Consumer Law & Policy Blog

Kaplinsky on Why Consumers Don't File Arbitration Claims

by Jeff Sovern

BloombergBusiness columnist Carter Dougherty has a story, Bank Customers May Get Their Day in Court, about the CFPB arbitration report.  Dougherty writes:

In its report, the CFPB noted that there were just 52 arbitration claims under $1,000 in 2010 and 2011, and consumers won relief in just four of them. Says [Deepak] Gupta: “What this report shows is not that claims go to arbitration but that they simply go away.”

Alan Kaplinsky, an attorney with Ballard Spahr who helped pioneer the use of arbitration clauses in financial contracts, counters that consumers resolve claims in other ways. They call the company to complain. They go to the Better Business Bureau. “That’s why you don’t see a heck of a lot of arbitration or litigation when there’s a clause,” he says.

I'm skeptical about Kaplinsky's claim, because a lot of research, beginning with Best and Andreason's seminal article, Consumer Response to Unsatisfactory Purchases: A Survey of Perceiving Defects, Voicing Complaints, and Obtaining Redress, 11 Law & Soc.Rev. 701, 728–29 (1977), shows that dissatisfied consumers mostly do not complain to either the offending business or external agencies like the BBB.  Mostly, they don't do anything.  If Alan has evidence to substantiate his claim, I hope he will make it public.

But even if his claim is true, it's hard to see how it helps to defend arbitration. If consumers benefit so much from arbitration, as Kaplinsky claims, why do consumers with arbitration clauses in their contracts prefer the Better Business Bureau?  Why don't they just use arbitration?  Does the benefit of arbitration derive from the fact that it drives consumers to use something else to resolve disputes?

 

Fitzpatrick article on "The End of Class Actions?"

Prolific class action scholar (and former Scalia clerk) Brian Fitzpatrick of Vanderbilt Law has just posted to SSRN an interesting new paper foreseeing and lamenting the effects of his former boss's handiwork in AT&T Mobility v. Concepcion and American Express v. Italian Colors (both cases in which I had the privilege of representing the losing plaintiffs). Fitzpatrick's article is especially timely because it buttresses the CFPB's recently released study on the effects of mandatory arbitration clauses in consumer contracts. Here's the abstract of Fitzpatrick's piece, which is forthcoming in the Arizona Law Review:

In this Article, I give a status report on the life expectancy of class action litigation following the Supreme Court’s decisions in Concepcion and American Express. These decisions permitted corporations to opt out of class action liability through the use of arbitration clauses, and many commentators, myself included, predicted that they would eventually lead us down a road where class actions against businesses would be all but eliminated. Enough time has now passed to make an assessment of whether these predictions are coming to fruition. I find that, although there is not yet solid evidence that businesses have flocked to class action waivers — and that one big category of class action plaintiffs (shareholders) remain insulated from Concepcion and American Express altogether — I still see every reason to believe that businesses will eventually be able to eliminate virtually all class actions that are brought against them, including those brought by shareholders.

Excellent Sheryl Harris Column on Arbitration

Here.  An excerpt:

 

In the Big Business narrative, arbitration is a far better place for consumers than a nasty-wasty court. Lack of choice is a better choice!

Well, this week, a big, fat government report blew that fiction away.

* * *

Companies, it turns out, weren't using mandatory arbitration clauses to protect us. They were protecting them. The CFPB found that companies overwhelmingly invoked the arbitration clause to head off class-action suits.

CFPB field hearing on consumer arbitration, live-tweeted and livestreamed

The following consumer advocates will be live-tweeting today's CFPB field hearing on arbitration, which gets underway at 11am.

• Ellen Taverna, NACA – @NACAdvocate
• Christine Hines, Public Citizen – @chrhines
• Michelle Schwartz, Alliance for Justice – @SchwartzAFJ
• NCLC – @NCLC4consumers
• AFR – @realbankreform

You should also be able to watch a web livestream of the hearing here.

Richard Cordray's remarks on the CFPB arbitration report

Here's the text of CFPB Director Richard Cordray's remarks on the arbitration report, to be delivered at today's field hearing in Newark.  He summarizes the legal backdrop to the Bureau's report, its empirical approach, and its key findings (which I've highlighted in bold). Well worth reading in full.                                                                           

Prepared Remarks of Richard Cordray

Director of the Consumer Financial Protection Bureau

Field Hearing on Arbitration, Newark, New Jersey, March 10, 2015

Thank you for joining us for this field hearing of the Consumer Financial Protection Bureau.  We are here in Newark today to discuss the subject of arbitration.  At its most basic level, arbitration is a way to resolve disputes outside of the court system.  Parties can agree in their contract that if a dispute arises between them at a later time, rather than take it before a judge and perhaps a jury as part of a public judicial process, they will be required to turn instead to a non-governmental third party, known as an arbitrator, to resolve the dispute in private.  These contractual provisions are referred to as “pre-dispute arbitration clauses.”

Arbitration clauses were rarely seen in consumer financial contracts until the last twenty years or so.  Arbitration is often described by its supporters as a “better alternative” to the court system – more convenient, more efficient, and a faster, lower-cost way of resolving disputes. Opponents argue that arbitration clauses deprive consumers of certain legal protections available in court, may not provide a neutral or fair process, and may in fact serve to quash disputes rather than provide an alternative way to resolve them.

Long ago, prior to the Great Depression, Congress provided a general framework that located the role of arbitration in federal law.  Court decisions over the years refined the relationship between private arbitration and formal judicial proceedings under a number of federal business statutes, including the antitrust laws and the securities laws as well as under the labor laws.  More recently, however, Congress has taken an increased interest in arbitration clauses in consumer financial contracts.  In 2007, Congress passed the Military Lending Act, which prohibited such clauses in connection with certain loans made to servicemembers.  That was the first occasion on which Congress expressed explicit concern about the effect such clauses may have on the welfare of individual consumers in the financial marketplace.

In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress went further and prohibited the inclusion of arbitration clauses in most residential mortgage contracts.  Another measure in that same law is of special interest because it leads directly to our discussion today.  In section 1028 of the Dodd-Frank Act, Congress directed the Consumer Bureau to conduct a study and provide a report to Congress on the use of pre-dispute arbitration clauses in consumer financial contracts.  Further, Congress provided that “[t]he Bureau, by regulation, may prohibit or impose conditions or limitations on the use of” such arbitration clauses in consumer financial contracts if the Bureau finds that such measure “is in the public interest and for the protection of consumers,” and findings in such a rule are “consistent with the study” performed by the Bureau.

We have set about this mandatory task to study the use of arbitration clauses with conscious care.  We began our study almost three years ago, when we issued a Request for Information seeking public input on the appropriate scope, methods, and data sources for this work.  We received dozens of written comments in response and held a series of stakeholder meetings to gather more informal input.  In December 2013, we released preliminary results from our study.  We wanted to provide a progress report to the public on our work, while also eliciting further comments on the work plan that we had developed.  In those results, we found that arbitration clauses are commonly used by large banks in credit card and checking account agreements.  We also found that these clauses can be used to prevent any litigation, including class litigation, from moving forward.  In addition, we observed that roughly nine out of ten such clauses barred arbitrations on behalf of a class of consumers.

Public Justice's Arthur Bryant Op-Ed on Arbitration

Here. 

Effective Disclosure of Arbitration Clauses and the CFPB's Power to Regulate Them

by Jeff Sovern

Brian posted earlier that the CFPB has announced a field hearing on arbitration for March 10.  Because the CFPB often schedules such hearings when it announces something, it is probably going to release the next installment in its arbitration report (maybe the final installment) in conjunction with the hearing.  As Brian also noted, the Bureau can regulate or ban arbitration in consumer financial contracts after issuing the report, under the authority of 12 U.S.C. § 5518.  But that is not the only provision in Dodd-Frank that would enable the Bureau to regulate arbitration. For example, 12 U.S.C. § 5532 provides (emphasis added):

(a) In general. The Bureau may prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.

* * *

(c) Basis for rulemaking. In prescribing rules under this section, the Bureau shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.

The St. John's Arbitration Study raised serious questions about whether the arbitration feature in contracts is "fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances." Not only did the respondents not understand what agreeing to the arbitration clause in the contract we showed them meant, but many had agreed to arbitrate in other contracts without realizing it.  We asked the respondents about three different types of contracts:  cell phones (Verizon Wireless, AT&T Mobility, and Sprint), PayPal, and Skype.  Not one of those contracts produced a greater level of consumer awareness of the arbitration clause than the others.  Put another way, the differences in respondents' answers to the questions about whether they had agreed to an arbitration clause were not statistically significant regardless of which one of those contracts they had entered into (I should note that there was overlap among the respondents, meaning that some had entered into two such contracts, and some had entered into all three types). Adding in our credit card contract, we have reason to think that not one of the four contracts fully and effectively disclosed to consumers what they were agreeing to.

Perhaps the Bureau will use be § 5518 to determine that arbitration clauses should be banned or regulated.  But another option would be for the Bureau to use § 5532 (or both sections) to prescribe a rule that the clauses cannot bind consumers unless companies can fully, accurately and effectively disclose to consumers the features of an arbitration clause in a way consumers can understand. Given the CFPB's findings that the average credit card contract arbitration clause requires two years of college to understand, I wonder if arbitration clauses can even be written in a way that meets the § 5532 standard.

 

Arbitration Statistics: About One Consumer in a Thousand Opts Out

by Jeff Sovern

Some arbitration clauses provide that consumers can opt out of arbitration if the consumer writes to the company within a certain period of time of entering into the agreement, typically 30-60 days after opening the account. In our arbitration study, we observed that we didn't know how many consumers had taken advantage of such opt-outs. Gregory J. Gauthier has emailed me to point out, among other things, that some information about opt-out rates is available.  In Ross v. American Express, the Discover defendants submitted proposed findings of fact which stated (at ¶ 78) that "Since Discover added its opt-out clause, at least 6,500 cardholders have successfully opted out of the arbitration provision."  Plaintiffs also submitted proposed findings of fact, and at ¶659, they acknowledged that, as they put it, " 6,500 [or] some 0.1% of Discover Cardholders" had opted out. If those figures are accurate and continue to reflect opt-out rates today, they indicate that about one consumer in a thousand opts out of arbitration clauses.

Guest Post From Peter Holland: Forced Arbitration is the Silver Bullet to Kill Consumer Lawsuits, Says Prominent Corporate Attorney

by Peter Holland

In anticipation of the CFPB’s forthcoming study on forced arbitration in consumer contracts, we can expect lots of rhetoric from industry about how arbitration is more consumer friendly than litigation, and that it results in better outcomes (i.e. more money) for consumers.  (If this were really so, then how could a company justify these added losses to their shareholders)?

 It is not often that the general public gets a peek behind industry messaging, so this article and related podcast (especially starting at 8:44) are a particular treat.  Although industry may describe forced arbitration as a consumer protection measure, when talking amongst themselves, they describe it as “silver bullet” which can magically kill consumer claims.  Judge for yourself:

 “What if there existed a single argument that could be made in many consumer cases that would successfully remove the matter from Court and likely end the case in its entirety? 

Surprisingly, such an argument exists, though it is often overlooked in the defense of debt collectors and debt buyers.” 

The answer, according to the author, is to force the case out of court and into arbitration, where the claims will never be pursued because of the cost.  The lawyer in the podcast says that once a court orders arbitration, it is “very rare” a case actually goes to arbitration, and he can only think of 2 cases over the past several years that went to arbitration after the case was stayed or dismissed in court.  One of the reasons he offers is that plaintiff’s attorneys don’t want to spend their own money on arbitration.

So, in the words of one prominent lawyer, industry has a “silver bullet” which kills almost all disputes because of economic barriers and an inability to find lawyers.  Nice system. 

Times Dealbook Piece on St. John's Arbitration Study

Here.