Consumer Law & Policy Blog

Video of CFPB Arbitration Field Hearing Now Available

Here.  (HT: Gregory Gauthier)

House Appropriations Committee Votes to Block Arbitration Reform

by Jeff Sovern

CFPB Monitor is reporting:

[T]he House Appropriations Committee has approved an amendment to the FY 2016 Financial Services Appropriations bill that would impose new requirements on the CFPB before it can issue a rule governing arbitration agreements.  The amendment, which was introduced by Republican Representatives Steve Womack and Tom Graves, reportedly would require the CFPB to produce a peer-reviewed study on arbitration and determine that the benefits of a new rule outweigh the costs before issuing an arbitration regulation.

They attribute the information to a Politico report.  The House Appropriations Committee web site indicates that the amendment was approved on a voice vote and that the Committee has approved the bill, as amended.  

Empirical Study of Arbitration and Repeat Player Effect

David Horton and Andrea Cann Chandrasekher both of California, Davis, have written After the Revolution: An Empirical Study of Consumer Arbitration, 104 Georgetown Law Journal (Forthcoming 2015). Here's the abstract:

For decades, mandatory consumer arbitration has been ground zero in the war between the business community and the plaintiffs’ bar.  Some courts, scholars, and interest groups argue that the speed, informality, and accessibility of private dispute resolution create a conduit for everyday people to pursue claims.  However, others object that arbitration’s loose procedural and evidentiary rules dilute substantive rights, and that arbitrators favor the repeat playing corporations that can influence their livelihood by selecting them in future matters.  Since 2010, the stakes in this debate have soared, as the U.S. Supreme Court has expanded arbitral power and mandated that consumers resolve cases that once would have been class actions in two-party arbitration.  But although the Court’s jurisprudence has received sustained scholarly attention, both its defenders and critics do not know how it has played out behind the black curtain of the extrajudicial tribunal.

This Article offers fresh perspective on this debate by analyzing nearly 5,000 complaints filed by consumers with the American Arbitration Association between 2009 and 2013.  It provides sorely-needed information about filing rates, outcomes, damages, costs, and case length.  It also discovers that the abolition of the consumer class action has changed the dynamic inside the arbitral forum.  Some plaintiffs’ lawyers have tried to fill this void by filing numerous freestanding claims against the same company.  Yet these “arbitration entrepreneurs” are a pale substitute for the traditional class mechanism.  Moreover, by pursuing scores of individual disputes, they have inadvertently transformed some large corporations into “extreme” repeat players.  The Article demonstrates that these frequently-arbitrating entities win more and pay less in damages than one-shot entities.  Thus, the Court’s consumer arbitration revolution not only shields big businesses from class action liability, but gives them a boost in the handful of matters that trickle into the arbitral forum.

Do Opt-Out Clauses Save Arbitration Agreements from Being Unconscionable?

by Jeff Sovern

In Mohamed v. Uber, the federal district court for the Northern District of California said no.  Opt-out clauses appear in contracts and give the contracting parties the right to opt-out of arbitration to resolve disputes within a certain period of time after entering into the contract, often thirty or sixty days (which is frequently before any dispute actually arises). Industry lawyers sometimes claim that because consumers are given the opportunity to opt-out, the arbitration clause cannot be unconscionable and therefor is enforceable.  Here is part of how the court responded to that argument:

 

* * * Drivers’ opt-out right under the 2013 Agreement was illusory because the opt-out provision was buried in the contract. The opt-out provision was printed on the second-to-last page of the 2013 Agreement, and was not in any way set off from the small and densely packed text surrounding it. 2013 Agreement § 14.3(viii). Furthermore, the fact that those drivers who actually discovered the opt-out clause (if any) could only opt-out by a writing either hand-delivered to Uber’s office in San Francisco or delivered there by a “nationally recognized overnight delivery service,” renders the opt-out in the 2013 Agreement additionally meaningless.

 It probably did not help Uber that after claiming at oral argument that some drivers had opted out, Uber failed to present evidence that any had. 

(HT: Dalie Jimenez)

Jean Sternlight: Asking Tough Questions About Mandatory Arbitration and Article III

Sternlight has been writing about arbitration for years, and has some interesting comments about the Supreme Court's opinion last week in Sharif at the Indisputably blog.  An excerpt:

The Supreme Court’s most recent Article III decision, Wellness Int’l v. Sharif (2015), raises substantial questions as to the constitutional legitimacy of the Federal Arbitration Act, 9 U.S.C. § 1 et seq., at least as applied to private mandatory arbitration. * * *

A five justice majority (Sotomayor, Kennedy, Ginsburg, Breyer & Kagan), also joined by Justice Alito, in substantial part, held that litigants may “knowingly and voluntarily” allow a bankruptcy judge to hear claims that, absent such consent, Article III would bar the bankruptcy judge from deciding.* * *

* * * [W]hen courts have sought to justify arbitration on the ground that parties “consented” to bring claims in arbitration rather than in court, they have not applied the “knowing and voluntary” definition of consent recently applied in Sharif. If courts did look for knowing and voluntary consent they would find that while many business-to-business arbitration agreements meet the test, few if any consumer and employment clauses do so.

Those interested in the matter should read the entire post  (HT: Elayne Greenberg).

Boston Globe Op-Ed: Arbitration clauses for credit cards cost consumers

Here. 

Arbitration and Shots, or Why It Often Won't Matter If Arbitration is Cheaper Than Litigation

by Jeff Sovern

I don't know anyone who likes getting a shot.  One of my daughters, as a small girl, would hide under chairs at the pediatrician's office to avoid them, which by the way, was not an effective strategy.  But most of us are willing to get stuck with needles if the payoff is large enough, like avoiding a serious illness.  Even so, millions of Americans apparently do not judge reducing the risk of getting the flu a sufficient tradeoff for getting a flu shot.

Arbitration is similar.  Few consumers wake up in the morning looking forward to arbitration (though I'm not aware of any who hide under chairs to avoid it),  but some will tolerate it in pursuit of a significant payoff.  How big does that payoff have to be?  One lesson from the CFPB Arbitration Report is that the payoff has to exceed $1,000 for just about all consumers, because consumers just don't file arbitration proceedings for less than that. 

One argument frequently made for arbitration is that, as Alan Kaplinsky recently put it in an essay, Even in the CFPB’s Numbers, Arbitration Benefits Consumers,  33 Alternatives to the High Cost of Litigation, No. 4 at  55, 56 (Apr 2015):

Arbitration is a great solution for both consumers and companies because everyone benefits from a process that is faster, cheaper and more efficient and congenial than court litigation.

Assuming for the sake of argument that that is an accurate description of arbitration, it doesn't actually matter unless the payoff from using arbitration is large enough. That's for the same reasons most of us wouldn't get a shot no matter how fast, cheap, or efficient it is, just to avoid a single sneeze. When consumers have small stakes at issue, it is irrelevant whether litigation or arbitration is faster or cheaper, more efficient or congenial, because consumers, by and large won't choose either. Some consumers, though, will bring class actions, and other consumers can benefit from those class actions. That's because the existence of class actions deters corporate misconduct, and because some consumers will obtain compensation by complying with the requirements for doing so, assuming the class action results in a settlement or judgment awarding compensation (often not so many as would obtain compensation in a perfect world, but in a perfect world, we wouldn't need class actions).  The point is, for disputes of less than a thousand dollars or so, talk about whether arbitration is "faster, cheaper and more efficient and congenial" than litigation is a red herring.

Will the Industry Attack the Constitutionality of the CFPB's Power to Regulate Arbitration Clauses?

by Jeff Sovern

Marc James Ayers of Bradley Arant Boult Cummings LLP has posted an item, Can the CFPB really prohibit pre-dispute arbitration agreements?  in which he wrote:

[S]hould the CFPB independently decide to adopt regulations limiting or prohibiting the use of pre-dispute arbitration agreements relating to consumer finance, that regulation could be seen as an amendment or partial repeal of the FAA. Those defending such a regulation would argue that by enacting Section 1028 [the statute authorizing the CFPB to regulate or ban arbitration clauses in consumer financial contracts], Congress delegated the power to amend or repeal the [Federal Arbitration Act] in this way.

However, a serious challenge could be raised to such a regulation: While Congress can delegate authority to an administrative agency to adopt rules fleshing out the details of some existing statute (in a manner consistent with that statute), Congress does not have the constitutional authority to empower an agency to repeal existing law at that agency’s discretion. A challenger could argue that authority to repeal existing law is constitutionally vested solely in Congress and cannot be delegated in this manner. The answer to this question may determine whether those in the financial services industry may continue to utilize arbitration provisions in their consumer products.

I'm not a constitutional law person and so have only a limited ability to evaluate this argument.  Ayers didn't cite any authority, leaving unclear the extent to which courts have adopted this limit to Congress's power.  But I have a few quick thoughts: first, the CFPB would not be repealing the FAA if it banned arbitration clauses. The FAA would remain in effect as to commercial contracts and consumer contracts, like cell phones, that did not involve consumer financial contracts. Second, if the CFPB were to ban arbitration waivers, while otherwise allowing companies to use arbitration clauses in consumer contracts, it would be much harder to sustain the argument that the Bureau has repealed arbitration clauses.  It could be argued that the Bureau would simply be interpreting the FAA as not applying to class action waivers (I recognize that Justice Scalia took a different view in Concepcion).  Finally, instead of inserting the provision giving the CFPB the power to regulate arbitration clauses in the US Code where it did, suppose Congress had amended the FAA to provide that the CFPB has the power to exclude certain contracts from the FAA or alternatively regulate what those contracts may say. Doesn't Congress have the power to do that?  Wouldn't that be what Ayers approvingly calls giving "authority to an administrative agency to adopt rules fleshing out the details of some existing statute"?   And how is that different from what Congress did?

Talesh Article: How Private Organizations Influence the Content and Meaning of Consumer Protection Legislation

Shauhin A. Talesh of Irvine has written Institutional and Political Sources of Legislative Change: Explaining How Private Organizations Influence the Form and Content of Consumer Protection Legislation, 39 Law and Social Inquiry 973 (2014 ). Here's the abstract:

This article explores how private organizations influence the content and meaning of consumer protection legislation. I examine why California forced consumers to use a private dispute resolution system that affords consumers fewer rights, while Vermont adopted a state-run disputing structure that affords consumers greater rights. Drawing from historical and new institutional theories, I analyze twenty-five years of legislative history, as well as interviews with drafters of the California and Vermont laws, to show how automobile manufacturers weakened the impact of a powerful California consumer warranty law by creating dispute resolution venues. As these structures became institutionalized in the lemon law field, manufacturers reshaped the meaning of legislation.

Unlike California, the political alliances in Vermont and a different developmental path led to a state-run dispute resolution structure. I conclude that how social reform laws are designed and how businesses influence social reform legislation can increase or decrease the achievement of a statute’s social reform goals.

 

 

Replying to Alan Kaplinsky

by Jeff Sovern

Last Friday, I posted a comment on Alan Kaplinsky’s remarks, quoted in the Bloomberg Business story, Bank Customers May Get Their Day in Court, about the CFPB arbitration report.  Alan replied in a post captioned “Sovern v. Kaplinsky.” Here I offer a rebuttal.

In my original post, I expressed the view that consumers mostly don’t do anything when they have a problem with a company.  Alan noted in response that the Consumer Financial Protection Bureau reports having received more than 558,800 consumer complaints.  But that statistic, by itself, says little about the likelihood that consumers will complain when they have an issue because it talks about the absolute number of complaints rather than what percentage of consumers with problems complain.  To see what I mean, let’s focus just on credit cards.  The CFPB reports that 12% of the complaints are about credit cards, meaning that roughly 67,056 of the complaints involve credit cards.  As we reported in our arbitration study, “[e]stimates of the number of Americans with credit cards in recent years vary from 156 million to 226 million.” If we use the smaller figure and assume that only 156 million Americans have credit cards (and if I’ve done the math right and haven’t dropped a decimal point), that means that out of every million Americans with a credit card, about four have complained to the CFPB.  Suddenly, the number of complaints doesn’t seem so large. And even that probably overstates the percentage of complaining consumers, first, because it uses a low estimate of the number of credit card holders, and second, it also assumes that no consumer filed more than one complaint.  It seems likely that some consumers file multiple complaints, if only because the same issue may trigger complaints against a lender, credit bureaus , debt collectors, and so on. But even the four out of a million number doesn’t tell us much because we don’t know how many consumers have a problem with their credit card issuers. Maybe every unhappy consumer complains or maybe only a fraction of dissatisfied consumers complains. Without knowing how many consumers have an issue, we can’t determine the percentage who complain, but the research I’ve seen says it’s tiny. In that regard, here’s an excerpt from Director Cordray’s speech about the arbitration report:

In [a] survey, we asked consumers what they would do if they were charged a fee by their credit card issuer that they knew to be wrong and they had already exhausted all possible efforts to obtain relief from the company.  Only two percent of consumers said they would consider bringing formal legal proceedings or would consult a lawyer.  That is almost the same percentage of consumers who said they would simply accept responsibility for the fee.  Most people, in fact, say they would simply cancel their card.  The research thus indicates that consumers are very unlikely, acting alone, to even consider bringing formal claims against their card issuers – either through arbitration or through the courts.

In other words, consumers mostly don’t do anything—other than cutting off ties with the offending company--when they have a problem with a company.

I also took issue with Alan’s original statement that you don’t see a lot of arbitrations because consumers use other means to assert their grievances. I wrote “Does the benefit of arbitration derive from the fact that it drives consumers to use something else to resolve disputes?”  Alan responded to my critique by saying—correctly, I believe—that consumers  may prefer informal means of resolving disputes to arbitration or litigation because those means may be “faster, cheaper and more efficient for consumers than either arbitration or litigation.” I was less clear than I should have been and I appreciate that Alan's comment made that apparent.  What I should have said is that those informal means of dispute resolution are available for litigation just as they are with arbitration.  Consequently, we would expect that the availability of informal means would have the same effect on the amount of litigation as it has on the amount of arbitration.    But the CFPB found that individual consumers were more likely to file cases in court than bring arbitrations, suggesting that something other than the availability of informal dispute mechanisms is suppressing the number of arbitrations. Put another way, if Alan’s statement means that consumers subject to arbitration clauses use informal means to resolve disputes more than is true of litigation, that would suggest arbitration drives consumers to use informal means more than litigation does.

My favorite part of Alan’s post is that one “reason[] why “consumers don’t file arbitration claims” (Professor  Sovern’s words) are that . . . Professor Sovern and consumer advocates have railed against arbitration for almost two decades, thereby fostering a negative public perception of arbitration . . . .” Alan is very kind to say that consumers are listening to me--though he is also wrong on this score, of course. And I should add that while I often disagree with Alan, I think his blog is terrific. His clients are lucky to have him.