Consumer Law & Policy Blog

Rutledge & Drahozal Paper on the Prevalence of Arbitration Clauses After Concepcion and Amex

Peter B. Rutledge of Georgia and Christopher R. Drahozal of Kansas have written 'Sticky' Arbitration Clauses?: The Use of Arbitration Clauses after Concepcion and Amex. Here's the abstract:

We present the results of the first empirical study of the extent to which businesses have switched to arbitration after AT&T Mobility LLC v. Concepcion. After the Supreme Court’s decision in Concepcion, commentators predicted that every business soon would use an arbitration clause, coupled with a class arbitration waiver, in their standard form contracts to avoid the risk of class actions. We examine two samples of franchise agreements:  one sample in which we track changes in arbitration clauses since 1999, and a broader sample focusing on changes since 2011, immediately before Concepcion was decided.  Our central finding is consistent across both samples of franchise agreements:  the use of arbitration clauses in franchise agreements has increased since Concepcion, but not dramatically, and most franchisors have not switched to arbitration. While our results necessarily are limited to franchise agreements and may not be generalizable to consumer and employment contracts, they nonetheless provide valuable evidence on how businesses are responding to Concepcion.

Given our finding that only a handful of franchisors have switched to arbitration clauses since Concepcion, the next question is “why not”?  We reexamine the assumptions underlying the predictions of a switch to arbitration ― that there is no reason for a business not to use an arbitral class waiver and that businesses readily and costlessly can and will modify their form contracts ― and find reason to question both. By using an arbitration clause, businesses do more than simply contract out of class actions:  they contract for a bundle of dispute resolution services, including, for example, a very limited right to appeal.  For businesses that perceive themselves as unlikely to be sued in a class action, these “bundling costs” may discourage them from using an arbitration clause.  In addition, even standard form contracts might be sticky ― i.e., resistant to change even if change might be in the business’s best interest.  We find empirical support for both possible explanations for why many franchisors have not begun using arbitration clauses after Concepcion.

Finally, we consider the potential implications of the Court’s subsequent decision in American Express Cos. v. Italian Colors Restaurant for the future use of arbitration clauses. To the extent bundling costs deter the use of arbitral class waivers, we still would not expect all or most businesses to switch to arbitration even after Amex.  Likewise, to the extent contract stickiness explains the limited switch to arbitration, Amex will have limited effect. In fact, Amex might actually make class action waivers that are not part of an arbitration clause more attractive than before.  Although on its facts Amex addresses the enforceability of arbitral class waivers, much of the Court’s reasoning applies as well to non-arbitral class waivers, which avoid the bundling costs of an arbitral class waiver. Of course, even after Amex much legal uncertainty remains about the enforceability of non-arbitral class waivers. But on this broad interpretation, Amex on the margin increases the attractiveness of non-arbitral class waivers and might result in some uptick in their use (an increase that was occurring even before Amex, at least in franchise agreements).

Soliciting Comments on an Arbitration Study

by Jeff Sovern

I figure if it's good enough for the CFPB, it's good enough for us: 

I'm part of a team, along with other professors and the Hugh L Carey Center for Dispute Resolution here at the Law School, that is crafting a survey on consumer understanding of arbitration clauses.  Unlike the CFPB survey, which is a telephone survey, we plan to approach consumers on the street and ask them to read a credit card contract containing an arbitration clause.  We then will ask questions about the arbitration clause to see what the consumers understand: do they realize they're giving up their right to sue in court, to bring a class action, to seek a jury trial; what happens if the arbitrator rules against them, etc.  It's a little artificial because while we will ask the consumers to imagine that they have just received the credit card contract and to give it the same amount of attention (or lack of attention) they would give a real credit card contract, the way they respond may not be exactly the way they would respond to receiving a real credit card contract.  On the other hand, unlike the CFPB survey, it doesn't require consumers to try to remember terms they may not have read in years. And who knows if we will even be able to persuade people to take the time to answer the questions?  Anyway, just as the CFPB is soliciting comments on its survey, I would love to get helpful comments on ours.  If you want me to email you the draft survey for the purpose of commenting on it, please let me know in the comments or email me at sovernj at stjohns dot edu.  We have already begun testing the survey and may begin surveying consumers in earnest next week, so we would prefer to have any comments soon.

Talking Arbitration, the Supreme Court, and Civil Rights

I'm presenting at a few CLE programs over the next few days and I thought readers of the blog might be interested. The first can be accessed via phone; the other two will be at the American Association of Justice's Annual Convention in San Francisco:

• A one-hour phone briefing on American Express v. Italian Colors: Practical Implications for Class Action Attorneys, on Tuesday, July 23 at 10-11 Pacific/1-2pm Eastern. I represented the respondents in Italian Colors and will be joined by Archis Parasharami of Mayer Brown, who represented the U.S. Chamber of Commerce as amicus.  The program is moderated by Professor Thomas Stipanowich of Pepperdine Law, a leading expert on the law of arbitration. (There's a $25 discount for CL&P readers.)

• A talk on the U.S. Supreme Court Term in Review to AAJ's Civil Rights Section, Monday, July 22, 11am.

• A talk on Arbitration Developments to AAJ's Class Action Litigation Group, Tuesday, July 23, 2:15pm.

American Banker: Truth in Lending Litigation Slows But Bankers Remain Wary

by Jeff Sovern

Here (behind paywall).  Excerpt:

 

Court decisions tied to the 1968 law fell 18% year over year during a
12-month period that ended May 31, to 1,037, data from the National Consumer
Law Center shows. That number is down 38% from the peak two years earlier.

The pace of new litigation is also slowing. In May, plaintiffs filed 16
lawsuits in federal courts over alleged Truth in Lending violations, according
to TRAC Records, a research arm of Syracuse University. That was less than half
the lawsuits filed a year earlier and much lower than the 152 civil actions
filed in May 2009.

The article offers several speculations as to the causes of the drop, but doesn't mention arbitration clauses as one possible cause.  I'm not sure why that possibility is omitted, given that a goal of arbitration clauses is to eliminate litigation, even though that goal is not always acknowledged.

Is American Express v. Italian Colors the "Worst Supreme Court Arbitration Case Ever"?

So says Paul Bland in a persuasive blog post.

Feeney in Plain English

A commenter on my post about the Massachusetts Supreme Judicial Court's decision in Feeney asked for an explanation in plain English. Here goes.

The court decided that Massachusetts courts will not enforce an arbitration clause that bans class actions when a claim really cannot be pursued without a class action.

For example, if the claim is legally or factually complicated, each individual's damages are so small that it's not economical to try to pursue the claim individually, and the arbitration agreement doesn't allow successful plaintiffs to get attorneys' fees or provide any other incentives that will make individual arbitration a practical way to proceed, then the only way to try to pursue that claim is to combine each small individual claim into a larger class action. In those kinds of cases, an arbitration agreement that says you can't have a class action won't be enforced by the Massachusetts courts.

However, the court in Feeney also decided that it can't strike down a class action ban just because it thinks that it is bad policy to ban class actions or that class actions have practical advantages over individual arbitration. Only when a class action ban effectively means a plaintiff cannot assert a claim is it invalid.

The court decided that the claims in the Feeney case, which were that Dell was illegally collecting small amounts of tax when buyers bought service contracts, could not really be made without a class action, so the class action ban in Dell's arbitration agreement could not be enforced in that case. But in the companion case, Machado, the court decided that the individual claims were big enough that it was possible to pursue the claims without a class action.

 

The U.S. Supreme Court is considering similar issues in the American Express case, where a decision is expected in the next 10 days. If the Supreme Court rejects the kind of reasoning employed in Feeney, Feeney could become a dead letter. If not, Feeney may be extremely important.

Times Report: Automakers Push Back Against Consumer Protections

Here.  The story is about how car makers are using arbitration clauses to defeat consumer protections, including state lemon laws, and keep defects secret.

Voice of San Diego Series on Mandatory Arbitration, and a Response to Professor Lobel

by Deepak Gupta

The Voice of San Diego has been publishing a muli-part series on mandatory arbitration by reporter Will Carless. The most recent installment explores the war on consumer class actions and the impact of AT&T Mobility v. Concepcion. Previous installments focus on arbitration secrecy, the National Arbitration Forum debacle, and the plight of an individual consumer in the arbitraiton system. You can find the full series here, and hear Carless interviewed in a radio segment as well.

I spent some time talking to Carless for the series, and was impressed by his thoroughness. It's terrific to see a local organization devoting such significant resources to this under-reported story. More generally, the site itself is worth checking out as a great example of the new non-profit model of investigative reporting. 

The Voice has also published a response of sorts by Orly Lobel, a University of San Diego law professor (and former CL&P contributor), who argues that "the advantages of arbitration should not be understated" and suggests that policymakers focus on tinkering with the procedural fairness in the arbitration system itself rather than adopt more systemic reform. Her column deserves a quick response.

The problem with Lobel's argument is that it relies chiefly on comparative studies that ask: How do indivdual consumers who are able to bring claims and complete the arbitration process fare compared to individual consumers who do so in court? But, as several other legal scholars have pointed out, that's the wrong question to ask for purposes of policy reform because it misses the real purpose and effect of mandatory arbitration clauses in mass consumer contracts. Hypothetically, if arbitration clauses wiped out 99% of the claims, would it make sense to focus on putting the 1% that remain under the microsope? As Jean Sternlight of UNLV has recently argued, we should instead be asking "whether consumers' claims are suppressed or eliminated altogether as a result of companies' use of mandatory arbitration clauses." And always worth reading on this general topic is David Schwartz's article, Mandatory Arbitration and Fairness, which lays bare the misuses of empirical research by opponents of arbitration reform. This is not to say that Lobel is a political opponent of the sort that Schwartz's article has in mind; her column seems a bit more fair-minded and circumspect. But to the extent that she contends that comparative studies of individual outcomes can make the case against systemic arbitration reform, she is widely off the mark.

Charles Schwab drops its class-action ban, at least for now

In February, the brokerage firm Charles Schwab won a ruling from a hearing panel of FINRA, the financial industry regulatory authority, invalidating FINRA's rule against class-action bans and allowing Schwab to use a class-action ban in its customer agreements.  The panel concluded that "the amended language used in Schwab's customer agreements to prohibit participation in judicial class actions does violate FINRA rules, but that FINRA may not enforce those rules because they are in conflict with the Federal Arbitration Act," as interpreted by the U.S. Supreme Court in AT&T Mobility v. Concepcion.

Now, just three weeks after Public Citizen launched a campaign to shame Schwab into dropping its class-action ban, it has done just that -- at least for now.  Here's Public Citizen's statement and here's Schwab's statement describing its decision:

SCHWAB STATEMENT ON CLASS ACTION WAIVERS

SAN FRANCISCO, May 15, 2013 — The Charles Schwab Corporation today made the following statement about class action waivers in Schwab client account agreements:

Effective immediately, Schwab is modifying its account agreements to eliminate the existing class action lawsuit waiver for disputes related to events occurring on or after May 15, 2013 and for the foreseeable future.

While the company believes that dispute resolution is best handled via FINRA arbitration, we have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decisions.  Given that the process will likely take considerable time to resolve, and may leave clients with a degree of uncertainty about their dispute resolution options in the meantime, we have elected to remove that uncertainty until the legal and regulatory process is completed.

To help ensure that small investors have access to pursue any claims they consider appropriate within the arbitration forum available to them, we will continue our existing policy of paying for the arbitration fees of any investor electing to pursue an arbitration claim under $25,000 against Schwab.

Related articles

UPDATE 1-Schwab reverses ban on client class-action lawsuits

Charles Schwab Drops Forced-Arbitration Clause From Contracts

Arbitration Fairness Act Reintroduced Today in Congress

by Deepak Gupta

The Arbitration Fairness Act of 2013 -- legislation that would ban mandatory pre-dispute binding arbitration in consumer and employment contracts -- was introduced today in both houses of Congress by Senator Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.). New to this version of the bill--an exclusion for antitrust disputes.

The House bill (H.R. 1844) has 22 original cosponsors; the Senate bill (S. 878) has 17 original cosponsors. The legislation's proponents hope to use the bill as a catalyst for movement on arbitration in a number of areas -- including hearings, expanded coalition building, continued media attention, as well as supporting action at the CFPB and the SEC and through additional future legislation.

Here's a letter of support from a broad coalition of supporters, including the AFL-CIO, American Association for Justice, American Civil Liberties Union, Consumer Federation of America, Consumers Union, NAACP, National Association of Consumer Advocates, Public Citizen, and U.S. PIRG, among others.

Learn more: Take Justice Back, Fair Arbitration Now.