Consumer Law & Policy Blog

Zacks Paper on Whether Contract Design Influences Consumer Behavior

Eric A. Zacks of Wayne State has written Shame, Regret, and Contract Design, forthcoming in Marquette Law Review. Here is the abstract:

This Article examines whether contract design can influence the post-formation behavior of the party that did not prepare the contract. Repeat players that utilize the same contract for many transactions, as is the case for many consumer transactions, would be significantly advantaged if this were true. This Article suggests that several contractual features can be explained in terms of their ability to exploit the cognitive biases of, and to induce particular “advantageous” emotions from, the other party after the contract has been executed. These features may include arbitration provisions, disclosures in capital letter or bold face type, “reliance” language, and language framing possible losses in particular ways. Contracts can encourage us to feel shame, to blame ourselves, to believe that contracts are sacred promises that should be specifically performed, to utilize faulty judgment heuristics when determining contract costs, and to rely on misperceived social norms with respect to challenging or breaching contracts. This may influence us not to breach or challenge an otherwise uneconomical, unconscionable, or illegal contract. Consequently, contract preparers may be able to enjoy the benefits of promises that often would not be realized if the other contracting party were profit-maximizing like the contract preparer.

Bales & Gerano Paper: Oddball Arbitration

Richard A. Bales and Mark B. Gerano, both of Northern Kentucky have written Oddball Arbitration, 30 Hofstra Labor & Employment Law Journal (2013). Here's the abstract:

Congress passed the FAA in 1925 to resolve commercial disputes involving merchants. Since then, the Supreme Court has dramatically expanded the scope of the FAA and applied it in the employee and consumer settings. More recently the Supreme Court has chosen for its arbitration docket a set of cases with wholly atypical fact patterns in what appears to be a deliberate effort – successful so far – to advance its pro-arbitration policy agenda without provoking a political backlash. This article describes three oddball arbitration cases and argues that their atypical facts have permitted the Court to create legal rules that, while perhaps creating a just outcome in the oddball cases themselves, create unjust outcomes in the typical arbitration cases that much more commonly appear in the lower courts

Automotive News Survey Finds Many Dealers Expect CFPB to Bar Use of Arbitration Clauses

Here.  An excerpt:

* * * Nearly 40 percent of dealers responding to a recent unscientific Automotive News survey also expressed concern that they soon will lose  the arbitration option.

"I think arbitration is on its last legs," said Tom Hudson, a partner in the  Hudson Cook law firm in Hanover, Md., who predicts the bureau could issue such a  ruling before year end.

Interesting Column by The Nation's Rick Perlstein on Fine Print Contracts

Here.  And here's the beginning:

Imagine you’ve clicked on your computer screen to accept a contract to purchase a good or service—a contract, you only realize later, that’s straight out of Kafka. The widget you’ve bought turns out to be a nightmare. You take to Yelp.com to complain about your experience—but lo, according to the contract you have given up your free speech rights to criticize the product. Let’s also say, in a fit of responsibility, (a bit fantastic, I know) you happened to have printed out this contract before you “signed” it, though you certainly hadn’t read through the thing, which is written, literally, on a “twenty-seventh grade” reading level. Well, you read it now (perhaps with the help of a friend who’s completed the twenty-seventh grade). And you see that there was nothing in the contract limiting your right to free speech at the moment you signed it. That part was added later. Your friend with the twenty-seventh-grade education points to the clause in the contract in which you’ve granted this vendor-from-hell the right to modify the terms of the contract, unilaterally, at any time into the vast limitless future.

Others, you realize, must have had the same problem with this lemon of a product. You begin canvassing the possibility of a class action suit. But you guessed it: the contract you agreed to waived your right to class action as well.

You study this gorgon of a text to figure out what other monstrosities lie within—and discover this: you’ve waived away your right to the privacy of certain information, too. Shocked, you resolve: never again. You realize that when you buy a product or service, you’re also buying the contract that goes with it. So you’ll comparison shop. You think about how, when you rent a car, you have to sign and initial all that contract language you have no time to read with eight people behind you in line at the airport. So you call all the big rental car companies to get copies of their standard boilerplate contracts to read at your leisure—but not one would e-mail you the contract. You’re told it just isn’t done.

Two Conceptions of Concepcion

Arpan Sura and Robert A. DeRise, both of Arnold & Porter, have written Conceptualizing Concepcion: The Continuing Viability of Arbitration Regulations.  Here's the abstract:

Section 2 of the Federal Arbitration Act (“FAA”) provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In AT&T Mobility Limited, LLC v. Concepcion, a sharply-divided Supreme Court held that the FAA preempted a California unconscionability rule that effectively guaranteed plaintiffs the right to class action arbitrations. A wildly controversial decision, Concepcion has left courts and litigants uncertain about whether longstanding state and federal regulations on the arbitration process remain viable. To take but a few examples, may the draftor of an adhesive contract select the arbitrators unilaterally or eliminate all of a plaintiff's rights to discovery? State and federal courts have traditionally not permitted such behavior. But to date there has been no systematic analysis of the impact of the Concepcion Court’s expansive reasoning on such regulations.

This article — the first of its kind to do so — fills that void. We argue that Concepcion has entrenched, and in many ways rewritten, the fundamental principles of arbitration jurisprudence. What made Concepcion a bellwether was not its narrow holding on class actions, but rather its unprecedented analysis of when and how the FAA trumps other laws. In earlier opinions, the Court had suggested that the FAA would trump rules that were not “generally applicable” but instead were applied to discriminate against arbitration. But in Concepcion, the Court devised a new test that held that the California rule was preempted because it conflicted with the “fundamental attributes of arbitration” — informality, efficiency, reduced costs, and speed.

We argue that the Court’s newly-minted preemption analysis, in combination with its free-floating abstractions about arbitration’s “fundamental attributes,” threaten to jeopardize a bevy of facially neutral contract laws merely because they are applied to arbitration agreements. In formalizing what arbitration is and why it is important, Concepcion has unwittingly upended decades of statutory and common law that hinder arbitration’s “fundamental attributes.” This article describes how the Court arrived upon this precipice, shows how going over — taking Concepcion’s reasoning to its logical conclusion — disrupts a longstanding body of law, and suggests a lodestar to guide courts and litigants safely back from the post-Concepcion cliff.  

Meanwhile, Lisa Tripp of Atlanta's John Marshall and Evan R. Hanson have written AT&T v. Concepcion: With Only Four Votes for the Deciding Rational [sic], Is it Precedent?. Here's their abstract:

The Supreme Court’s 2011 decision in AT&T v. Concepcion is considered by many to be a landmark decision which has the potential for greatly expanding the already impressive preemptive power of the Federal Arbitration Act (FAA). It is a well-known case exploring the interplay between state law unconscionability doctrine and the vast preemptive power of the FAA. In spite of its significance as an FAA case, Concepcion’s real importance may lie elsewhere.

AT&T v. Concepcion is ostensibly a 5-4 majority decision with a concurring opinion. However, the differences in the majority and concurring opinions present a unique conundrum for lower courts. Although the Court is not divided in form, there being 5 Justices who joined the majority opinion, it is indisputably divided in substance.

Justice Thomas joined the majority opinion and provided the fifth vote, but wrote a concurring opinion that explicitly rejected the legal reasoning of the majority opinion in its entirety. The putative majority opinion authored by Justice Scalia allows that unconscionability can be a valid defense to the enforcement of an agreement to arbitrate, but in Concepcion, allowing California to apply its unconscionability doctrine (the Discover Bank rule), would frustrate the purposes and objectives of Congress in enacting the FAA. For these reasons the Scalia opinion finds the law is preempted.

Justice Thomas, in contrast, does not believe that unconscionability can ever be a basis to invalidate an agreement to arbitrate and he reaffirmed his emphatic position articulated in Wyeth v. Levine that “[t]his Court’s entire body of purposes and objectives preemption jurisprudence is inherently flawed. The cases improperly rely on legislative history, broad atextual notions of congressional purpose, and even congressional inaction in order to pre-empt state law.” Justice Thomas’s conclusion that the law was preempted turned on the text of the statute which he interprets as not allowing unconscionability-based defenses to preemption. Justice Thomas has reaffirmed his rejection of purposes and objectives preemption in cases decided after Concepcion. This means, looking at the substance of the opinions, that there are but four votes for the ratio decidendi articulated in the Scalia opinion and there is not a single common denominator that the Scalia and Thomas opinions share, except that they agree on the result.

The Concepcion Court is, in substance, equally divided. Four members found that California’s unconscionability doctrine frustrated the purposes and objectives of the FAA, four in the dissent thought the law did not frustrate the purposes and objectives of the FAA, and one found that the purposes and objectives of Congress were immaterial to the resolution of the case.

How should lower courts react to an equally divided court in this situation? The Supreme Court provided the answer over 100 years ago in Hertz v. Woodman: "Under the precedents of this court, and, as seems justified by reason as well as by authority, an affirmance by an equally divided court is, as between the parties, a conclusive determination and adjudication of the matter adjudged; but the principles of law involved not having been agreed upon by a majority of the court sitting prevents the case from becoming an authority for the determination of other cases, either in this or in inferior courts."

Under any rational reading of the opinions, there can be no doubt that “the principles of law involved [have not] been agreed upon by a majority of the court sitting” and this should “prevent[] the case from becoming authority for the determination of other cases, either in [the Supreme Court] or in inferior courts.” Although Hertz dealt with a situation where the votes were literally split, its point that it takes a majority to create a governing rule is inescapable. In looking at the substance of the Scalia and Thomas opinions, there simply are not five votes for any aspect of the controlling rational articulated by Justice Scalia in his putative majority opinion. Because of this, Concepcion must, like two other Supreme Court cases that are similar to it, Branzburg v. Hayes and United States v. Verdugo-Urquidez, be treated as not having a majority opinion for precedential purposes.

 

 

Nancy Welsh Paper on Arbitration and Incentivizing Procedural Safeguards

Nancy Welsh of Penn State has written Mandatory Predispute Consumer Arbitration, Structural Bias, and Incentivizing Procedural Safeguards, 42 Southwestern University Law Review 187 (2012).  She presented the paper at the AALS annual conference.  Here's the abstract:

Within the past several decades, there has been an explosion in the creation, institutionalization and use of “alternative” dispute resolution procedures. Mandatory predispute arbitration has generated the most controversy because it appears beset with structural bias. The recent cases of AT&T Mobility LLC v. Concepcion and Compucredit Corp. v. Greenwood have raised additional concerns as the Supreme Court has announced that corporations can force consumers to arbitrate their private and statutory claims and give up their rights to pursue class relief. This Article begins by arguing that the Supreme Court’s enthusiastic embrace of mandatory predispute arbitration should be understood primarily as institutional self-help, as an opportunistic search for the funding and personnel that courts need to conduct fact-finding and decision-making in cases that the courts perceive as routine. By permitting corporations to impose class waivers on consumers, the Supreme Court is incentivizing the corporations to provide and fund a national private small claims court.

If the Court is incentivizing in this way, however, this Article urges that it should demand more in return for class waiver. Specifically, it should demand evidence that the arbitration procedure is sufficiently attractive to consumers so that they will pursue their claims, as well as evidence that the procedure is sufficiently fair. One difficulty in making these demands, however, is that courts are obligated to use very limited grounds and a deferential standard of review for arbitral awards.

Second, therefore, this Article urges courts to mine past experience in other legal contexts that involve privatized judicial functions, a deferential standard of judicial review, and the incentivizing of procedural safeguards. For guidance, this Article examines MetLife v. Glenn and the evolution of the deferential standards of review that courts apply to ERISA plan benefit denials by private claims administrators, particularly when such administrators operate in a conflicted decision-making context. In this context, the Supreme Court has managed to acknowledge the existence of structural bias and make it a relevant and important factor to be considered as part of deferential judicial review. Further, the Supreme Court has provided guidance to lower courts regarding the weight to be given to structural bias and has provided examples of the information required to assess such weight. Structural bias has been given the stature of tiebreaker in close cases. Finally and most important for the purposes of this Article, the Supreme Court has also incentivized the provision of structural and procedural safeguards (as well as discovery into the existence and operation of such safeguards) in order to reduce the potency of the structural incentives that encourage biased decision-making. In other words, the Supreme Court has incentivized the provision of safeguards that will enhance the likelihood of accurate decision-making — all while maintaining a deferential standard of review.


Glenn and its progeny thus offer procedural safeguards that the Supreme Court could -- and should -- import into its arbitration jurisprudence. These, at the very least, are the sorts of safeguards that the valuable bargaining chip of class waiver should be able to buy.

 

 

Supreme Court Hears Oral Arguments in Major Arbitration Case: American Express v. Italian Colors

by Deepak Gupta

Along with the historic Voting Rights Act arguments this morning, the Supreme Court heard oral arguments in American Express v. Italian Colors -- a major antitrust arbitration case that we've mentioned on the blog several times over the years (e.g., here and here).  I've been serving as co-counsel for the plaintiffs/respondents in the Supreme Court along with Paul Clement, who argued for our side today. Deputy Solicitor General Malcolm Stewart also appeared -- making a rare appearance for the U.S. government in an arbitration case -- as amicus curiae supporting the plaintiffs/respondents. 

The argument transcript is available here and all of the briefing here.  You can find an illuminating discussion of the case at the Point of Law blog here, with pro and con submissions by Myriam Gilles and Ted Frank.  An early report from Bloomberg is here.

There was some dispute today about exactly what the question presented is, but the basic legal issue in the case -- in layman's terms -- is whether a court must send a case to arbitration even where it is undisputed that the plaintiffs can't vindicate their federal statutory claims in the arbitral forum. I say there was some dispute because even though it was uncontested below that the plaintiffs couldn't vindicate their claims, the petitioners seemed to want to retreat from that position and some of the Justices questioned whether they could do so, leaving open the possibility of some kind of limited remand.

I'm not going to venture any predictions here, but I can safely say that our best arguments were ably presented and that the Justices seemed to understand that this case was not about the availability of class actions, but about whether there will be some kind of ultimate safety valve in the arbitration system at least where important federal statutory rights are at stake.

Carolyn Dessin Paper: Arbitrability and Vulnerability

Carolyn Dessin of Akron has written Arbitrability and Vulnerability, 21 Temple Political & Civil Rights Law Review, 349 (2012).  Here's the abstract:

Arbitration is cool. Everybody's doing it. In the eighty-five years since the passage of the Federal Arbitration Act, that seems to be the prevailing sentiment. Recent decades have seen the meteoric rise of arbitration as a form of alternative dispute resolution. Arbitration is widely regarded as a less expensive, more expeditious alternative to litigation.

Courts frequently note that federal policy clearly favors arbitration. No judicial enthusiasm for arbitration seems more complete than that evidenced in the jurisprudence of the United States Supreme Court.

Along with the rise of arbitration, however, there has also been a rise in the amount of criticism of arbitration. Some suggest that nothing short of a complete overhaul of the Federal Arbitration Act will correct problems that have arisen in the arbitration context.

One of the main focuses of the criticism has been against mandatory binding pre-dispute arbitration in the consumer context. The United States has condoned this species of arbitration in an unparalled fashion, and some suggest that our country has gone too far. One of the major concerns in this area is that it is unlikely that a consumer can knowingly agree to arbitrate claims that have not yet arisen.

This Article focuses on mandatory pre-dispute arbitration agreements in the context of a situation involving a vulnerable party. As the
discussion will illustrate, there is no precise definition of vulnerability. Although most of the cases discussed herein involve older vulnerable adults, the concerns in this area frequently arise in other contexts as well. Thus, the author suggests that the discomfort exhibited by courts in dealing with these cases may suggest a broader discomfort with mandatory pre-dispute arbitration agreements in the consumer context.

 

 

Today's Recess Appointment News

by Deepak Gupta

• The Arbitration Wars Meet the Recess Appointment Wars: Since its beginning, this blog has closely covered controversies over mandatory arbitration in consumer and employment contracts. More recently, we've been covering the constitutional controversy over the President's recess appointments to the CFPB and NLRB. On Tuesday, those two worlds officially collided when lawyers for the D.R. Horton company sent a letter to the Fifth Circuit invoking the D.C. Circuit's recent decision in Noel Canning. As observers of the arbitration wars know, D.R. Horton has been fighting the NLRB's year-old decision holding that federal labor law precludes employers from forcing their workers to waive collective-action rights through arbitration clauses. Now, D.R. Horton argues that the March 2010 recess appointment of NLRB member Craig Becker is invalid and therefore nullifies the board's decision. "Just like the situation in Noel Canning," the letter asserts, "the vacancy Mr. Becker filled did not arise during the Senate's recess, nor did the president appoint him during that recess. When the NLRB issued the D.R. Horton decision, it therefore had only two properly appointed members and no quorum to act."

• A New Court Challenge to the Cordray Appointment? Carter Dougherty of Bloomberg reports on the possibility that a CFPB enforcement action now pending before the U.S. District Court in Los Angeles could provide a new forum for a court challenge to Rich Cordray's status as the Bureau's director. The defendants in the action are a law firm and its principals that operated a network of mortgage loan modification businesses. On Tuesday, their lawyer sent the Bureau a letter "asking for a negotiated settlement of the six-month-old case in light of" the D.C. Circuit decision in Noel Canning. The lawyer appears to be trying to use the prospect of a recess appointment challenge to obtain leverage in settlement negotiations: “I want to give them an opportunity to resolve this without court intervention,” he says. (The case that's received the most attention -- C. Boyden Gray's Big Spring case filed in district court here in Washington -- is likely to be thrown out on standing grounds, so the big question is where and when a fresh court challenge will appear. My guess is that the Los Angeles case won't become the next vehicle.)

• Free Webinar on Monday: Our friends at Ballard Spahr, a law firm that represents banks in consumer finance matters, are convening a free webinar on Monday at noon entitled "The Impact of the D.C. Circuit Court NLRB Ruling on the CFPB." I won't be able to participate in Monday's webinar, but I recently co-hosted a webinar with Ballard Spahr and can attest to the quality of their programming. This is a good opportunity to hear some of the banking industry perspective on the recess appointment controversy. The banks -- despite what they may say -- are quite worried about the CFPB's fate. The webinar will discus the holding and reasoning of the court and the possibility of a further en banc review by the D.C. Circuit or review by the U.S. Supreme Court; the status of other cases dealing with the recess appointments; how the CFPB will react to the ruling; the impact on ongoing investigations and consent orders; the impact on supervision of non-banks; and the political impact of the ruling.

Bottomside Briefs in American Express Arbitration Case, Including Briefs of the U.S. Solicitor General and 22 States

by Deepak Gupta

Since at least 2009, this blog has covered (e.g. here and here) the long-running saga of American Express v. Italian Colors, an antitrust dispute that raises fundamental questions about the limits of federal arbitration jurisprudence. The case, now before the Supreme Court, presents the question whether an arbitration clause should be enforced when there is no dispute that a litigant has shown that it would be unable effectively to vindicate its federal statutory rights in the arbitral forum. (Along with Paul Clement of Bancroft PLLC, I represent the respondents before the Court.)

Last week, we filed our merits brief. Today, amicus briefs supporting the respondents were filed by 22 States, national business groups (including separate briefs from the National Retail Federation and National Grocers Association), professional arbitrators, leading scholars (of antitrust, arbitration, and civil procedure), and public interest groups (including both Public Citizen and Public Justice). Notably, the stack of briefs supporting the respondents includes an amicus brief from the Solicitor General of the United States. The Solicitor General's submissions receive special attention from the Justices, and so the filing of an SG amicus brief is always noteworthy. But today's brief is even more significant because the SG has generally stayed out of recent arbitration cases, but made a judgment that this case was different. I'll collect all of the bottomside briefs as they come in and post them here, so interested readers can find them in one place.