Consumer Law & Policy Blog

James Kwak on Economism and Arbitration Clauses

Here.  Excerpt:

It’s unlikely that anyone actually believes that consumers understand arbitration clauses and take them into account when making buying choices. These arguments aren’t meant to be taken seriously. They are air cover for banking executives who like taking advantage of customers and politicians who want to do favors for the financial lobby. That’s the purpose of economism, and why it continues to be so influential.

[Disclosure: He discusses my recent arbitration/Wells Fargo article at length.]

My American Banker Op-ed: Would Wells scandal have come to light with a defanged CFPB?

Here.  Excerpt:

Wells Fargo’s opening of millions of phony accounts using the names of its customers was perhaps the most significant bank scandal to come to light since the financial crisis. But Hensarling’s Financial Choice Act, which passed the House Financial Services Committee, would have weakened federal regulators’ ability to publicize the scandal and punish Wells. * * *

If the bill had been enacted — and the consumer bureau were just a shell of the agency it is today — it is a fair question to ask whether Wells Fargo would have been held accountable for its actions.

The op-ed is based in part on my forthcoming Rutgers Law Review article.

CBS News: Only 18 AT&T Customers Brought Arbitration Claims Despite Thousands of Overcharging Complaints

Here.  The story reports that AT&T has nearly 150 million customers and that the eighteen claims were filed in the last two years.

UPDATE: See comment by Gregory Gauthier below.

My Latest Law Review Article: Free-Market Failure: The Wells Fargo Arbitration Clause Example

by Jeff Sovern

It's for an arbitration symposium at Rutgers and is available for download here.  I would love to hear comments!  Here's the abstract:

In September 2016, regulators charged Wells Fargo with opening millions of unauthorized accounts on behalf of its customers. When some of those customers filed class actions against Wells, the bank initially responded by moving to compel arbitration on the ground that the consumers had agreed to arbitrate disputes and waive their class action rights. Because most customers with claims in small amounts would probably have foregone filing an arbitration claim, the effect would have been to leave their damages uncompensated except for the refunding of fees, which Wells agreed to in the consent order it entered into with regulators.

The Consumer Financial Protection Bureau has proposed a regulation which, if it had been in effect at the relevant time, would have enabled the injured Wells customers to obtain class action relief. But the proposed rule is encountering objections in Congress, based partly on free-market economic theory. This Article argues that free-market economics is not sufficient to protect consumers from the type of problem present in the Wells Fargo case for two reasons. First, free-market economics assumes that consumers have complete information while empirical evidence shows that consumers do not understand arbitration clauses, much less that consumers realize that such clauses would bar class actions as to fraudulent accounts that the consumers did not know about. Second, the number of primary checking accounts at Wells consistently increased as the fraud became public, suggesting that the free market did not discipline Wells for its misconduct until regulators intervened, and did so only modestly at that point. It is even possible that by enforcing arbitration clauses as written, free-market economics prolonged the Wells fraud, thus enabling more consumers to be injured.

In short, some device beyond the free market is necessary to prevent financial institutions from cheating many consumers out of small amounts. Class actions are one such device, but arbitration clauses as currently enforced enable financial institutions to prevent their use, thus reducing their incentive to comply with the law.

House Financial Services Committee Reported Set to Markup Financial Choice Act Next Week

by Jeff Sovern

So CNNMoney reports here. The Committee will hold a hearing tomorrow; the witness list appears here.  Seems pretty rushed for a 600-page bill that would make major changes in financial regulation, including changing the structure of the CFPB, eliminating its power to prohibit unfair, deceptive, and abusive practices, abrogating its power to regulate arbitration, and plenty of other changes.  But that's how this Congress rolls. I suspect this bill will share the fate of Trumpcare, though it may get further in the legislative process than Trumpcare did. 

Level Playing Field Study Finds "shockingly low number of consumer arbitration cases" Against Wells Fargo

Here.  The LA Times reports on the study in this story, headlined, Here's why Wells Fargo forces its customers into arbitration: It wins most of the time. 

Rutgers Arbitration Symposium This Friday

by Jeff Sovern

More here.  One panel is on the CFPB proposed arbitration rule (I'm on that one) and consumer arbitration; another is on FAA preemption and nursing home arbitration; a third is on ADR in practice.

Stephen Ware Article Takes On Current (Conservative) Arbitration Law

Stephen J. Ware of Kansas has written The Centrist Case Against Current (Conservative) Arbitration Law, 68 Florida Law Review  (2016). Here is the abstract:

In The Politics of Arbitration Law and Centrist Proposals for Reform, I explained how issues surrounding consumer and other adhesive arbitration agreements became divisive along predictable political lines (progressives vs. conservatives) and proposed an intermediate (or centrist) position to resolve those issues. However, The Politics of Arbitration Law did not argue the case for my proposals. It left those arguments for this Article, which makes the case against current (conservative) arbitration law, and a third article, which will make the case against progressive proposals to reform arbitration law. In other words, this Article stands out from the many other articles critiquing current arbitration law because this Article’s critique comes from a centrist, rather than progressive, perspective. For that reason, this Article’s critique may be more likely than progressive critiques to gain traction with lawmakers.

Horton Article: Arbitration About Arbitration

David Horton of California, Davis has written Arbitration About Arbitration Stanford Law Review, Vol. 70, (2017 Forthcoming).  Here is the abstract:

Recently, the U.S. Supreme Court’s interpretation of the Federal Arbitration Act (“FAA”) has nearly eliminated consumer and employment class actions, sparking vigorous debate. Yet another important development in federal arbitration law has received less attention. Traditionally, judges granted motions to compel arbitration only after confirming that the parties formed a valid agreement to arbitrate that applies to the underlying lawsuit. But now, through the use of “delegation clauses,” businesses are giving arbitrators the exclusive power to decide these matters. Increasingly, critical questions about the arbitration—including whether the process is fair—are being resolved in arbitration.

This Article demonstrates that judges are struggling with every major issue related to arbitration about arbitration. Indeed, they have splintered over how to determine whether a contract contains a delegation clause, how to gauge the validity of these provisions, and whether arbitrators can decide whether the FAA even applies to a lawsuit. The Article then contends that this doctrinal chaos stems from a single faulty premise.

The Court has opined that delegation provisions are their own freestanding miniature arbitration clauses:

(1) agreements to arbitrate disputes,

(2) over the broader agreement to arbitrate the underlying complaint.

Seen this way, delegation clauses are entitled to the same extraordinary deference enjoyed by conventional arbitration clauses. However, drawing on the FAA’s text, legislative record, and forgotten strands of federal common law, the Article contends that arbitration about arbitration is manifestly different from arbitration about the merits of a case. Finally, the Article explains how acknowledging the ways in which delegation clauses are unique can resolve the many of the questions that are currently dividing courts.

 

 

Center for American Progress: Senators Must Ask Gorsuch If He Will Force Americans into Arbitration

Here.  The essay reviews Judge Gorsuch's arbitration decisions. Here's an excerpt:

Senators must press Judge Gorsuch on arbitration during his hearing next week. If he does believe that limits on the FAA’s “heavy hand” exist [as Judge Gorsuch indicated in an opinion], he should be willing to define and describe them. Otherwise, more and more Americans will find themselves unfairly locked out of the courthouse by companies that would rather sweep abuses under the rug than face a judge and jury.