Consumer Law & Policy Blog

National Arbitration Forum's Wall of Secrecy Crumbling

by Paul Bland

cross-posted from Tort Deform

While very few of them actually know it, courts would say that tens if not hundreds of millions of Americans have "agreed" that if they ever have a dispute against various powerful corporations, that their dispute will be decided by an organization named the National Arbitration Forum (or "NAF"). Who is the NAF?  What is its background? Is it really a neutral organization, or is it likely to favor one side or the other in disputes?

Let me put my own "biases" on the table at the outset. Based upon extensive investigation and interviews with literally hundreds of people, my law firm, Trial Lawyers for Public Justice, has argued vociferously in several different court cases around the nation that the NAF is not a truly neutral organization. Instead, we have argued, NAF has conducted itself in ways that suggest that it in disputes between consumers and large corporations (and particularly banks and other lenders), that the NAF as an institution is pre-disposed to favor the corporations and lenders.

Arbitrators Are Answerable to No One

by Paul Bland

In an ever-growing trend, corporations have moved to excuse themselves from the normal civil justice system by shifting disputes that their customers or employees may have against them from courts into the private judging system of arbitration. In this situation, instead of having lawsuits alleging consumer fraud or racial discrimination or similar types of claims handled in court, corporations are requiring consumers and employees to bring their claims before private arbitrators who are largely selected by private arbitration firms who compete with each other to be selected by the corporations.

While consumer and civil rights advocates have raised a host of concerns about this system of private judging, one concern that has consistently arisen is that the decision of the private judges are almost subjected to any meaningful review by courts. Drawing upon a long strand in American political thought that it is unwise to give any one power that is not subject to any meaningful check or challenge, consumer and civil rights advocates have questioned the wisdom of sending important consumer and statutory cases into a system where one person will make a decision that will almost certainly never be seriously questioned.

These policy concerns have been completely rejected by the U.S. Supreme Court. About 15 to 20 years ago, there was a lively controversy in this country about whether arbitrators should be given the power to decide cases involving important statutes that Congress had passed to protect the public at large. "Arbitration may be alright for deciding contract and commercial disputes between two businesses," the argument essentially ran, "but corporations should not have the power to push their customers and employees to bring civil rights and other public statutory claims in arbitration." In a several different cases, the U.S. Supreme Court has flatly rejected these arguments. The Court has held that a broad variety of federal statutory claims are subject to mandatory arbitration agreements.

Illinois Supreme Court Holds Class Action Waiver Unconscionable

by Scott Nelson

On October 5, the Illinois Supreme Court issued its opinion in Kinkel v. Cingular Wireless LLC, No. 100925, holding that a provision in Cingular's arbitration agreements with its customers that purported to bar class actions was unconscionable.  The Illinois Supreme Court has now joined the California Supreme Court in holding that such class action waivers are, at least in some circumstances, unenforceable.  At the same time, the Illinois court held that the class action ban was severable from the arbitration agreement itself, with the result that the consumer claims at issue may become the subject not of a class action heard in the Illinois courts, but rather a class arbitration.

The Kinkel opinion is narrowly written in that it does not condemn all class action waivers under all circumstances.  The opinion also carefully states that its unconscionability analysis is equally applicable to class action waivers in arbitration agreements and those that are not tied to arbitration clauses, thus avoiding the argument that its state-law-based analysis discriminates against arbitration and is preempted by the Federal Arbitration Act (FAA).  The court's solid analysis on this point should "cert-proof" its opinion against any effort by Cingular to request review by the U.S. Supreme Court on the preemption issue -- though that may not stop Cingular from trying, given the vehemence with which industry litigants have sought to enforce class action waiver provisions.

CL&P Roundup

by Deepak Gupta

• Congress to Limit Predatory Lending to the Military:  The groundbreaking Talent-Nelson amendment--which imposes limits on predatory lending to the military--is now part of the must-pass defense authorization bill.   Paul Bland and Elizabeth Warren make similar observations about different aspects of this legislation.  Paul, discussing the bill's precedent-setting ban on arbitration clauses, asks:

"If Congress recognizes that binding mandatory arbitration provisions are unfair as applied to all members of the military who deal with lenders, how does that jibe with the assertion often made that binding arbitration is fairer, cheaper, and better for other consumers who deal with lenders?" 

And Professor Warren, discussing the bill's 36% usury cap for interest rates on loans to servicemembers, asks:

"Soon it will be OK to roll an elderly person with a 400% interest rate, or a Hispanic worker, or a college student, but not someone in the military.  How long will that last?"

• Most Identity Thieves Are Unknown:  The other day, Jeff Sovern observed that Judge Posner, in his discussion of identity theft, seemed to operate on the mistaken belief that "much, maybe most" identity theft is the work of "friends or relatives" and is easily prevented by potential victims.  Similar claims have been made repeatedly in the media in recent weeks, particularly by industry representatives.  Now privacy expert Chris Hoofnagle of Berkeley has demonstrated, using FTC data, the problem with those claims.  He even includes a colorful pie-chart.  (via Ed Mierzwinski)

• More on Consumer Cases in the Supreme Court:  Over at the Credit Slips blog, Katie Porter of Iowa has some thoughts on the recently-granted Fair Credit Reporting Act cases and so-called "off-label" uses of credit reports; we discussed the cases here on Tuesday.   And Bob Lawless speculates about the practical implications of Watters v. Wachovia, the OCC preemption case.  We'll surely have a lot to say about the Watters case here in the coming months, including its administrative law implications.  (Disclosure:  Public Citizen joined an amicus brief in Watters and we'll be providing assistance to petitioner's counsel.  We're counsel for the respondents in the FCRA cases.)

• Emerging Issues in Class Actions:  The UCLA Law Review has published an interesting batch of papers from its symposium on emerging issues in class actions.  The papers include an empirical study on incentive awards to class action plaintiffs by Theodore Eisenberg and Geoffrey Miller; an article on Backdoor Federalization by Samuel Issacharoff and Catherine Sharkey; an article considering various proposals to enhance fairness hearings by William Rubenstein; and a piece by Richard Nagareda discussing the implications of Eisenberg & Miller's empirical research.

• An Ideological Flip-Flop?:  It used to be the case, back in the 1960's, that the conservatives were the ones who supported tort law and the liberals/progressives were the ones that thought it needed to be "reformed" (with statutory consumer protection regimes).  Now it's just the opposite, and the reasons are complex and worth pondering.  So says Stephen Sugarman of Berkeley in a draft paper posted at SSRN, Ideological Flip-Flop: American Liberals are Now the Primary Supporters of Tort Law.  (via Point of Law)

Defense Department Appropriations Bill Includes Precedent-Setting Ban on Arbitration Clauses for Service People

by Paul Bland

I've just seen what I understand is the final language of Sen. Talent's amendment to the DoD appropriations bill, which is aimed at protecting service people against the predations of payday lenders.  Several weeks ago, the Defense Department released a ground-breaking report, which discussed how predatory lending by pay day lenders was harming our national security. There is a body of evidence showing that pay day lenders have particularly targeted service people for years (co-blogger Chris Peterson has published a study on this point that left little doubt), and many service people have had their military careers interrupted as they were unable to extricate themselves from the cycle of debt.  The DoD study brought a torrent of publicity -- USA Today broke the story on the front page a few weeks ago, and in the intervening weeks, literally dozens of newspapers have editorialized in support of the DoD's recommendations.  Senator Talent and a number of other legislators decided to take action.

While the centerpiece of the legislation is a hard 36% usury cap on loans to covered military personnel, there is also a provision dealing with mandatory arbitration.  This provision, which was also strongly supported by the DoD, states

"Notwithstanding section 2 of title 9, or any other Federal or State law, rule, or regulation, no agreement to arbitrate any dispute involving the extension of consumer credit shall be enforceable against any covered member [of the U.S. armed forces] or dependent of such member, or any person wh owas a covered member or dependent of that member when the agreement was made."

This language apparently has made it out of the conference committee!

Two-Faced Policy Claims in Support of Mandatory Arbitration

by Paul Bland

Anyone with even a passing familiarity with trends in consumer law will have noticed that a large and rapidly growing number of corporations have inserted binding mandatory arbitration clauses in the fine print of their standard form contracts. Most consumers in the U.S. cannot get a loan, a checking account, a car, cell phone service, residential phone service, nursing home care, a computer, pest control service, or a host of other goods and services without submitting to an arbitration clause.

This growing trend raises an obvious question: why should tens of millions of Americans have to give up their constitutional right to a jury trial, and instead submit their legal disputes to private judges largely selected by corporations, in a process that is rather secretive and almost completely unreviewed by courts?

Corporate America answers this question with claims that mandatory arbitration is supposed to be much fairer, cheaper and faster than the American civil justice system.

While there are an enormous number of retorts that could be offered to these claims, perhaps the most telling is corporate practice itself: corporations don’t act like they believe these claims.

The Flight from Arbitration: An Empirical Study

by Deepak Gupta

Theodore Eisenberg (Cornell) and Geoffrey Miller (NYU) have posted the draft of a very interesting empirical paper on the incidence of mandatory binding arbitration clauses in contracts between sophisticated corporate actors, with some revelaing implications about what corporations really think about the relative efficiency of arbitration versus litigation.

Their premise is simple: If arbitration "is always, or nearly always, a more efficient dispute resolution procedure than litigation," then, "in a data set of contracts freely agreed to by sophisticated parties, we will always, or nearly always, observe arbitration clauses being used." Thus, they hypothesize, the incidence of arbitration clauses in such contracts "provides some rough measure of the degree to which arbitration actually is perceived to provide greater efficiency in dispute resolution as compared with litigation."

CL&P Roundup

by Deepak Gupta

• "Tort Deform": That’s the snappy and provocative title of a new blog on civil justice issues produced by the Drum Major Institute for Public Policy, a progressive think tank in New York. They’ve already assembled an impressive and interesting lineup of contributors (including CL&P co-bloggers Paul Bland and Brian Wolfman). Here’s their mission statement. Highlights so far include a piece on preemption by Alan Morrison; an item by Linda Andros on the junk food bill (on which Steve Gardner also posted here last week); and a discussion by the blog’s coordinator, Cyrus Dugger, on the book Distorting the Law.

• Victor Schwartz's Common Sense: Philosophers warn us to be wary of appeals to 'common sense'. In a recent Kansas Law Review article, Victor Schwartz presents his case for “Common-Sense Construction of Consumer Protection Acts.” Although he assures the reader that he's not advocating the complete “elimination of private rights of action,” Schwartz's proposal would come as close to that goal as might be thought politically feasible; the article bristles with hostlity to modern statutory consumer protection law and urges a return to common law principles. Schwartz advocates model legislation that would require proof of objectively reasonable reliance and actual injury, strict limitations on treble damages and awards of attorneys’ fees, a complete prohibition on class actions wherever statutory damages are available, modifications to statutes of limitations, and extreme restrictions on the circumstances under which class certification could be granted. As we discussed earlier in this post, Schwartz's article isn't mere theory; it's the blueprint for legislation that will soon be introduced in state legislatures across the country.

• Ban on Consumer Class Actions Held Unconscionable: Wading into the growing battle over the enforceability of class action bans in arbitration agreements, a California appellate court this week said DirecTV could not require its customers to give up their right to class actions and held that a waiver buried in a “bill stuffer” was both procedurally and substantively unconscionable. California's 2d District was not persuaded by DirecTV's argument that the possible amount of recovery could be as high as $1,000. While "$1,000 is not an insignificant sum, many consumers of services such as those offered by DirecTV may not view that amount as sufficient to warrant individual litigation.” The court explained that “the class action device remains, in our view, the only practicable way for consumers of services such as DirecTV's to deter and redress [such] wrongdoing.” The ruling builds on the California Supreme Court's landmark Discover Bank decision last year.

• Debt Collectors and Bankruptcy Filings: Elizabeth Warren suggests that last year’s bankruptcy legislation may have emboldened debt collectors to intimidate consumers out of filing for bankruptcy.

Preserving a Judicial Safety Valve for Arbitration

by Deepak Gupta

One of the things I plan to do with this blog is offer regular updates on litigation in the U.S. Supreme Court affecting consumers’ rights. My office, Public Citizen Litigation Group, litigates frequently in the Court--both in our own cases and through our Supreme Court Assistance Project--and we closely monitor the Court’s docket. I’ll start with an arbitration case in which my colleague Scott Nelson and I filed a brief in opposition this past Friday.

When you purchase pretty much any consumer good or service these days (a new car, cable TV, phone service), the chances are good that there's a mandatory binding arbitration clause hiding somewhere in the fine print. Mandatory arbitration's proponents sell it as a cheap, efficient, and fair means of resolving disputes outside the courts, while consumer advocates point out that it’s actually a costly private legal system with a systemic bias in favor of corporate defendants and that the mere presence of an arbitration clause is enough to deter most consumers from even attempting to pursue their disputes. Set that debate aside for a moment. Regardless of which view you take, should there be a remedy for the inevitable extreme case in which an arbitrator completely disregards the law?