIZATIONAL BEHAV. & HUM. DECISION PROCESSES} 132, 137-38 (1989) (finding that jurors were more likely to use vivid information in making their decisions). Of course, that fits in with the goal of companies to prevent consumers from noticing their rights. 

I've written more about these issues, though not really in the context of arbitration, in Towards a New Model of Consumer Protection: The Problem of Inflated Transaction Costs, 47 Wm. & Mary Law Review 1635 (2006), Opting In, Opting Out, Or No Options at All: The Fight for Control of Personal Information, 74 Washington Law Review 1033 (1999), and in my forthcoming The Coase Theorem and the Power to Increase Transaction Costs, -- McGeorge Law Review -- (2009).

Comments

[Joe Consumer]

How about pushing for customer notification on a regular basis, such as when the notices are provided, on statements, and online, of their current option status? I've opted out of junk mail from American Express approximately 3 times (thrice by mail, thrice by phone), and yet they kept sending it to me for months, and they couldn't confirm that I'd been opted out of mail solicitations when I called to ask. After those 6 contacts, I logged in and found that at least AMEX provides the status online and the ability to change it. I found that was STILL not opted out, and did so online, and closed my AMEX account on a fourth call.

This article is about privacy and dispute option status; I know of no financial institution that provides either option status in any written form at all.