Consumer Law & Policy Blog

CFPB Announces Arbitration Field Hearing

October 7, in Denver.  More here.  Will the Bureau announce proposed arbitration rules? (HT: Gregory Gauthier)

A Comment on Kaplinsky & Levin's "CFPB Makes Consumer Arbitration a Numbers Game—and the Numbers Overwhelmingly Support Consumer Arbitration"

by Jeff Sovern

The following is the body of an email I sent to the editor of the Consumer Financial Services Law Report (a very useful newsletter on developments in consumer finance):

The August 9, 2015 issue of the Consumer Financial Services Law Report includes an advocacy piece by financial industry lawyers Alan S. Kaplinsky and Mark J. Levin titled CFPB Makes Consumer Arbitration a Numbers Game—and the Numbers Overwhelmingly Support Consumer Arbitration, that comments on an article I co-authored. I write to set the record straight.

Our article reports on an online survey my co-authors and I conducted of 668 consumers approximately reflecting adult Americans in various demographic categories.  We provided consumers with a representative credit card contract that included an arbitration clause printed in bold, italics, and ALLCAPS. The arbitration clause was more readable than most such arbitration clauses. We then asked consumers questions about the arbitration clause as well as about arbitration clauses in general.  The responses indicated that few respondents understood the arbitration clause and that many believed that they could not lose their rights to judicial process, including the rights to litigate in court and to participate in class actions, by agreeing to what one respondent termed a “whimsy little contract.” 

Our findings raise serious questions about whether consumer consent to pre-dispute arbitration clauses is informed and thus whether it can be called consent in any meaningful sense.  The results thus create doubt about arbitration’s legitimacy, because any such legitimacy must be rooted in consent: consumers cannot be forced to arbitrate unless they have agreed to do so.

Messrs. Kaplinsky and Levin do not question our findings. Indeed, it would be difficult for them to do so, given that the CFPB’s telephone survey echoed some of our results, and that an industry group, the American Financial Services Association, has acknowledged both that consumers usually do not read contracts and that it is unlikely they are aware of credit card arbitration clauses.  See Letter from Bill Himpler, American Financial Services Association to CFPB re Telephone Survey Exploring Consumer Awareness of and Perceptions Regarding Dispute Resolution Provisions in Credit Card Agreements (Aug. 6, 2013), http://www.afsaonline.org/library/files/legal/comment_letters/CFPBArbitrationSurvey.pdf.

Instead, Messrs. Kaplinsky and Levin claim that a “methodological flaw” in our study “is the critical fact that the authors did not interview consumers who actually had participated in arbitration and who would likely have positive comments about their experience.” Next we will see tobacco companies charging that studies showing smoking is harmful suffer from a “methodological flaw” because the studies did not ask smokers whether they enjoy smoking.  Our study was intended to shed light on whether consumers understood what they were doing when they surrendered constitutional rights, including the right to have a court decide their disputes and to a jury trial, among other rights.  Perhaps Messrs. Kaplinsky and Levin should focus on what we found, rather than on things they wish we had found.

I will leave to others the task of rebutting other claims Messrs. Kaplinsky and Levin made (I have previously responded to some of them on the Consumer Law and Policy Blog, which can be found at http://pubcit.typepad.com/).  But I want to make one more point.  For some reason, Messrs. Kaplinsky and Levin departed from conventional norms by referring to our article without including the names of the authors, the name of the article, or a link where it can be found. My co-authors are Elayne Greenberg, Paul Kirgis, and Yuxiang Liu and the article is titled “Whimsy Little Contracts” with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements. The article will appear in the Maryland Law Review and can be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432.   It provides a much fuller accounting of our findings than I can here. 

Gauthier Guest Post: Spotify Modifies Not Just Privacy Policy, But Also Arbitration Clause: The Results Are Outrageous

Guest Post by Gregory Gauthier:

Late last week, many media outlets drew attention to broadly-worded terms in Spotify’s new privacy policy.  Although Spotify’s CEO later explained the intent of the changes to the privacy policy, another change to Spotify’s terms has yet to be explained by Spotify or discussed by the media.  The change, which Spotify characterized as providing “[g]reater detail around the arbitration process for dispute resolution”, is far from innocuous.  The two most outrageous terms added to the arbitration clause (original version here) are an exceptionally broad gag clause and a clause requiring some arbitration hearings to take place in San Francisco or New York City, the consumer’s residence and the locations’ convenience for the consumer notwithstanding.

Arbitration gag clause

Section 24.3.5 of the new terms states:

All documents and information disclosed in the course of the arbitration shall be kept strictly confidential by the recipient and shall not be used by the recipient for any purpose other than for purposes of the arbitration or the enforcement of arbitrator’s decision and award and shall not be disclosed except in confidence to persons who have a need to know for such purposes or as required by applicable law. Except as required to enforce the arbitrator’s decision and award, neither you nor Spotify shall make any public announcement or public comment or originate any publicity concerning the arbitration, including, but not limited to, the fact that the parties are in dispute, the existence of the arbitration, or any decision or award of the arbitrator.

The confidentiality provision in the new terms is not to be confused with the general principle that, in contrast to litigation, arbitration proceedings are not open to the public and arbitration papers are not public records.  Rather, this gag clause goes much farther.  Here are just some examples of the gag clause restricts core First Amendment activity:

• It may prohibit consumers from sharing information about previous Spotify arbitrations to better prepare for arbitration hearings against a business that already has all the information about all Spotify arbitrations.
• Some consumers dissatisfied with the arbitration process publicize faults they find in the arbitration process.  Jon Perz created a website documenting his frustration with an arbitration proceeding with a car dealer.  Nicole Mitchell and Debbie Brenner provided their narratives on their dissatisfaction with their arbitration proceedings and outcomes for the Alliance for Justice film Lost in the Fine Print.  Yet, none of this robust commentary would be possible for consumers in an arbitration with Spotify, for Spotify users’ core First Amendment rights have been erased like “a pinky hitting the delete key”.  Licitra v. Gateway, Inc., 189 Misc. 2d 721, 728 (N.Y.C. Civ. Ct. Richmond County 2001).
• Congress has regularly heard testimony from participants criticizing the fairness of arbitration proceedings in conjunction with bills limiting the scope of the Federal Arbitration Act (FAA).  Yet Spotify can veto any attempt by fed-up consumers to tell their arbitration story before their elected officials.
• It is doubtful that a consumer dissatisfied with a Spotify arbitration could even submit complaints about the fairness of the arbitration proceeding to their representatives or administrative agencies.  After all, Spotify could argue that government officials do not have a “need to know” about the complained-of arbitration.
• Most disturbingly, Spotify can use the aegis of the FAA to achieve what KlearGear could not: complete suppression of criticism.  Suppose that a consumer makes a public complaint about Spotify.  In order to erase this complaint, all Spotify needs to do is initiate arbitration about that dispute.  Voila!  Now, the consumer’s original complaint is “publicity concerning…the fact that the parties are in dispute” that is prohibited under the contract.  Moreover, Spotify can “seek injunctive relief in a court of law” under Section 24.3.2 to obtain a court order gagging the consumer from talking about the dispute.  At least the couple in the KlearGear case were only subject to the threat of a fine, not possible contempt of court, which Spotify users could face.

A Pair of Arbitration Papers

Richard Frankel of Drexel has written Concepcion and Mis-Concepcion: Why Unconscionability Survives the Supreme Court's Arbitration Jurisprudence, 17 Journal of Dispute Resolution. Here is the abstract:

States have long relied on the doctrines of unconscionability and public policy to protect individuals against unfair terms in mandatory arbitration provisions. The Supreme Court recently struck a blow to such efforts in AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurant. In those two cases, the Court established that a challenge to the enforceability of unfairly one-sided arbitration clauses is preempted if it would interfere with “fundamental attributes of arbitration.” Several commentators have argued that these decisions will dramatically alter the arbitration landscape, by wiping away virtually any contract defense to the validity of an arbitration agreement and giving corporations carte blanche to impose whatever terms they want into an arbitration clause. Many practitioners are aggressively pushing courts to take a similarly broad reading of Concepcion and Italian Colors.

This article takes a contrary view. First, this article argues that the cases will have very little impact outside of the context of class action waivers, the subject matter of both Concepcion and Italian Colors. Applying state law to strike down arbitration provisions that are so one-sided as to be unconscionable ordinarily will not interfere with “fundamental attributes of arbitration” and should not be preempted.

Second, the Court’s newfound focus on “fundamental attributes of arbitration” reveals why Concepcion should actually narrow the scope of Federal Arbitration Act (FAA) preemption rather than expand it. A careful examination of arbitration clauses shows that, if anything, the “fundamental” aspect of arbitration is choice, that is, the ability of parties to freely negotiate the terms of their arbitration agreements in an arms-length fashion. If choice is fundamental to arbitration, then what is inconsistent with arbitration is a lack of choice, namely adhesion. As a result, states have much greater power than previously thought to ensure fairness in standard-form, non-negotiable adhesion contracts, in which most arbitration agreements are contained, without violating the FAA.

And Stephen J. Ware of Kansas has authored The Politics of Arbitration Law and Centrist Proposals for Reform.  Its abstract is as follows:

Arbitration law in the United States is far more controversial when applied to individuals than to businesses. While enforcement of arbitration agreements between businesses sometimes raise legal issues that divide courts, those issues tend to interest only scholars, lawyers, and other specialists in the field of arbitration. In contrast, enforcement of arbitration agreements between a business and an individual (such as a consumer or employee) raises legal issues that interest many members of Congress and various interest groups — all of whom have taken positions on significant proposals for law reform. The Consumer Financial Protection Bureau has extensively researched and reported on consumer arbitration agreements and is expected to issue a rule regulating, or even prohibiting, such agreements.

This Article both explains how issues surrounding consumer and other adhesive arbitration agreements became divisive along predictable political lines and introduces a framework to understand and compare various positions on them. This new framework arrays on a continuum five positions on the level of consent the law should require before enforcing an arbitration agreement against an individual. Progressives generally would require higher levels of consent than arbitration law currently requires, while conservatives generally defend current arbitration law’s low standards of consent.

This Article proposes an intermediate (or centrist) position. It joins progressives in rejecting conservative-supported anomalies that enforce adhesive arbitration agreements more broadly than other adhesion contracts on the three important topics: contract-law defenses, correcting legally-erroneous decisions, and class actions. Once these anomalies are fixed though, adhesive arbitration agreements should — contrary to progressives — be as generally enforceable as other adhesion contracts. In other words, this Article joins conservatives in defending general enforcement of adhesive arbitration agreements under contract law’s standards of consent. The Article briefly concludes with the language of a rule the CFPB could adopt to enact into law the reforms advocated in this Article.

Some Comments on Comments on the CFPB Arbitration Study

by Jeff Sovern

Earlier this week, I posted a link to the Ballard Spahr comments, on behalf of various industry trade associations, on the CFPB Arbitration Study .  Their thesis is that the Bureau Study indicates that consumers fare better in arbitration than litigation in general and class actions in particular. For example, here is one excerpt from their comments:

Consumers who received cash payments in class action settlements obtained an average of only $32.35. * * *

By contrast, customers who prevailed in arbitration recovered an average of $5,389, compared to the $32.35 obtained by the average class member in class action settlements. Thus, the average customer who prevailed in arbitration received 166 times more in financial payments than the average class member in class action settlements.

Sounds like a big difference, except for one thing.  In the words of Director Cordray introducing the study:

For those consumers who do use arbitration, we observed that very few of them filed arbitration claims for small-dollar amounts. For example, there are almost no disputes over amounts less than $1,000.

And here's a quote from the Study itself (Section 1, p. 12):

The average consumer affirmative claim amount in arbitration filings with affirmative consumer claims was around $27,000. The median was around $11,500. Across all six product markets, about 25 disputes a year involved affirmative consumer claims of $1,000 or less.

Unfortunately, the CFPB was not able to gather much information about class action claim amounts.   But class actions are often brought to compensate individual consumers in amounts much smaller than $1,000, an amount that evidently is not even enough to cause consumers to file for arbitration.  In other words, the Ballard Spahr comments show that when consumers bring arbitration claims averaging $27,000, and almost never for under a thousand, they recover larger amounts than they do in class actions in which individual consumers have suffered far more modest damages.  Not exactly a surprise. Such an apples-to-oranges comparison is hardly evidence that consumers do better in arbitration than in class actions.

 

 

Arbitration and the American Bar Association's One-Sided Webinar

by Jeff Sovern

The American Bar Association's Business Law Section Consumer Financial Services Committee held a webinar earlier today in which the topic was listed as "The CFPB Begins Arbitration Rulemaking, But Its Own Study Shows that Arbitration Benefits Consumers." The sole speakers, other than the moderator, were Ballard Spahr's Alan Kaplinsky and Mark Levin. Ballard Spahr has a particular point of view on the CFPB arbitration study, as indicated in the comments the firm submitted to the Bureau on behalf of the American Bankers Association, the Consumer Bankers Association, and the Financial Services Roundtable last month. That viewpoint certainly should be expressed, and the Committee's webinars are an appropriate forum for it. But shouldn't the contrary view also be voiced at such webinars?  Why didn't the Committee also put on at least one speaker to support the CFPB study?  Is the Committee serving lawyers well when it presents only one side of a debate?

I should add that I found the webinar informative, as I often find the Committee's webinars, which are a valuable service.  But it would have been more informative if it had been more balanced.

Appellate court holds cases should be stayed, not dismissed, during arbitration

The Second Circuit Court of Appeals yesterday weighed in on the “unsettled” question whether a district court should stay a case or dismiss it, when it grants a motion to compel arbitration. The court held that the case should be stayed. The opening paragraph summarizes the issue and the reasoning:

In an effort to more efficiently manage their dockets, some district courts in this Circuit will dismiss an action after having compelled arbitration pursuant to a binding arbitration agreement between the parties. That is what happened here. After the District Court (Briccetti, J.) found Michael A. Katz’s state law claims against Cellco Partnership d/b/a Verizon Wireless (“Verizon”) to be arbitrable, the court compelled arbitration but denied Verizon’s request to stay proceedings. By dismissing the case, however, the District Court made the matter immediately appealable as a final order, provoking additional litigation—specifically, this appeal. Although we recognize the administrative advantages of a rule permitting dismissal, we hold that the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (“FAA”), requires a stay of proceedings when all claims are referred to arbitration and a stay requested.

Read the decision in Katz v. Cellco Partnership here.

Senate hearing on constitutionality of CFPB and Dodd-Frank

This afternoon (at 2pm), I'll be testifying before the Senate Judiciary Committee on the constitutionality of the Consumer Financial Protection Bureau and the Dodd Frank Act. The title for today's hearing gives you a flavor of the sweeping (and fringe) legal theories being advanced by the CFPB's opponents: "The Administrative State v. The Constitution: Dodd-Frank at Five Years."

As I explain in my written testimony, the challengers' theories (which have uniformly failed in court after court) are based on separation-of-powers arguments at odds with eight decades of settled precedent. They aren't so much attacks on the CFPB and Dodd-Frank as attacks on the modern administrative state itself. In that sense, the hearing's title is apt. 

Here's the bottom line: The Bureau's political opponents, lacking the votes to kill the agency through the normal democratic process, are trying to constitutionalize their objections. In so doing, they're asking the courts to roll back the clock to before 1935--the height of judicial hostility to the New Deal.

A parallel dynamic is playing out in the appropriations process as well, where Republicans who don't have the votes to pass regular legislation are attaching a variety of anti-CFPB riders to must-pass funding bills--including a troubling rider that would kill the CFPB's arbitration study through a strategy of paralysis by analysis.

The majority witnesses at today's hearing will be C. Boyden Gray (former White House Counsel to Bush I and lead counsel for the plaintiffs in State National Bank of Big Spring, Texas v. Lew); Mark Calabria (Cato Institute); and Neomi Rao (George Mason Law). I'll be testifying alongside Adam Levitin of Georgetown Law, whose written testimony is here.

You can watch the hearing live here.

Paul Bland Op-Ed on Womack-Graves Arbitration Amendment

Here.  Excerpt:

 

* * * Congressmen Steve Womack (AR-3) and Tom Graves (GA-14) wrote an amendment to an appropriations bill that ignores all the evidence in the [2015 CFPB Arbitration] report. Unsurprisingly, they both have received consistent financial support for years from banking lobbyists. Adopted by voice vote within a matter of minutes, the amendment revoked CFPB’s authority to create regulations for arbitration clauses until an entirely new study is conducted.

CFPB would be barred from restoring American consumers’ essential right to bring their disputes to court until they essentially repeat the study they just did. * * *

Horton & Chandrasekher Reply to Kaplinsky & Levin on Empirical Study of Arbitration

Guest Post by Professors David Horton & Andrea Cann Chandrasekher:      

We recently posted our draft article, After the Revolution: An Empirical Study of Consumer Arbitration, 104 Geo. L.J. -- (forthcoming 2015) on the Social Science Research Network.  On June 22, well-known corporate defense lawyers Alan S. Kaplinsky and Mark J. Levin published a critique of the piece on their CFPB Monitor Blog.  Although we appreciate Kaplinsky and Levin taking the time to engage our work, they don’t do it justice.   

For starters, Kaplinsky and Levin misunderstand After the Revolution’s goals.  The paper analyzes 4,839 cases filed by consumers with the American Arbitration Association (AAA) between July 2009 and December 2013.  In part, it tries to accomplish the ultra-benign task of improving our understanding of what happens inside the arbitral forum.  How many consumers file claims?  What percentage reach the award stage?  Who wins, and how much?  How long do cases usually take?  As one might imagine, the answers to these questions are often nuanced and can’t be reduced to talking points.  Bizarrely, though, Kaplinsky and Levin insist on casting After the Revolution as an anti-arbitration polemic.  They call our encouraging discoveries “admissions” and contend that our gloomier data betray our lack of objectivity. But the article fails as a saw-toothed indictment of alternative dispute resolution for a simple reason—it’s not supposed to be one.

In addition, After the Revolution examines the impact of the U.S. Supreme Court’s April 2011 decision in AT&T Mobility LLC v. Concepcion.  As most readers know, Concepcion effectively required plaintiffs to arbitrate low-value complaints on an individual basis, rather than as part of a class action.  So do consumers abandon these small-dollar grievances or pursue them in bilateral arbitration?  We find that filing levels moderately increased after Concepcion, largely because some plaintiffs’ lawyers have initiated numerous individual arbitrations against the same company.  In turn, these class action-style claims have transformed some companies into “extreme” repeat players, who arbitrate dozens or even hundreds of times.  Using several regression analyses, we prove that extreme repeat players win more often and pay less in damages than other defendants.    

It’s this last finding—the extreme repeat player advantage—that draws most of Kaplinsky’s and Levin’s ire.  Notably, they don’t engage it on its own terms.  Indeed, they couldn’t—our conclusions are statistically significant and robust to various model specifications.  Instead, they attempt to impugn it by saying that we “purport[] to find a ‘repeat player’ effect favoring companies that previous researchers, including the Consumer Financial Protection Bureau (CFPB) itself, have not discerned.” 

This assertion is flawed to the core.  Where to begin?  For starters, nearly every “previous researcher[]” has uncovered a repeat player effect in arbitration.  See, e.g., Lisa B. Bingham, Employment Arbitration: The Repeat Player Effect, 1 Emp. Rts. & Emp. Pol’y J. 189 (1997); Lisa B. Bingham, On Repeat Players, Adhesive Contracts, and the Use of Statistics in Judicial Review of Employment Arbitration Awards, 29 McGeorge L. Rev. 223 (1998); Alexander J. S. Colvin, An Empirical Study of Employment Arbitration: Case Outcomes and Processes, 8 J. Empirical Legal Stud. 1 (2011); cf. Searle Civil Justice Inst., Consumer Arbitration: Before the American Arbitration Association 76-82 (2009) (finding a repeat player advantage in consumer arbitration under one definition of “repeat player” but not another).  Likewise, section 5.6.12 of the CFPB’s recent Arbitration Study does discover that repeat-playing companies win more often than one-shot firms—although, to be fair, the Bureau doesn’t highlight this effect, perhaps because their sample sizes are small. 

Moreover, Kaplinsky and Levin play ostrich with the fact that After the Revolution takes the repeat player debate to the next level.  Prior commentators define “repeat player” as a firm that arbitrates more than once.  Rather than employ this crude rubric, we create tiers of repeat players based on how often a company appears in our data.  In addition, with the exception of Colvin, existing studies do not use multivariate regression analysis to tease out the effect of repeat player status on win rates and damage amounts, which has the advantage of being able to hold other confounding factors constant.  This means that they can’t rule out the possibility that an apparent repeat player advantage stems from a source other than the company’s repeat player status.  Conversely, our regressions allow us to control for a wide array of variables.  Here’s just one example:  near the end of their contribution, Kaplinsky and Levin gesture toward the fact that the CFPB found that any repeat player boon “was counter-balanced by the fact that counsel for the consumers were also usually repeat players in arbitration.”  But (even ignoring the fact that this arguably distorts the CFPB’s conclusions), the Bureau simply tallies up results in cases along the binary dimensions of whether or not a company or a consumer’s lawyer are repeat players.  After the Revolution, on the other hand, compares arbitration outcomes across different levels of consumer lawyer experience—all the while controlling for other factors (claim amount, documents only submission, telephonic hearing, and case length) that could confound the consumer lawyer effect.  In this more detailed investigation, we are able to uncover the result that having a highly seasoned plaintiffs’ attorney isn’t the panacea that Kaplinsky and Levin claim it is.  In fact, we show that it often hurts consumers. 

Ultimately, the glowing question isn’t whether extreme repeat playing companies thrive in the extrajudicial forum; it’s why they do so.  One hypothesis that has been kicking around for years is that arbitrators follow their wallets, and thus rule in favor of big companies in the hopes of being selected again in the future.  As we explain in the paper, we’re skeptical of that theory.  Not surprisingly, Kaplinsky and Levin heavily emphasize our discussion of this topic.  But they misleadingly frame it as though it’s somehow a “contradiction[]” or hiccup in our agenda, rather than just straight-up empirical and legal analysis.  That’s emblematic of their response—it accuses us of missing a mark we never set out to hit.