Consumer Law & Policy Blog

Omri Ben-Shahar Paper Looks at Which Consumers Are Hurt Most by Arbitration Clauses

Omri Ben-Shahar of Chicago has written Arbitration and Access to Justice: Economic Analysis. Here is the abstract:

Mandatory arbitration clauses in consumer contracts are widely regarded as problematic because they limit consumer’s access to judicial forums, to fair procedures, and potentially to any kind of remedy. But rather than looking at consumers as a group, I examine which sub groups of consumers are affected by this limitation more than others. I argue that in most circumstances, access to courts benefits the elite, not the weak. It is a species of open-access policy that has an unintended regressive effect. Paradoxically, rules that limit the use of pre-dispute arbitrations clauses hurt, rather than protect, weaker consumers, as they mandate a regressive reallocation. I also consider the role of class actions, and whether weak consumers are potentially the indirect beneficiaries of class action litigation. This argument has theoretical merit, but it, too, is limited in ways that are often unappreciated.

Paper Proposes Solution to Class Arbitration Problem

Emanwel J. Turnbull has written Opting Out of the Procedural Morass: A Solution to the Class Arbitration Problem, forthcoming in the Widener L. Rev. Here's the abstract:

American class actions are internationally regarded as a procedural form to avoid and widely criticized in the United States. They have been narrowed and restricted by U.S. statutes and case law. Plaintiffs' lawyers in consumer class actions are  portrayed as greedy and fraudulent, while businesses are increasingly acting to avoid class actions through mandatory pre-dispute arbitration clauses. Even class arbitration is criticized as leading to a “procedural morass.”

This Article proposes that parties and arbitral fora opt out of the American procedural morass (and the attendant long-running disputes about American class actions) by adopting an English procedural rule for aggregation. This Article performs the necessary investigation into the legal contexts of England and America and adjusts the transplant rule to best fit its new home.


The proposed arbitral rule is simpler and more flexible, and therefore more suitable, than the existing arbitral rules adapted from Federal Rule of Civil Procedure. Perhaps more importantly, this new rule does not carry the cultural baggage of the American class action. Where consumers and businesses are vehemently opposed, this new approach to aggregation can bring compromise and co-operation. If adopted, this rule can relieve the consumer-business tensions and breathe new life into the arbitral forum as a setting in which many consumers can obtain a fair hearing of a dispute, even if they need to do so together.

 

 

Shauhin Talesh Study on How Dispute Resolution Structures Affect Implementation of Consumer Law

Shauhin A. Talesh of Irvine has written How Dispute Resolution System Design Matters: An Organizational Analysis of Dispute Resolution Structures and Consumer Lemon Laws, 46 Law & Society Review (2012).  Here's the abstract:

This study demonstrates how the structure of dispute resolution shapes the extent to which managerial and business values influence the meaning and implementation of consumer protection law, and consequently, the extent to which repeat players are advantaged. My analysis draws from, links, and contributes to two literatures that examine the relationship between organizational governance structures and law: neo-institutional studies of law and organizations and socio-legal studies of repeat players’ advantages in disputing. Specifically, I compare an instance where powerful state consumer protection laws are resolved in private dispute resolution forums funded by automobile manufacturers but operated by independent third-party organizations (California) with one where consumer disputes are resolved in public alternative dispute resolution processes run and administered by the state (Vermont). Through in-depth interviews and participant observation in the training programs that dispute resolution arbitrators undergo in each state, I show how different dispute resolution structures operating in California and Vermont give different meanings to substantially similar lemon laws. Although my data do not allow me to establish a causal relationship, they strongly suggest that the form of the dispute resolution structure, and how business and state actors construct the meaning of lemon laws through these structures, have critical implications for the effectiveness of consumer protection laws for consumers.

Another Concepcion Paper, This Time From Harvard

David Korn and David Rosenberg of Harvard have written Concepcion's Pro-Defendant Biasing of the Arbitration Process: The Class Counsel Solution.  Here's the abstract:

By mandating that numerous plaintiffs litigate their common question claims separately in individual arbitrations rather than jointly in class action arbitrations, the Supreme Court in AT&T Mobility LLC v. Concepcion created a potent structural and systemic bias in favor of defendants. The bias arises from the parties’ divergent stakes in the outcome of the common question litigation in individual arbitrations: each plaintiff will only invest to maximize the value of his or her own claim, but the defendant has an incentive to protect its entire exposure, and thus will have a classwide incentive to invest more in contesting common questions. This investment advantage enables the defendant to wield superior litigation power against each plaintiff, skewing the outcome of individual arbitrations in its favor and frequently rendering claims not worth filing in the first place. Concepcion perpetuates the bias by precluding the use of a class arbitration solution. We propose that courts neutralize the Concepcion bias by appointing class counsel to represent each plaintiff in individual arbitrations. Without offending Concepcion’s prescriptions for maintaining the efficiency of arbitral procedures, in particular the general bar against class arbitration without express contractual authorization, the class counsel solution equalizes the parties’ investment incentives to transform individual arbitrations into a socially useful legal system for promoting the deterrence, compensation, and other public policy objectives of federal and state substantive law.

 

 

 

The Ninth Circuit's En Banc Argument in Kilgore v. Keybank

An 11-judge en banc panel of the Ninth Circuit heard oral argument this week in Kilgore v. Keybank, an important consumer arbitration case. Kilgore presents the question whether the Federal Arbitration Act and the Supreme Court's decision in AT&T v. Concepcion require courts to enforce arbitration clauses even when they would block consumers from pursuing their substantive statutory rights to a public injunction under California consumer-protection laws. The panel, consisting of Chief Judge Kozinski and Judges Pregerson, McKeown, Fletcher, Tallman, Callahan, Milan Smith, Murguia, Christen, Watford, Hurwitz, notably includes four new Obama appointees. Andy Pincus argued for the Chamber and Jim Sturdevant argued for the plaintiffs. You can read detailed accounts of the arguments at the UCL Practitioner blog here and here, read the papers at Public Justice's website, and go here or click on the embedded video below to watch the arguments:

Richard Frankel Paper on Arbitration Clauses

Richard Frankel of Drexel has written The Arbitration Clause as Super Contract.  Here's the abstract:

It is widely acknowledged that the purpose of the Federal Arbitration Act was to place arbitration clauses on “equal footing” with other contracts. Nonetheless,federal and state courts have placed arbitration clauses on a pedestal by creating special interpretive rules for arbitration clauses that do not apply to other contracts. In doing so, they have relied extensively on the Supreme Court’s adoption of a “federal policy favoring arbitration” in the case of Moses H. Cone Memorial Hosp., Inc. v. Mercury Constr. Corp., 463 U.S. 1 (1983).

While many scholars have focused attention on the public policy rationales for and against arbitration, few have explored how arbitration clauses should be interpreted. This article fills that gap and asserts that judicial reliance on the federal policy favoring arbitration unfairly deprives litigants of access to the courts by pushing cases into arbitration that do not belong there and in the process. By creating special rules favoring arbitration that deviate from state contract law, courts are enforcing arbitration agreements in situations where they would not enforce other agreements. This article questions the basis for the federal policy favoring arbitration and identifies several areas in which courts are relying on it to over-enforce arbitration clauses. Because the original purpose of the Federal Arbitration Act was to make arbitration clauses just like other contracts, this article proposes that courts should not rely on a poorly-conceived federal policy favoring arbitration, but instead should apply general contract principles to arbitration clauses. Doing so best ensures that litigants are not unfairly forced into arbitration in situations where they never agreed to it.

American Banker: Lobbying CFPB on Arbitration Intensifies

Here (login required).  An excerpt:

Likewise, there was initially deep skepticism inside the banking industry about the CFPB's arbitration study, and there is still a belief among industry insiders that the agency's research is likely to lead to new regulations. * * *

But over the last few months, industry observers have been relatively pleased
with they have seen from the consumer bureau.

Overseeing the arbitration study for the CFPB is Will Wade-Gery, a former
Morrison Foerster lawyer who used to represent financial institutions. * * *

Ballard Spahr's [Alan] Kaplinsky said: "I must say that before having had some discussions
with people at the CFPB about the project, I was probably very skeptical about
whether this would really be a fair study that they would conduct, whether it
would be based on political data, or whether it would be based more on
political leaning. And so far I've been impressed."

Pew Study of Arbitration Clauses in Checking Accounts

Here.  Some highlights:

Of the 92 financial institutions studied, 43 percent contain mandatory binding arbitration clauses. This number increases to 47 percent when considering only banks, because none of the credit unions studied include an arbitration clause in their account agreements.

* * *

The larger the financial institution, the more likely an account agreement will contain a clause requiring mandatory binding arbitration.

* * *

Three-quarters (75 percent) of account agreements that contain mandatory binding arbitration clauses likewise contain a provision barring consumers from joining a class
action against their financial institution, either in arbitration or litigation.

* * *

More than one in 10 (13 percent) account agreements shorten the legally prescribed statute of limitations for consumers to bring disputes against their bank or credit union.

The range for these clauses is three months to two years, with a median of one year.

David Horton Paper on the Federal Arbitration Act Preemption

David Horton of UC Davis has written Federal Arbitration Act Preemption, Purposivism, and State Public Policy, 101 Georgetown law Journal (2013).  Here's the abstract:

The relationship between the Federal Arbitration Act (“FAA”) and state public policy has long been unsettled. According to some judges, scholars, and litigants, the FAA precludes courts from invalidating arbitration clauses under the contract defense of violation of public policy. However, in a practice that is impossible to square with that understanding of FAA preemption, courts have traditionally nullified arbitration clauses when necessary to preserve substantive rights or remedies under state law. Nevertheless, in its recent decision in AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court held that the FAA eclipses a rule that deemed class arbitration waivers to be unconscionable when they prevented plaintiffs from pursuing numerous, low-value state law claims. Both Justice Scalia’s majority opinion and Justice Thomas’s decisive concurrence strongly implied that state public policy is not a permissible basis for striking down an arbitration clause. As a result, lower courts are now compelling arbitration — often through gritted teeth — of lawsuits that are destined to fail.

Counter-intuitively, I argue that Concepcion holds the seeds of an approach to FAA preemption that gives judges greater freedom to strike down arbitration provisions to further state interests. FAA preemption stems from its centerpiece, section 2, which makes agreements to arbitrate specifically enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” Under the leading account of FAA preemption, the plain language of this “savings clause” immunizes arbitration clauses from state public policy: few state regulations apply across-the-board to “any contract.” Yet the courts and commentators who embrace this view have not explained why its rigid textualism is appropriate in the context of the FAA, which displaces state law through the purposivist mechanism of obstacle preemption. And indeed, Concepcion relied not on section 2’s text, but on Congress’ “purposes and objectives” when it enacted the FAA. I show that the purposivism that animates Concepcion is superior to the textualism that dominates FAA preemption cases. The incoherence of the literalistic “any contract” test and the centrality of context and legislative history to “purposes and objectives” preemption suggest that purposivism should be the primary technique for mapping the FAA’s dominion over state law. However, this path leads to a starkly different end-point than the one Concepcion reached. A faithful, full-bore examination of Congress’ intent reveals that section 2 allows courts to strike down arbitration clauses under any traditional contract doctrine, including some strands of the venerable defense of violation of public policy. I conclude by proposing a test for when the FAA preempts state public policy and applying it to controversial issues now pending in courts, including class arbitration, the unconscionability doctrine, and judicial or legislative rules that prohibit that arbitration of particular claims.

The Limits on "Agreements" to Arbitrate

One of things that bothers opponents of binding pre-dispute mandatory agreements in consumer contracts is that often they don't seem like agreements at all. In most cases, the arbitration clauses are buried in take-or-leave-it contracts that the consumer doesn't read (and sometimes has little opportunity to read). Arbitration opponents sometimes say that contracts of adhesion are efficient and thus good. Or perhaps some consumers know that they will be bound to whatever the hell is in the contract (even if they don't know what's in it). But it's hard to say that these contracts are consensual in the ordinary sense of that term. And, yet, in the arbitration context, the courts' opinions upholding ariitration contracts are full of language about the parties' "consent" and "agreement"--because the Federal Arbitration Act is supposedly built on those concepts--even when the underlying contract is of the take-it-or-leave it variety.

But last Friday the Second Circuit in Schnabel v. Trilegiant Corp. put on the brakes, at least a little bit, in the context of on-line consumer contracting. The opinion is worth reading in full, but here's a summary of the holding that gives you a flavor:

The question presented to us on this appeal is whether the plaintiffs are bound to arbitrate their dispute with the defendants as a consequence of an arbitration provision that the defendants assert was part of a contract between the parties.Neither of the plaintiffs acknowledge being aware of the existence of the arbitration provision when their contractual relationships with the defendants were formed. But, according to the defendants, the provision was made available to the plaintiffs through a hyperlink appearing on the page the plaintiffs would have seen before enrolling in a service offered by the defendants and an email sent to the plaintiffs after their enrollment. We conclude that despite some limited availability of the arbitration provision to the plaintiffs, they are not bound to arbitrate this dispute. As regards the email, under the contract law of Connecticut or California –- either of which may apply to this dispute –- the email did not provide sufficient notice to the plaintiffs of the arbitration provision, and the plaintiffs therefore could not have assented to it solely as a result of their failure to cancel their enrollment in the defendants' service. As regards the hyperlink, we conclude that the defendants forfeited the argument that the plaintiffs were on notice of the arbitration provision through the hyperlink by failing to raise it in the district court. [Read the opinion, and decide for yourself whether the hyperlink created an agreement to arbitrate.]