Consumer Law & Policy Blog

TV News Story on Arbitration

Here.

Can Downloading a Coupon Bind Consumers to Arbitration?

Yesterday's and today's Times have a pair of articles on General Mills's new arbitration policy (HT: Eric Levine). According to the articles, yesterday's When ‘Liking’ a Brand Online Voids the Right to Sue and today's General Mills Amends New Legal Policies, if you sign up for General Mills email alerts, download a coupon from General Mills (including in exchange for "liking" a General Mills product on Facebook), you agree that any dispute you have with the company is to be decided by binding arbitration. The Atlantic offers its perspective here. The Sunday Times Magazine also has an arbitration piece, How Payday Lenders Prey Upon the Poor — and the Courts Don’t Help in its It's the Economy column.

Are political conservatives trying to weaken popular support for social security by slashing its budget for customer service?

That's the theme of this article by Michael Hiltzik. Here's an excerpt:

[I]f you really want to destroy a business, just hack away at its customer service. ... The principle also holds true for government programs, which is why you should be very suspicious about the relentless budget-cutting at the Social Security Administration. Mark Miller of Reuters brings us up to date on this underhanded campaign, which involves closing field offices by the score, satellite offices by the hundreds and service staff by the thousands. "Visitors to field offices waited more than 30 percent longer in fiscal 2013 than in 2012," Miller reports. "Busy signals on the SSA's toll-free customer assistance line (800-772-1213) doubled in fiscal 2013 over the previous year." As Nancy Altman, co-director of the advocacy group Strengthen Social Security, told Miller, this is part of "a raging fight by conservatives to get rid of the government's footprint wherever possible." And since Social Security has long been in their cross hairs, it's unsurprising that a meat cleaver has been taken to its administrative budget. The budget request has been pared down in 14 of the last 16 years, Miller found.

An Overseas Look at Binding Arbitration Clauses

Bruce Wardhaugh of the School of Law--Queen's University Belfast haas written Unveiling Fairness for the Consumer:  The Law, Economics and Justice of Expanded Arbitration, forthcoming in the Loyola Consumer Law Review. Here is the abstract:

In recent years, the US Supreme Court has rather controversially extended the ambit of the Federal Arbitration Act to extend arbitration’s reach into, inter alia, consumer matters, with the consequence that consumers are often (and unbeknownst to them) denied remedies which would otherwise be available.  Such denied remedies include recourse to class action proceedings, effective denial of punitive damages, access to discovery and the ability to resolve the matter in a convenient forum.

The court’s extension of arbitration’s ambit is controversial.  Attempts to overturn this extension have been made in Congress, but to no avail.  In contrast to American law, European consumer law looks at pre-dispute agreements to arbitrate directed at consumers with extreme suspicion, and does so on the grounds of fairness.  In contrast, some argue that pre-dispute agreements in consumer (and employment) matters are consumer welfare enhancing:  they decrease the costs of doing business, which is then passed on to the consumer.  This Article examines these latter claims from both an economic and normative perspective.

The economic analysis of these arguments shows that their assumptions do not hold.  Rather than being productive of consumer surplus, the use of arbitration is likely to have the opposite effect.  The industries from which the recent Supreme Court cases originated not only do not exhibit the industrial structure assumed by the proponents of expanded arbitration, but are also industries which exhibit features that facilitate consumer welfare reducing collusion.

The normative analysis addresses the fairness concerns.  It is explicitly based upon John Rawls’ notion of “justice as fairness,” which can provide a lens to evaluate social institutions.  This Rawlsian analysis considers the use of extended arbitration in consumer matters in the light of the earlier economic results.  It suggests that the asymmetries present in the contractual allocation of rights serve as prima facie evidence that such arbitration-induced exclusions are prima facie unjust/unfair.  However, as asymmetry is only a prima facie test, a generalized criticism of the arbitration exclusions (of the sort found in Congress and underlying the European regime) is overbroad.

Radio Interview on Fine Print in Consumer Contracts

Here.  Tim Danahey interviews Theresa Amato of Fair Contracts.org and Citizen Works.  Theresa discusses how consumer contracts reduce consumers to "contract serfdom" and also explores issues governing arbitration clauses. Worth a listen, and if you are teaching consumer law this semester, this merits passing on to students as a painless way to learn about consumer protection issues.

How the Obama Administration Can Unilaterally Strike a Blow Against Arbitration Clauses

by Jeff Sovern

A theme of the President's state of the union address was that if he cannot achieve his goals by working with Congress, he will pursue those goals unilaterally, to the extent he can, through executive action.  One tool presidents have is the purchasing power of the United States.  The US buys about $500 billion worth of goods and services annually, more than anyone else.  As this Sunday Times Review essay by Ian Urbina notes, presidents, including President Obama, have used this tool to effect social change.  Urbina explained:

In 1941, for example, President Franklin D. Roosevelt issued an executive order prohibiting racial discrimination by defense contractors after it became clear that federal legislation would be impossible because of the stranglehold that Southern Democrats had on Congress.

Since then, the government has used its purchasing power to promote an array of other social goals, including ending forced child labor, promoting recycled paper, incentivizing the hiring of disabled people and opposing apartheid.

President Obama has made one major foray into this realm. In September 2012, he issued an executive order strengthening rules preventing federal agencies from using factories that relied on forced labor or trafficked workers. * * *

Suppose the president ordered that federal agencies not do business with companies that use predispute arbitration clauses.  Businesses like Citibank  that both do business with the government (see here and here) and use arbitration clauses would have to choose which one was more valuable to them.  The result might be fewer consumer contracts subject to arbitration clauses. And the president wouldn't have to wait for Congress to pass the Arbitration Fairness Act to get there.

What's the downside?  Urbina reports that some critics charge that using government purchasing power to accomplish substantive goals helps contractors who are better at gaming the system.  Yet those who use arbitration clauses have already demonstrated skill at gaming the system, and so presumably no company using arbitration clauses would be disadvantaged in that way. Other critics claim that such strategies might increase costs to the government.  But some major businesses, including JPMorgan Chase with its credit cards, are already eschewing the use of binding arbitration clauses, and there's no evidence that their prices are not competitive. 

This president has already done a lot for consumers by signing the Dodd-Frank Act and creating the Consumer Financial Protection Bureau.  He can add to that legacy by using the government's purchasing power to do still more.

Tenth Circuit rejects "one-sidedness" as defense to arbitration clause

Even as the Supreme Court has aggressively wielded the Federal Arbitration Act to preempt state-law contract rules that prevent arbitration, state courts have still been able to use traditional contract doctrines to invalidate arbitration agreements that are unfairly "one-sided" -- for instance, where an agreement provides that a business gets to bring its claims in court but the consumer must bring her claims in arbitration.

In a decision that could have far-reaching implications, the Tenth Circuit rejected that reasoning yesterday in THI of New Mexico v. Patton, holding impermissible (and therefore preempted) under the FAA the New Mexico state courts' position that a business-goes-to-court-but-consumer-goes-to-arbitration agreement is unfairly one-sided. Because the FAA requires courts to treat arbitration as equal to litigation, reasoned the Tenth Circuit, courts cannot assume that consumers are being treated unfairly by being forced to arbitrate their claims even though the business who drafted the arbitration agreement chose to retain its own access to courts. That view, according the Tenth Cicuit, is premised on the notion that arbitration is inferior -- a view that contravenes the FAA. (One wonders: if arbitration is so great, why would a business force only its prospective opponents to go there, while reserving its own right to go to court?)

If this reasoning is picked up in other courts, consumer advocates will have lost a critical tool in challenging arbitration agreements.

Did the CFPB Discover a Natural Experiment on the Impact of Arbitration Clauses on the Willingness of Consumers to Bring Claims?

by Jeff Sovern

I'm finally getting around to reading the CFPB's December 12 report, Arbitration Study: Preliminary Results, about which Brian blogged here. Though the Bureau does not make much of it, perhaps because the natural experiment has some flaws (as natural experiments often do), the CFPB Study sheds some light on the impact of arbitration clauses on the willingness of consumers to file claims.  At page 70, the Study states "consumers filed more than four times as many federal court credit card disputes as AAA credit card arbitrations" from 2010 to 2012.  Combine that with two other items noted in the Study. At page 12, the Study reports that "just over 50% of credit card loans outstanding are subject to" arbitration clauses.  The other item is how frequently AAA is identified in credit card contracts as the arbitration provider.  At page 34, the Study explains:

Nearly half (48.5%) of credit card arbitration clauses in the sample listed AAA as the sole option.  Three listed JAMS and three listed NAF as sole options. * * *Counting clauses in which AAA is at least an option yields * * *  83.3% for credit card arbitration clauses . . . .

What does all this mean? To some extent, it allows us to compare the incidence of consumers bringing claims under contracts containing arbitration clauses and under contracts not containing such clauses. If arbitration clauses had no impact on the willingness of consumers to file claims, we would expect to see slightly more consumers filing arbitration claims than consumers filing claims in court, to reflect the fact that slightly more credit card loans are subject to arbitration clauses than aren't.   But we don't: in fact, we see four times as many claims filed in federal court as in AAA arbitrations.  That seems like a huge difference and suggests that arbitration clauses substantially reduce the willingness of consumers to file credit card cases.

But now we get to the flaws. First, we don't know that the people with credit card loans subject to arbitration clauses are similar to those whose credit cards are not subject to arbitration clauses.  For example, if different types of consumers were drawn to different credit card issuers, that could conceivably account for the differences.  Second, not all the arbitration clauses designated the AAA as the provider. While nearly half the credit card contracts with arbitration clauses list AAA as the sole arbitration provider, that still leaves about a third who could choose a different provider and nearly a fifth who, if they opt for arbitration, must go with a different provider.  But that doesn't fully explain the differences  Even if we assume that everyone who has a choice about going to AAA selects an alternative provider, we end up with about half the consumers subject to arbitration clauses filing claims with the AAA (assuming also that the number of consumers filing claims is evenly distributed among those with arbitration clauses)--which explains only half the difference the Bureau found between AAA filings and federal court filings.   And how likely is it that consumers with a choice would consistently reject the AAA?  Finally--and this suggests that the CFPB comparison understates the scope of the effect--the CFPB compared only federal court filings with arbitration filings, and obviously cases are also filed in state courts. Indeed, many arbitration clauses do not bar consumers from filing claims in state small claims courts. 

So it's not a perfect comparison by any means, but it sure suggests that arbitration clauses result in fewer filings than contracts lacking such clauses.  That's not a surprise (after all, many in the industry, which benefits from fewer filings, support arbitration clauses, and consumer advocates oppose them), but still it's interesting to have some support for something that many have long suspected.

TV News Report on Binding Arbitration

Here. 

Cole Paper on the Federalization of Consumer Arbitration

Sarah Rudolph Cole of Ohio State haas written The Federalization of Consumer Arbitration: Possible Solutions.  Here is the abstract:

Over the past fifteen to twenty years, businesses dramatically increased the use of arbitration clauses in contracts with consumers.  Although commentators criticize the use of arbitration to resolve consumer disputes because arbitration lacks the due process protections inherent in traditional litigation, efforts to regulate or eliminate the use of arbitration in this context have failed miserably.  This failure to due in large part to the Supreme Court’s embrace of arbitration and the corresponding lack of federal legislative interest in addressing this issue.  The Supreme Court’s arbitration jurisprudence, particularly as it applies to consumer disputes, is the surest example of the “federalization” of an area of law that federalism principles dictate traditionally belong to the states.  Interpreting the Federal Arbitration Act (FAA), the Court routinely applies a preemption doctrine that effectively precludes states from regulating the use of arbitration to resolve consumer disputes.  As a result, enforcement of state laws regulating the use of arbitration to resolve consumer disputes has become the exception rather than the rule.

This Article will focus on the Supreme Court jurisprudence that led to the current situation in which state law plays a minimal role in arbitration doctrine.  While state legislatures traditionally regulate contract law issues, the Supreme Court’s interpretation of the FAA has resulted in an anomalous situation in which federal law routinely trumps state laws attempting to reform arbitration.  The Article will also explain how the Court’s Stolt-Nielsen (2010) and Concepcion (2011) decisions took the anti-federalism approach a step further – by permitting preemption in areas the FAA does not address.  This expansion of the preemption doctrine further undermines the states’ ability to substantively regulate arbitration by defining arbitration in a very specific way and then declaring preempted any regulation or decision that is not consistent with the definition.  Moreover, this expansion, together with Congress’ lack of interest in regulating arbitration, makes it quite likely that private dispute resolution providers will be the only institutions able to reform the arbitration process.  Recognizing that arbitration law is largely federalized, this Article will then identify a number of possible reforms private dispute resolution providers could implement and review one of the more promising avenues of reform – arbitrator opinion-writing – in greater depth.  This reform would have a number of beneficial effects.  It would provide transparency in the arbitration process, address problems perceived to exist in the arbitrator selection process, make clear whether the parties received due process during the arbitration, and ensure that awards are carefully considered and evidence properly balanced.