Consumer Law & Policy Blog

Comments from the Arbitration Study Respondents: Contracts Can't Take Away Your Rights as an American Citizen

by Jeff Sovern

Last week I posted the abstract for our study, 'Whimsy Little Contracts' with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements.  The abstract observed that many respondents think that form contracts can't strip consumers of certain rights. That conclusion is obvious from the statistical data, but the written comments make the point more dramatically.  After each multiple choice question, we gave respondents room to comment. Here is some of what they had to say: 

• I don’t see how they could preclude us from filing a class action suit through a whimsy little contract
• You always have a right to pursue legal action when someone has wronged you, it is not up to one party or another to determine whether or not they will take away that right
• It is your right as an American to have a trial by a jury of your peers.
• I believe it is your American right to sue in larger court systems.
• Binding arbitrators are stipulated, right? I GUESS that stipulation could be contested, THEN we’d get a jury trial. It’s also why I avoid putting very much on credit cards.
• I did not read this information but I would expect that [suing in a non-small claims court] would be my right as a free citizen of the US.
• Based on my memory of what I think I’ve read has happened. And an old cliche, “You can’t sign away your rights.”
• I believe that would be my rights as a citizen.

The Supreme Court has a different view of what it means to be an American citizen.

I hope to write more about the article in the days to come.

Arbitration Study Shows That Consumers Who Think They Understand Clauses Twice as Likely to be Wrong

by Jeff Sovern

Last week I posted the abstract for our study, 'Whimsy Little Contracts' with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements.  But the abstract doesn't come close to capturing all the interesting  findings.  I hope to write more about some of them in the days to come. Here's something that didn't make it into the abstract:

Recall that we asked the respondents eight questions that had right and wrong answers. We also asked them how much of the contract they thought they read and had understood.  Respondents who thought they had read and understood more of the contract did get more answers correct than those who didn't.  But those who reported reading and understanding the entire contract still averaged correct responses to only 28% of the questions while those who described themselves as reading and understanding most of the contract clicked the right answer to only 30% of the questions.  In other words, their performance still fell well short of what we would think of as demonstrating understanding. Even worse, those who said they read and understood all the contract were more than twice as likely to record wrong answers as those who reported reading and understanding very little of the contract. Similarly, respondents saying they read and understood all the contract gave twice as many wrong answers as right ones.  It thus appears that those who think they understand arbitration clauses really don't.  That is particularly frightening because consumers who believe they understand the contract may feel more comfortable relying on that supposed understanding--but such confidence would be misplaced.

Our Study Finds Widespread Consumer Misconceptions About the Arbitration Clauses

by Jeff Sovern

Elayne Greenberg, Paul Kirgis, Yuxiang Liu, and I have posted a draft of our article, "Whimsy Little Contracts" with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, to the web.  Here's the abstract:

Arbitration clauses have become ubiquitous in consumer contracts. These arbitration clauses require consumers to waive the constitutional right to a civil jury, access to court, and, increasingly, the procedural remedy of class representation. Because those rights cannot be divested without consent, the validity of arbitration agreements rests on the premise of consent. Consumers who do not want to arbitrate or waive their class rights can simply decline to purchase the products or services covered by an arbitration agreement. But the premise of consent is undermined if consumers do not understand the effect on their procedural rights of clicking a box or accepting a product. 

This article reports on an empirical study exploring the extent to which consumers are aware of and understand the effect of arbitration clauses in consumer contracts.  We conducted an online survey of 668 consumers, approximately reflecting the population of adult Americans with respect to race/ethnicity, level of education, amount of family income, and age.  Respondents were shown a typical credit card contract with an arbitration clause containing a class action waiver and printed in bold and with portions in italics and ALLCAPS. Respondents were then asked questions about the sample contract as well as about a hypothetical contract containing what was described as a “properly-worded” arbitration clause. Finally, respondents were asked about their own experiences with actual consumer contracts. 

The survey results suggest a profound lack of understanding about the existence and effect of arbitration agreements among consumers. While 43% of the respondents recognized that the sample contract included an arbitration clause, 61% of those believed that consumers would, nevertheless, have a right to have a court decide a dispute too large for a small claims court. Less than 9% realized both that the contract had an arbitration clause and that it would prevent consumers from proceeding in court. With respect to the class waiver, four times as many respondents thought the contract did not block them from participating in a class action as realized that it did, even though the class action waiver was printed twice in bold in the sample contract, including one time in italics and ALLCAPS. Overall, of the more than 5,000 answers we recorded to questions offering right and wrong answers, only a quarter were correct. 

Turning to respondents’ own lives, the survey asked if they had ever entered into contracts with arbitration clauses.  Of the 303 respondents who claimed never to have done so and who also answered a question asking whether they had accounts with certain companies that include arbitration clauses in their contracts, 264, or 87%, did indeed have at least one account subject to an arbitration clause. 

These and other findings reported in this Article should cause concern among judges and policy-makers considering mandatory pre-dispute consumer arbitration agreements. Our results suggest that many citizens assume that they have a right to judicial process that they cannot lose as a result of their acquiescence in a form consumer contract. They believe that this right to judicial process will outweigh what one respondent referred to as a “whimsy little contract.” Our results suggest further that citizens are giving up these rights unknowingly, either because they do not realize they have entered into an arbitration agreement or because they do not understand the legal consequences of doing so. Given the degree of misunderstanding the results demonstrate, we question whether meaningful consent is possible in the consumer arbitration context.

To the extent my schedule permits, I will post more about our findings in the days to come.

Alliance for Justice Film: Lost in the Fine Print, on Arbitration Clauses

You can watch the trailer here.

Department of Defense Proposes Military Lending Act Regulations to Protect Soldiers

The Times has the story under the headline Tougher Shield for Soldiers Against Predatory Lenders.  The proposed regulation closes loopholes like these described in the Times story:

The law set a 36 percent interest rate cap on a range of high-cost loan products. But the protections applied to a narrow sliver of loans, covering only loans for up to $2,000 that lasted for 91 days or fewer. It also covered auto-title loans with terms no longer than 181 days. To get around the restrictions, some lenders simply altered their products to evade the restrictions. Some offered loans for just over $2,001, or for periods that were just over 181 days.

A Comment on Comments on the CFPB Arbitration Study

by Jeff Sovern

The CFPB Monitor blog has a post titled Industry trade groups urge OMB not to approve CFPB arbitration telephone survey about a filing by the American Bankers Association, the Consumer Bankers Association and the Financial Services Roundtable. They "strongly recommend that OMB not approve the proposal because it will not produce information of practical utility . . . ."  I couldn't disagree more. 

The survey will ask respondents what credit card they have.  From that, the CFPB should be able to determine if the credit card contract includes an arbitration clause, waives the right to a jury trial,  and the right to participate in class actions, among other things, because the Bureau has credit card contracts on file.  The survey asks respondents about all those rights. Accordingly, the Bureau should be able to find out how aware consumers are about their surrender of those rights.

Suppose for the sake of argument that the Bureau finds that significant numbers of consumers don't realize that they have given up those rights.  Wouldn't that raise questions about whether arbitration clauses are abusive within the meaning of 12 U.S.C. section 5531(d), which provides that conduct can be abusive a long as it “takes unreasonable advantage of— (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service . . . "?  The abusive definition establishes public policy that the Bureau should consider in exercising its discretion to ban or regulate arbitration in consumer financial contracts under the Dodd-Frank Act.

I will have a lot more to say about consumer understanding of arbitration clauses later in the summer.

Drahozal Chapter on AAA Consumer Arbitration

Christopher R. Drahozal of Kansas has written AAA Consumer Arbitration, forthcoming in Beyond Elite Law: Access to Civil Justice for Americans of Average Means (Samuel Estreicher & Joy Radice eds. Cambridge University Press).  Here's the abstract:

This chapter has provided an overview of consumer arbitrations administered by the American Arbitration Association, the largest administrator of consumer arbitrations.  It does not, of course, purport to resolve the ongoing debate over arbitration and access to justice.  A consumer’s incentive to bring a claim (and an attorneys’ incentive to take a case) depend on the costs of the process and the expected outcome in the forum.  With the recent amendments to its consumer arbitration rules, the AAA reduced the cost to consumers of bringing claims in arbitration, both by lowering the upfront fees and by largely precluding reallocation of fees to consumers in the award.  The expected outcome in arbitration (in particular, relative to the expected outcome in court) presents a much more difficult question because limits to available data preclude comparison of similarly-situated complainants.  More research remains to be done. 

Drahozal on FAA Preemption After Concepcion

Christopher R. Drahozal of Kansas has written FAA Preemption after Concepcion, 35 Berkeley Journal of Employment and Labor Law 153 (2014, Forthcoming). Here is the abstract:

AT&T Mobility LLC v. Concepcion is an important case for its holding that the FAA preempts application of state unconscionability doctrine to invalidate an arbitration clause with a class arbitration waiver. But in a number of respects, the effect of Concepcion has been overstated, including its effect on application of state unconscionability doctrine to arbitration clauses. Concepcion does not preempt all or even most state unconscionability doctrine as applied to arbitration agreements. Properly construed, Concepcion preempts state unconscionability doctrine only when that doctrine conditions enforcement of arbitration agreements on procedures inconsistent with “fundamental attributes of arbitration” of the sort illustrated in Concepcion itself ― such as the use of juries, court-monitored discovery, evidentiary rules, and, of course, class arbitration. If, however, the Supreme Court were to construe Concepcion more broadly (or eliminate application of unconscionability to invalidate arbitration clauses altogether), courts would retain some residual authority to police the fairness of arbitration clauses, but only by finding a dispute resolution process not to be arbitration at all.

Media Matters Talks to Paul Bland about Class Actions and Justice

Co-blogger Paul Bland, the new Executive Director of Public Justice, was recently interviewed by Media Matters.  In an engaging interview in his office Paul discusses his singular career as a champion for consumer rights, the importance of class actions as a means of challenging corporate wrondoing, and the pro-corporate bent of the Roberts Court. It's a nicely produced video, complete with animations, and Paul is as articulate a spokesperson as we have on these issues. Well worth watching and distributing widely.

NACA adopts Third Edition of its Standards and Guidelines for Litigating and Settling Class Actions

by Stephen Gardner

The Board of Directors of the National Association of Consumer Advocates adopted the Third Edition of its Standards and Guidelines for Litigating and Settling Class Actions on May 13 (Download here), continuing a tradition of setting high standards for the ways consumer class actions are handled that began with the first Guidelines adopted in 1997 and published at 176 F.R.D. 370. (NACA issued the Second Edition of the Guidelines in 2006, published at 255 F.R.D. 215)

A number of courts have referred to the Guidelines, including Boyle v, Giral, 820 A.2d 561, 569 fn. 8 (D.C.C.A. 2003); Braud v. Transport Service Co. of Illinois, 2010 WL 3283398 (2010 E.D. La.); Figueroa v. Sharper Image Corp., 517 F. Supp. 2d 1292, 1308 (S.D. Fla. 2007); Henderson v. Eaton, 2002 WL 31415728, *6 (E.D.La. 2002); In re Compact Disc Minimum Advertised Price Antitrust Litigation, 216 F.R.D. 197, 204 (D.Me. 2003); In re Educational Testing Service Praxis Principles of Learning and Teaching, Grades 7-12 Litigation, 447 F.Supp.2d 612, (E.D.La. 2006); In re Mexico Money Transfer Litigation (Western Union and Valuta), 164 F.Supp.2d 1002, 1028-1030 (N.D.Il. 2000); In re Prudential Ins. Co. America Sales Practice Litigation Agent Actions, 278 F.3d 175, 194 fn. 1 (3rd Cir. 2002); Milkman v. American Travellers Life Ins. Co., 2002 WL 778272, *7-9  (Pa.Com.Pl. 2002); Moody v. Sears, 2007 WL 2582193 (N.C. Super. 2007);State v. Homeside Lending, Inc.,  826 A.2d 997, 1009-1011 (Vt. 2003); Wilson v. DirectBuy, Inc., 2011 WL 2050537 (D. Conn. 2011).

Because things have changed in the class action world since 2006, NACA’s Executive Director Ira Rheingold appointed a committee consisting of some of the most principled and experienced class action lawyers in the country (Rob Bramson, Seth Lesser, Mike Quirk, Stuart Rossman, and Brian Wolfman) and asked me to chair the committee. I’d had the privilege of helping draft the prior two editions of the Guidelines (together with committee member Rob Bramson), and was happy to coordinate the efforts of this excellent set of drafters.

The Third Edition is thoroughly updated on the law, and continues the spirit of demanding high ethical standards of NACA members who bring class actions. It covers a wide range of issues that arise in consumer class actions (listed below).

One significant, though regrettable, change from the Second Edition is that the Third Edition no longer has a guideline on arbitration, metaphorically marking the regrettable fact that the Supreme Court has effectively aided the business community in forcing arbitration in almost every situation covered by consumer laws.

Each Guideline is organized into three sections: A. The Issue (containing an overview of the current state of the topic of the specific Guideline), B. Discussion (discussing and addressing differing viewpoints), and C. NACA Guideline (the Guideline itself, which the Board adopted as NACA policy).

Reading any or all of these Guidelines provides a good overview of the current status of these issues, both factual and legal, and gives high standards for any lawyer who brings consumer class actions.

• Guideline 1 – The Propriety Of Class Actions When Individual Recoveries Are Small                  
• Guideline 2 – Settlements When Other Class Actions Are On File
• Guideline 3 – Class Actions Involving Homes
• Guideline 4 – Certificate Settlements
• Guideline 5 – Additional Compensation To Named Plaintiffs
• Guideline 6 – Class Member Buyoffs/Rule 68
• Guideline 7 – Cy Pres Awards
• Guideline 8 – Attorney Fee Considerations
• Guideline 9 – Class Member Releases
• Guideline 10 – Confidentiality
• Guideline 11 – Improved Notice Of Settlement
• Guideline 12 – Claim Forms
• Guideline 13 – Communications With Class Members
• Guideline 14 – Role Of Objectors
• Guideline 15 – Monitoring Settlement Compliance

 UPDATE: Brian Wolfman points out to me that it was NACA member Chandler Visher who first suggested that NACA consider revising these Guidelines, so good on ya, Chandler.