Consumer Law & Policy Blog

Why Allowing Pre-Dispute Arbitration Opt-Out Clauses Is Not Effective Consumer Protection

by Jeff Sovern 

One possible alternative to the Arbitration Fairness Act is an approach that permits consumers, when entering into contracts that contain pre-dispute arbitration clauses, to opt-out of arbitration before a dispute has arisen. This approach permits the illusion of consumer protection without the reality. Here are some reasons why: 

There's reason to think most consumers simply don't opt out in consumer transactions. For example, each year, financial institutions bombard consumers with privacy notices informing customers that they have the right to opt out of the sale of their financial information to others. Yet the available evidence suggests that very few consumers have acted to prevent the sale of information about their transactions. See Testimony of John C. Dugan, Partner at Covington and Burling on behalf of the Financial Services Coordinating Council, Before the U.S. Sen. Com. On Banking, Housing and Urban Affairs, Sept. 19, 2002 (“opt-out rates have generally been low, and in nearly all cases under 10 percent.”); W.A. Lee, Opt-Out Notices Give No One A Thrill, 166 Am. Banker 1 (July 10, 2001) (“5% opt-out rate . . . has been circulating as the unofficial industry figure . . . .”); America’s Community Bankers, Wash. Perspective (Supp. Dec. 3, 2001) ("ACB Survey") (60% of financial institutions report that less than one percent of customers opted out). 

Many consumers stay with the default, whatever that default is. As we wrote in our casebook: 

[S]ome evidence suggests that many consumers choose the course of least resistance. An unintentional experiment in automobile insurance in New Jersey and Pennsylvania illustrates the point. Pennsylvania policies provided that consumers could bring a certain claim, but offered them the choice of paying lower rates in exchange for foregoing the right to bring the claim. Approximately 75% decided to keep the right to sue. By contrast, New Jersey policies did not permit drivers to bring the claim, but offered them the right to do so if they paid higher rates. About 20% agreed to pay the higher rates. In other words, most motorists did not deviate from the default choice. Eric J. Johnson, John Hershey, Jacqueline Meszaros and Howard Kunreuther, Framing, Probability Distortions, and Insurance Decisions in CHOICES, VALUES, AND FRAMES 224-40 (D. Kahneman and A. Tversky, eds. 2000). 

The reasons for this tendency to stay with the default are unclear, and may vary in different contexts. My own belief is that one reason is that businesses increase consumer transaction costs in opting out; that is, they make it harder for consumers to opt out. One form this takes is to adopt strategies that reduce the likelihood that consumers even notice that their rights are at issue. For example, in Ting v. AT&T, 319 F.3d 1126( 9th Cir.), cert denied, 540 U.S. 811 (2003), (litigated by co-blogger Paul Bland), AT&T sent consumers a Customer Service Agreement (CSA) containing in bold text a disclaimer that service and billing would not change under the new CSA. The CSA also contained an arbitration clause. The court wrote: 

AT&T's market study concluded that most customers “would stop reading and discard the letter” after reading this disclaimer. AT&T did not change the substance of the letter as a result of its market research -- indeed, internal AT&T documents indicate that the letter was specifically intended to make customers less alert to the details of the CSA. 

Outrage in Ohio: An Unfair Decision on Arbitration

by Paul Bland and Tami Alpert (Power-Cotchett Felow, Public Justice)

Something really crazy has happened in Ohio. Last summer an Ohio State Court of Appeals held that, under Ohio law, if a company claims there is an agreement to arbitrate, then the plaintiffs can be automatically kicked out of the courtroom without being given a chance to respond.  The decision is Garber v. Buckeye Chrysler-Jeep-Dodge of Shelby, 2008 WL 2789074, No. 2007-CA-0121 (Ohio. App. 5 Dist. 2008). We urged the Ohio Supreme Court to review and overturn this decision, but several months ago it refused to hear the case.  For now, at least, this decision is the law in one part, and possibly all, of Ohio.  Under the Garber rule, a plaintiff can be forced go before a private arbitrator picked by the company they are suing, without ever being given an opportunity to respond.

This new decision in Ohio is a complete aberration – court cases are normally like a game of chess in the sense that parties are given a chance to respond whenever the other side makes a move.  But now, in Ohio, if a corporation simply claims that there’s an agreement to arbitrate, the corporation gets to have the legal equivalent of a checkmate on the first move.  Under the Garber ruling, the consumer immediately loses and is kicked out of court.  Under this decision, no matter how unfair a given arbitration clause may be, the consumer has no meaningful chance to appeal.

Fair Arbitration Coalition, Website & Blog Announced

A newly formed coalition is calling on Congress to stand up for employees and consumers and ensure companies are held accountable for misdeeds by passing legislation to end forced arbitration.  The goal of the Fair Arbitration Now Coalition is to pass the Arbitration Fairness Act (H.R. 1020).  Participants represent consumers, employees, homeowners, franchise holders and more. They range from Public Citizen, the National Association of Consumer Advocates, the National Employment Lawyers Association and the American Association of Justice to the National Consumer Voice for Long-Term Care, Home Owners for Better Building and the Leadership Conference on Civil Rights.

Website & Blog:  The coalition also has launched a blog that keeps readers up-to-date on the latest arbitration news and a web site, explaining what forced arbitration is, outlining the kinds of contracts in which forced arbitration clauses appear, providing links to news articles and telling stories of arbitration horrors.

Arbitration Fairness Day (April 29): The Fair Arbitration Now Coalition will hold a press conference and lobby day on Wednesday, April 29, with more than 50 consumers, employees and their representatives, who can speak about the injuries people suffer when they are forced into arbitration in an attempt to hold companies accountable for wrongdoing.

Amy Schmitz on Consumer Warranty Arbitration

Amy Schmitz of Colorado has written Curing Consumer Warranty Woes Through Regulated Arbitration, 23 Ohio State Journal of Dispute Resolution.  Here's the abstract: 

This article proposes legislative procedural reforms accounting for the realities of consumer arbitration that have threatened and denied consumers' access to remedies for companies' violations of public, or statutory, warranty remedies under the Magnuson-Moss Warranty Act (MMWA). Furthermore, the Article proposes to clarify and expand the MMWA's current dispute resolution template in order to resolve judicial disagreement regarding the template's application and foster beneficial use of finding arbitration. Accordingly, this is not a call to ban all pre-dispute arbitration clauses in consumer contracts, but is instead an invitation for more politically palatable reforms that preserve both companies' savings and consumers' access to warranty remedies through arbitration. The time is ripe for legislative reforms that account for the importance of procedural justice and temper contractors' and courts' deference to consumer form contracts.

Important First Circuit Arbitration Ruling

Check out Awuah v. Coverall North America, Inc., 554 F.3d 7 (1st Cir. 2009). In this case, franchisees were subject to an arbitration clause in their franchise agreements that, among other things, barred class actions and eliminated punitive damages. The agreements also said that the question of the validity of the aribtration clause was a question for the arbitrator, not the court. The franchisees brought a class action in court. The First Circuit acknowledged that the rule in that circuit was that if the agreement says the question of the validity of the arbitration clause is one for the the arbitrator, then (ordinarily) the issue is sent to the arbitrator. But -- and this is a big but -- the First Circuit sent the issue to the court, not the aribitrator -- on the question whether the costs of aribitration would be so high that they would render an arbitral remedy illusory. The First Circuit pointed to evidence concerning the high cost of arbitration compared to the relatively small claims of each franchisee. Note the similarity of the analysis in the First Circuit's decision to the analysis of the Second Circuit in In re American Express Merchants Litigation, which we blogged about last month. There, the Second Circuit struck down a class action ban as unconscionable because pursuing the case on an individual basis would have been far more costly than the value of any individual's claim. Different issue, but similar analysis.

Facebook Dumps Binding Mandatory Arbitration

by Greg Beck

As noted in a prior post, Facebook has been considering revisions to its terms of use in response to widespread criticism in the blogosphere. Facebook has now posted a proposed "Statement of Rights and Responsibilities" for its users to review. Instead of an arbitration clause, the agreement now states:

You will resolve any claim, cause of action or dispute (“claim”) you have with us arising out of or relating to this Statement or Facebook in a state or federal court located in Santa Clara County. The laws of the State of California will govern this Statement, as well as any claim that might arise between you and us, without regard to conflict of law provisions. You agree to submit to the personal jurisdiction of the courts located in Santa Clara County, California for the purpose of litigating all such claims.

There are still grounds to complain about requiring users to submit to jurisdiction in California, but Facebook deserves credit for doing away with binding mandatory arbitration. Hopefully other companies will learn a lesson from Facebook and realize that consumers don't appreciate being required to give up all their rights.

Third Circuit Strikes Down Class-Action Ban, Eliminates Claimed Circuit Split

by Deepak Gupta

This blog has closely followed the ongoing battle over class-action bans: adhesion contract provisions that purport to strip consumers and employees of their right to pursue class actions, whether in litigation or in arbitration. Needless to say, the stakes in this battle are big: Class actions seeking to vindicate protections under the civil rights, consumer, and tort laws could all be barred if industry gets its way.  Because these provisions are typically embedded in arbitration clauses, corporations argue that any refusal to enforce the clauses under state law is preempted by the Federal Arbitration Act.  Last year, I blogged about an industry effort to get the U.S. Supreme Court (in T-Mobile v. Laster and a series of tag-along cert petitions) to take up the preemption question and wipe out a string of industry losess in courts across the country. 

The industry pitch for Supreme Court review, and its claim of a split among the lower courts over preemption, had been premised largely on language in a single Third Circuit opinion by Senior Judge Morton Greenberg, Gay v. Creditinform, which could be read to reflect support for a categorical rule that state-law determinations concerning the unconscionability of class-action bans are preempted by the FAA. The Gay opinion was quite muddled, however, and it wasn't even clear that the panel understood that its discussion was in conflict with every other federal circuit and state high court to have considered the issue. In our cert opp in the Laster case, we suggested that the language in Gay was essentially dicta--unnecessary to the decision (which held that the clause was enforceable under Virginia law anyway) and entirely speculative, based on questionable predictions about what the Pennsylvania Supreme Court would do.

In a big victory for consumers on Tuesday, the Third Circuit's unanimous ruling in Homa v. American Express made clear that the FAA preemption language in Gay was nothing but dicta, thereby eliminating the industry's claimed circuit split. For those interested in the battle over mandatory arbitration and class-action bans, the decision is a must-read. It not only rejects the proposition that New Jersey's law on the unconscionability of certain class-action bans is preempted by the FAA, but also contains an important choice-of-law discussion. Based on New Jersey public policy, the court refuses to apply the law of Utah, under which the class action would be have been barred.  Congratulations to class-action-ban-slayer extraordinaire Paul Bland, who did a terrific job of briefing and arguing the appeal for the plaintiffs!

FTC Releases Annual Consumer Complaint Tally, Debt-Collection Reports

by Deepak Gupta

The Federal Trade Commission today released its annual tally of consumer complaints. For the ninth year in a row, identity theft was the number one consumer complaint category. Of 1,223,370 complaints received in 2008, 313,982, or 26 percent, were related to identity theft. The next-largest category, clocking in at 9% of all complaints, was debt collection. The FTC receives more complaints about the debt-collection industry than any other industry. You can view a summary of the results here, and a detailed report on the data, including geographical statistics, here.

The FTC also released two important reports on debt collection practices--a report on a workshop held last year to mark the 30th anniversary of the Fair Debt Collection Practices Act and the Commission's annual report to Congress on enforcement under the Act.  The workshop report, titled Collecting Consumer Debts: The Challenges of Change, makes several specific recommendations for amendments to the FDCPA and raises questions about abusive collection litigation practices and the use of mandatory binding arbitration.

• Give FTC Rulemaking Authority: The report recommends that Congress give the Commission authority to issue rules under the FDCPA.
• Increase Statutory Damages: The report states that private actions, not FTC actions, were intended by Congress to be the primary means of promoting industry compliance with the FDCPA, and notes that the amount of statutory damages (up to $1,000) that consumers can obtain in lawsuits under the FDCPA has not changed since 1977. To increase deterrence, the report recommends increasing the damage amounts to reflect inflation since then, and, in the future, to increase them periodically.
• Information Flow:  Require that collectors have better information, making it more likely that their efforts will be for the right amount and be directed to the right consumer.

• Validation Notices & Reasonable Investigations: Require that collectors provide consumers with better information explaining their rights under the FDCPA, including (1) that the “validation notices” that collectors are required to send to consumers also disclose the name of the original creditor; break down the debt by principal, total interest, and total fees; and inform consumers of certain rights they already have under the FDCPA and (2) that collectors conduct “reasonable” investigations responsive to the specific dispute the consumer raised.

• Adjustments for New Technology: Modernize the law to reflect changes in technology, including prohibiting collectors from contacting consumers via their mobile phones, including by text messaging, without prior express consent; and requiring collectors who use new payment technologies to obtain express verifiable authorization from consumers before accessing their accounts.

Debt-Collection Litigation and Arbitration Practices: The report recognizes that "certain debt collection litigation and arbitration practices appear to raise substantial consumer protection issues."  Among other things, the report cites Public Citizen's report, The Arbitration Trap, on the use of arbitration as a debt-collection mechanism. The report makes no definitive recommendations on arbitration and litigation, but instead announces that the FTC will convene regional roundtables this year with state court judges and officials, debt collectors, collection attorneys, consumer advocates, arbitration firms, and other interested stakeholders to learn more and develop possible solutions.

Jeffrey Stempel on Mandating Minimum Quality in Mass Arbitration

Jeffrey W. Stempel of UNLV has written Mandating Minimum Quality in Mass Arbitration, 76 Univ. Cincinnati L. Rev. 383 (2008).  Here's the abstract:

The Supreme Court's decision in McMahon and its progeny has led many businesses and employers to embrace what was once deemed a localized, industry-specific practice. The "new" or "mass arbitration" only mildly resembles the traditional system employed by niches in industry for settling commercial matters among commercial actors. While the "old" system involved parties who were relatively equal in bargaining power and knowledge, these systems for mass arbitration lack a freely entered bargain and resemble more closely, contracts of adhesion. Privatized arbitration resolves issues of both statutory and substantive law, and there is a strong argument, given the inexperience of the non-drafters, to impose both procedural and substantive due process controls on the system. The players arguably use arbitration as an alternative to litigation because of its efficiency and low costs as compared with litigation in the courts. However, the system cannot provide an equal forum for dispute resolution unless the relative outcomes are arguably the same. Otherwise, the system fails society's expectations of fairness, morality, effectiveness and market stability.

Several strides have been made, despite the Supreme Court's insistence that privatized arbitration is a fair system, to ensure that privatized arbitration produces fair results. Courts have invigorated the doctrine of unconconscionability to review arbitration clauses imposed on inexperienced players, judicial review of arbitration agreements, creation of due process protocols (both an Employment Protocol and Consumer Protocol), and various organization (AAA, JAMS) standards. While these advancements may better the system, they are of no use without some kind of lawful, meaningful enforcement. In particular, this article addresses the effect these concerns have had on securities arbitration. Securities investments have not declined, indicating that perhaps, the system is viewed as a fair means of resolution.

Even if the system is regarded as being beneficial to the market itself, it lacks the moral soundness necessary to be supported fully by the public and the legal community. To this end, it is suggested that the system provide neutral, quality, and independent arbitrators, provide equal access to sufficient information, eliminate unconscionable clauses (distant venue, high costs, one-sided arbitration rules), eliminate jurisdiction clauses that fail to provide adequate procedural and substantive due process, provide fairness in costs and fee shifting, allow the full range of remedies available in litigation, provide for equal access to representation and the legal market, and provide a meaningful, effective standard of review. Legislative authority may be the best solution for overall mass arbitration, but for securities arbitration, the SEC provides a legitimate, authoritative agency which could arguably effectuate these standards in a meaningful manner.

Stephen E. Friedman Argument that the Federal Arbitration Act Doesn't Apply to Internet Transactions

Stephen E. Friedman of Widener has written Protecting Consumers from Arbitration Provisions in Cyberspace, the Federal Arbitration Act and E-SIGN Notwithstanding, 57 Catholic University Law Review (2008). Here's the abstract:

Arbitration provisions are among the most significant of boilerplate contract terms. Yet the Federal Arbitration Act, which applies to written arbitration agreements, is generally understood as leaving little room for state regulation of these provisions. This article takes the position that arbitration provisions displayed on web-sites in consumer transactions are not written for purposes of the FAA. The FAA is therefore inapplicable to such arbitration provisions and states should be free to regulate them as they see fit.

When Congress enacted the FAA in 1925, Congress excluded oral and other non-written arbitration agreements from the FAA's coverage. In the current commercial environment, arbitration provisions on consumer web-sites are the closest equivalent to what oral and other unwritten arbitration provisions were in 1925 - a form of contracting notable for its casual nature and its failure in most instances to register meaningful choice or to impart seriousness. Arbitration provisions in consumer Internet transactions are thus properly excluded from the FAA.

This interpretation of the term written in the FAA must also be reconciled with E-SIGN. E-SIGN generally ensures that electronic documents be given the same effect as written documents. E-SIGN could thus be seen as requiring that all arbitration provisions in electronic form be treated the same as those in written form. While I acknowledge and discuss that argument, I take a contrary position and argue that E-SIGN does not dictate that text on an Internet web-site must always be considered written for purposes of the FAA.

Interpreting written to exclude at least some electronically displayed text from the scope of the FAA recalibrates the balance between state and federal arbitration law in an appropriate way and in an appropriate context