Consumer Law & Policy Blog

Stripping the Meaning from Meaningful Choice

by Paul Bland and Alexis Rickher

In a series of decisions stemming back about 20 years, the U.S. Supreme Court has broadened the scope of the Federal Arbitration Act to make it possible for corporations to insist that their employees and consumers must submit more and more cases to mandatory arbitration. In making these decisions, the Court has effectively said “it’s alright to expand mandatory arbitration, because courts will guard individuals against unfair arbitration clauses using traditional rules of contract law.” Under the Supreme Court’s guidance, a consumer or employee can’t argue that mandatory arbitration is unfair in itself, but if a corporation has written an arbitration clause that tacks on other unfair provisions that are not necessarily a part of arbitration, courts can strike down those provisions as “unconscionable.” (See Footnote 1)

Following the Supreme Court’s guidance on this point, when corporations have tacked unfair provisions onto arbitration clauses, a host of courts have struck down those provisions as unconscionable and unenforceable in particular cases. There is a general rule of contract law in every state (although the contours and scope of this law varies quite a bit from state to state) that unconscionable — which can be roughly paraphrased as very unfair — contract terms will not be enforced, and courts have played an important role in blocking some of the most unfair types of arbitration clauses that some corporations have tried to force on their customers and employees. For example, some courts have struck as unconscionable the following types of arbitration clauses:

• Clauses that would require individuals with small claims to travel great distances across the country to arbitrate their claims. (See Footnote 2)
• Clauses that would not only send people to arbitration but would also re-write the laws, so that the statutes of limitations would be changed to the point that individuals would have to bring their claims within a few months of having been wronged, even where the laws normally applicable to their claims would give them several years to bring their claims. (See Footnote 3)
• Clauses that would require individuals to pay more in fees to the arbitrators than the amount of money at issue in their case. (See Footnote 4)
• Clauses that would require individuals to submit to gag orders that barred them from speaking to anyone — even relatives! — about the facts or outcome of their cases. (See Footnote 5)

Mandatory Arbitration of Investor Disputes

by Brian Wolfman

Michele Singletary reports in today's Washington Post about a study of securities arbitrations conducted mainly under the auspices of the National Association of Securities Dealers (NASD).  The study looked at arbitrations from 1995 to 2004.  (Most investors are subject to mandatory arbitration and cannot go to court to litigate their individual securities claims.)  During that 10-year period, both the win rate for investors and the amounts recovered as a percentage of the claim dropped fairly dramatically.  The entire study is available here.

The Post article discusses a number of possible reasons for these results, including most prominently that three-person NASD arbitration panels include someone who is working for or has ties with the securities industry.  One of the authors of the study, Daniel R. Solin, a securities arbitration attorney and registered investment adviser, is quoted as saying that "[t]his study paints an alarming picture of a steadily worsening situation for investors who have no alternative to securities arbitration administered by the very industry that they are suing."

Here's a synopsis of the study's findings from the Post article:

[T]he win rate for investors in securities arbitration cases dropped to 44 percent in 2004 from a high of 59 percent in 1999.  When it came to their claims for damages, investors were awarded 22 cents on the dollar in 2004, as a percentage of the amount claimed, compared with a high of 38 cents in 1998. (Ninety percent of the cases reviewed went through the NASD arbitration process.)  The recovery percentage plunged to 12 percent for claims of more than $250,000. The larger the award and the bigger the brokerage firm, the smaller the recovery . . ..

Other news reports on the study are available here, here, here, and here.  And here's a column by Solin from the Huffington Post.

Paul Bland's Testimony on Mandatory Binding Arbitration

Just down the page, Deepak told you about today's congressional hearing on mandatory binding arbitration clauses in take-it-or-leave-it consumer contracts.  Deepak noted that Paul Bland testified on the topic, prompting me to read Paul's testimony.  It's so darn good that I am posting it here.  Read it.

House Judiciary Hearing on Arbitration This Morning

This morning, starting at 10:30am, the House Judiciary Committee's Subcommitee on Commercial and Administrative Law will hold a hearing entitled Mandatory Binding Arbitration Agreements: Are They Fair for Consumers? This hearing isn't tied to any specific legislative proposals, but it signals the increasing interest in this important issue on Capitol Hill.

The lineup is three pro-consumer witnesses and one corporate defense lawyer: our co-blogger Paul Bland of Public Justice, who has been leading the fight against BMA in the courts; Jordan Fogal, a consumer with an arbitration horror story; David Schwartz, a law professor at the University of Wisconsin, who will be criticizing the Supreme Court's Federal Arbitration Act jurisprudence as inconsistent with the original Congressional intent; and Mark Levin, a partner at the same Philadelphia law firm as mandatory arbitration's architect-in-chief, Alan Kaplinsky.

You can watch a live video webcast of the hearing and read written testimony at this link.

Times Articles on Certified Cars and Arbitration

Yesterday's New York Times had at least two articles that bear on consumer law issues.  The first, available here, reported on litigation and legislation involving certified cars.  The second described how Senators Leahy and Finegold have written to the S.E.C. to ask that it ban mandatory arbitration in claims brought by investors.  Many of the arguments for banning mandatory arbitration in the investor context apply with at least equal force to the consumer context.   

Arbitration and Identity Theft

by Jeff Sovern

  I was inspired by my co-blogger Paul Bland to add a problem to the consumer law casebook I've been working on with Dee Pridgen, Andy Spanogle, and Ralph Rohner about what happens when an identity thief signs an agreement providing for arbitration.  Can the impersonated consumer be forced to arbitrate?   Who decides if the consumer's signature is genuine: an arbitrator or a court?   Unfortunately, one of the downsides of writing a casebook with problems is that you have to give answers to the problems in the teacher's manual.  So what is the answer?

It seems incredible that a consumer who never agreed to arbitration would be obliged to submit to arbitration anyway.  In fact, a federal district court decision, Maranto v. Citifinancial Retail Services, Inc., 2005 WL 3369948 (W.D.La. 2005), held that when an account is allegedly opened by an identity thief, the impersonated person is not bound to arbitrate even though the agreement contains an arbitration clause. The opinion reads as if the Magistrate Judge felt that the court decides whether the consumer signed the agreement (“There is no valid agreement to arbitrate between Plaintiff and Defendant. Defendant apparently issued a credit card and opened an account in Plaintiff's name, but there is no evidence before the court that Plaintiff applied for the card or consented to the opening of the account. In fact, the allegations are that the account was opened as a result of identity theft committed by an imposter.”).

Consumer Law Publications

We recently obtained permission to reprint on the Blog abstracts of and links to articles published on the Social Science Research Network (SSRN).  As many of our readers will know, numerous writers on legal and other subjects post articles to SSRN when (or even before) they are submitted to law reviews, enabling the articles to be read long before they are available in print.  Consequently, SSRN has become perhaps the most important and certainly the most timely place to find current legal scholarship.  Seven recent abstracts on pieces relevant to consumer law , together with links, are pasted in below:

AAA Breaks Its Promise Not to Hear Pre-Dispute Arbitrations in Health Care Cases

by Paul Bland

Although most people haven’t heard of it, they have a big stake in the integrity and honesty of the American Arbitration Association (“AAA”). The reason is simple: it’s rapidly gaining more and more power over Americans. More and more big corporations insist that their customers and employees sign mandatory arbitration agreements taking away their right to go to court as a condition of getting goods or services or as a condition of getting or keeping a job. And of the private corporations that are increasingly replacing the American civil justice system, the AAA is the most prominent and largest.

To allay the concerns expressed by many consumers, employees, legislatures and courts, the AAA has repeatedly promised that Americans need not worry about the growing power of arbitrators, because the AAA will purportedly exercise great restraint in the exercise of its power. Alas, talk is cheap.

In a number of public statements over the last four years, the AAA has solemnly promised the public, the media and legislators that notwithstanding any contract agreements to the contrary, it would not handle pre-dispute binding arbitrations in cases brought by medical patients against health care institutions. But, I have just learned of a serious instance where the AAA has quietly broken that widely trumpeted promise. Apparently, the AAA is administering arbitrations in medical cases when it feels like doing so.

Justice Kennedy: Are Judges Abandoning the Bench?

by Paul Bland

In a series of decisions dating back many years, Justice Kennedy has proven to be a most reliable vote for those who wish to expand the use of mandatory arbitration in nearly every context in which the question has arisen. In Circuit City v. Adams, 532 U.S. 105 (2001), for example, he just declared as a self-evident truth that mandatory arbitration is cheaper than litigation in court.  Id. at 132 ("Arbitration agreements allow parties to avoid the costs of litigation. . . .").  The Justice did not cite to anything for this proposition, and no wonder, as indeed it is simply untrue in many circumstances. Because arbitrators charge by the hour – unlike judges, whose salaries are paid by the taxpayers and the government – many consumers and employees have been hit with huge bills in order to pursue their claims in arbitration. Justice Kennedy has also spoken favorably about how mandatory arbitration can reduce the "burden to the courts" of litigating employment discrimination cases. (Many civil rights lawyers have expressed frustration to me that the Justice views their lives’ work as a "burden.")

Yet, even Justice Kennedy has apparently found ONE thing about it that he doesn't like: because arbitrators can make a lot more money, arbitration is luring good judges from the federal bench. In recent testimony to the U.S. Senate Judiciary Committee, Justice Kennedy made the following point in support of a pay raise for federal judges:

There are two present dangers to our maintaining a judiciary of the highest quality and competence: First, some of the most talented attorneys can no longer be persuaded to come to the bench; second, some of our most talented and experienced judges are electing to leave it.  In just the past year, two of the finest federal district judges in California have left for higher-paying jobs elsewhere, one in academia and the other in the state judiciary. The loss of these fine jurists is not an isolated phenomenon. Since January 1, 2006, ten Article III judges have resigned or retired from the federal bench. It is our understanding that seven of these judges sought other employment. In 2005, nine Article III judges resigned or retired from the bench, which was the largest departure from the federal bench in any one year. Four of those nine judges joined JAMS, a California-based arbitration/mediation service, where they have the potential to earn the equivalent of a district judge’s salary in a matter of months. My sense is that this may be just the beginning of a large-scale departure of the finest judges in the federal judiciary. It would be troubling if the best judges were available only to those who could afford private arbitration.

Credit Union President Predicts "death to lending to service members"

by Christopher Peterson

Consumer Law and Policy Blog Readers will recall that Congress recently passed a variety of new consumer credit protections for military servicemembers. Among the key features of the act is a 36% annual percentage rate cap and a ban on mandatory, binding arbitration clauses in consumer credit contracts with military personnel.

Today was the last day to submit comments to the Department of Defense before the Pentagon undertakes to write proposed regulations to enforce the statute. (For those of you wishing to comment, there will be another period after DOD proposes regulations.) A variety of banks, credit unions, and other lenders turned out in force to suggest the most narrow possible interpretation of the statute and predict apocalypse if the Pentagon does not follow suit. One comment submitted by Taylor Community Credit Union President Phillip A. Matous particularly stuck out in my mind. Mr. Matous predicts that “[u]nless Credit Unions join banks in having the law rewritten or suspended before it takes effect October 1, 2007, it might well be called the death to lending to service members act.”

Of course the same predictions of armegeddon follow every major policy shift in consumer lending. Some creditors predicted the same thing before the Truth in Lending Act, before the FTC adopted its holder-notice rule, and before North Carolina past its predatory mortgage lending statute.