CL&P Blog

Industry Lawyer Concedes Arbitration Clauses Suppress Claims and Reduce Payments to Consumers

by Jeff Sovern

Industry lawyer Thomas B. Hudson of Hudson Cook has authored Arbitration Agreements: Not Always Good All the Time for AutoDealer Today, in which he writes:

An arbitration agreement is the dealer’s first and best line of defense against class-action lawsuits. If you think that isn’t reason enough, have a word with the many South Carolina dealers sued in class actions over allegedly improper doc fees who were able to have the class actions dismissed, with individual plaintiffs left with claims in arbitration. Dealers who did not use arbitration agreements paid millions of dollars to their customers and the customers’ class action lawyers.

* * *

Lawyers for consumers, when confronted with documents signed by their clients and containing arbitration agreements, tend to lose interest in pursuing the consumer’s claim. Perhaps these lawyers are unfamiliar with how to handle an arbitration proceeding, or perhaps they are of the view that they can’t get a decent award of attorneys’ fees from an arbitrator.

Whatever the reason, consumers have historically not initiated arbitration proceedings with much frequency. * * *

He also advocates:

In order to make sure arbitration agreements between dealers and consumers will be enforced by courts, and even by those courts that bend over backward to rule for consumers, lawyers for dealers who draft the agreements make them as consumer-friendly as possible. One of the consumer-friendly provisions that you’ll often see is one by which the business undertakes to pay some or all of the consumer’s costs in arbitration. 

Piché Paper on the Effectiveness of Class Action e-Notices

Catherine Piché of the University of Montreal has written The Coming Revolution in Class Action Notices: Reaching the Universe of Claimants Through Technologies. Here's the abstract:

This paper will address whether a correlation may be drawn between the types and modalities of notices sent to class action members and the rate of compensation of these members, based on data collected in 854 class action court files in Quebec superior court over a twenty year period (1997-2017). Notices are essential to fair procedure in all class action regimes, but it is difficult to know whether these notices have reached their intended addressee in such a way as to make them aware of the case and its potential distributions, and eventually allow for this distribution to be completed. If a collective approach to compensation is favored, class notices should aim to compensate at least 50% of the members. My hypothesis is that technologies will help doing just that. In this paper, I ask whether this hypothesis is supported by the data, and which forms of technological notices are actually most effective at reaching and compensating members. I argue that we have come to a revolution in class action noticing, a digital revolution. In traditional forms of notice, reduced cost has almost always meant reduced probability of achieving actual notice. By contrast, properly designed e-notices are potentially transformative because they serve to lower the cost of notice while increasing reach rates in time and space. With the support of empirical data, I demonstrate that cases making use of technological noticing serve to compensate members more efficaciously than those who rely upon traditional noticing (mail, newspaper notices), with a distribution (or take-up) rate of 69%.

Tinder's Diabolical RETROACTIVE Arbitration Clause

by Jeff Sovern

One of my students told me about Tinder's new retroactive arbitration clause which, of course, includes a class action waiver. As with many such contracts, consumers accept it by using the service, regardless of whether they have read it or not--and we know few consumers actually read such things.  The arbitration clause, in paragraph 16, provides that it applies to past claims against Tinder, including those which are the subject of pending class actions. The clause refers by name and docket number to four class actions already brought against Tinder, charging various forms of discrimination, and states that Tinder users who accept the contract will lose the ability to participate in those class actions.   It does give existing Tinder users the right to opt out of the arbitration clause, but only if they email Tinder within thirty days, something that we know few consumers have bothered to do in the past, to the extent that consumer opt-out rates have become public (new users apparently don't have a right to opt out). No doubt Tinder concluded that there was no downside in the specificity because consumers won't read or understand the terms anyway.  I wonder how the judges before whom the class actions are pending will react to this. If you will forgive the expression, Tinder is screwing its customers.

Horton Empirical Study of How Arbitrators and Judges Decide Differently on Whether to Allow Class Actions

David Horton of California, Davis has written Clause Construction: A Glimpse into Judicial and Arbitral Decision-Making, Duke Law Journal, Vol. 68, Forthcoming. Here is the abstract:

For decades, the U.S. Supreme Court has insisted that forcing a plaintiff to arbitrate — rather than allowing her to litigate — does not affect the outcome of a dispute. Recently, the Court has invoked this “parity principle” to expand arbitral jurisdiction. Reasoning that it does not matter whether an arbitrator or a judge resolves a particular issue, the Justices have allowed arbitrators to decide important questions about the arbitral proceeding itself.

The parity principle has proven impossible to test. First, cases that are arbitrated differ from those that end up in the judicial system, complicating efforts to compare outcomes from each sphere. Second, arbitral awards are rarely published, and thus remain shrouded in mystery.

However, one important topic defies these limitations. Jurisdictions are divided over whether courts or arbitrators should perform a task known as “clause construction”: determining whether an arbitration clause that does not mention class actions permits such procedures. As a result, both judges and arbitrators have been weighing in on the same question. Moreover, because class members are entitled to notice of rulings that impact their rights, the American Arbitration Association requires arbitral clause construction awards to be available to the public. For once, then, it is possible to assess how the two decision-makers resolve the identical issue.

The Article capitalizes on this opportunity by analyzing a dataset of 134 recent judicial and arbitral clause construction decisions. Its logit regression analysis concludes that the odds of class actions being allowed increase nearly 27 times when an arbitrator, rather than a judge, resolves the issue. The Article then uses its findings to propose a solution to the circuit split over clause construction and inform the broader debate over the boundaries between judicial and arbitral power.

Arbitration Opt-Outs Hit a New Low: Now They Are Undeliverable

by Jeff Sovern

Some arbitration clauses permit consumers to opt out of arbitration and class action waivers provided the consumer acts within a stated period. For example, Asana provides in § 13.8 of its Terms of Service for a 30-day opt-out. Those wishing to opt out are instructed to send "written notice of your decision to opt out to dispute-notice@asana.com with the subject line, 'ARBITRATION AND CLASS ACTION WAIVER OPT-OUT.'" But there's only one problem, as Gregory Gauthier discovered. Emails sent to that address are returned as undeliverable. Apparently Asana has listed that email address since at least its April 27, 2015 Terms of Service  (though the arbitration clause in those terms did not include an opt-out).  But maybe it doesn't matter because (1) few consumers read such terms of service; (2) few consumers understand arbitration clauses; (3) few consumers opt out, probably because of (1) and (2); if few consumers opt out, there won't be enough consumers to participate in a class action anyway. Companies undoubtedly adopted opt-outs to help them argue that arbitration clauses are not unconscionable without actually exposing the companies to class actions. Apparently Asana has taken things even further. 

Sad Report from The Hill: Trump to sign repeal of consumer bureau arbitration rule

Here. The report is based on a statement by an unidentified White House aide.  The signing is to take place tomorrow.

Senate Could Vote on CRA Resolution to Block Arbitration Rule Tonight . . .

by Jeff Sovern

. . .  or  it could come later in the week. Or not. My speculation is that the Senate leadership will call the vote if they think they have the votes to pass the resolution but otherwise they will let it go until closer to the deadline. So the real question is how many votes they have.

Am Banker Reports on Economists Who Are Critical of the OCC Claims in the CFPB-OCC Data Dispute

by Jeff Sovern

The article, by Kate Berry and Ian McKendry, is headlined Fight to kill CFPB arbitration rule could rest on whose data is right. Here's some of what the article says about the OCC claims, though the article has more than I can insert here.

"The uncertainty of the OCC's estimate is very large, it's a very noisy estimate, and there is quite a high chance that
the true effect is zero," said John Campbell, the Morton L. and Carole S. Olshan Professor of Economics at Harvard
University, who is a member of the CFPB's Consumer Advisory board. "The CFPB argues in its defense that the
effect can't be a large number like 3% because it's ridiculously large, relative to any reasonable estimates or costs
based on past class-action suits."

* * *

Other economists challenged the OCC's data, casting doubt on anyone's ability to predict consumers costs
resulting from the rule.

"Any statistically significant results would be highly questionable given the level of noise in the data," Alexei
Alexandrov, a senior economist at Amazon and a former senior economist at the CFPB, who had written a paper
that was the basis for the CFPB's own arbitration study.

* * *

However, Ted Frank, a senior attorney and director at the Competitive Enterprise Institute's Center for Class Action
Fairness, said that even if the CFPB's study found that an increase in credit card rates was not statistically
significant, that "does not mean it's not significant."

"They often cherry-pick their data," said Frank. "To say it's not statistically significant, therefore there's no effect,
that's wrong. What you can say is, we can't be confident there is an effect but there probably is an effect, and more
study is needed."

I'm not sure what the basis is for Frank's claim that there probably is an effect, but I'm not a statistician by any means.  If not using arbitration clauses increased lending costs, I remain confused why more credit card issuers don't use arbitration clauses out of self-interest (roughly half don't use arbitration clauses), or alternatively, where are the credit card issuers that don't use arbitration clauses and are charging more than those who don't?  I keep waiting for someone who supports the OCC position on this to address that point, but I'm not aware of anyone who has.  Perhaps that's because they can't.

UPDATE: Please see the comment below for the basis of Frank's claim and an argument for why some credit card issuers don't use arbitration clauses.

Politico Got Two Statisticians to Look at the CFPB-OCC Arbitration Statistical Dispute

by Jeff Sovern

The story is headlined 'Plague on both your houses': Cordray, Noreika get scolding from statisticians. Excerpt:

" * * * There isn’t strong evidence either way,” said Bruce Meyer, a professor at the University of Chicago.

“There is weak evidence that says more than likely there is a positive effect on the cost of credit,” Meyer said of the OCC analysis. “But the accepted approach is you don’t crow about something unless you have stronger evidence.”

As for Cordray’s rebuttal, “it was wrong, too,” Meyer said. “You can say that there’s an 88 percent probability if you believe that the study that’s being quoted. There are always potential problems with research studies.”

* * * 

Campbell Harvey, a Duke University professor and a past president of the American Finance Association, scolded both the bureau and OCC for fighting over things like p-values, which can be hacked or manipulated. He called the OCC’s probability calculations “vague” and said agency researchers “left themselves open to criticism that they don’t understand basic statistics.”

But he also said both sides should stop bickering and rethink what’s important. In that light, he noted that the CFPB couldn’t rule out the chance, however remote, that an arbitration ban could increase the cost of consumer borrowing by more than 3 percentage points.

“By standard methods we wouldn’t consider this significant. That doesn’t mean that you ignore it,” Harvey said. “While it’s not significant at traditional levels, so what? It could be economically important.”

There's more in the article. Two statisticians is better than we had, but still only a small (you should forgive the expression) sample.  I wonder what others would say. I would also like to know more about what Harvey meant when he said that the agency researchers left themselves open to the criticism that they don't understand basic statistics.  The agency in question seems to be the OCC rather than the Bureau, judging by the earlier reference in the sentence to the OCC.

WSJ Report on CFPB Response to Norieka's Arbitration Op-Ed

by Jeff Sovern

The Wall Street Journal, in a story headlined Regulator Fight Flares Anew Over Arbitration Rule As GOP Gears Up To Vote, reports on the CFPB response to the Norieka op-ed I wrote about earlier:

The CFPB countered Mr. Noreika’s attack by publishing a new report on the rule’s effect on consumers, arguing there is no statistical evidence it would have a significant impact on credit costs. The bureau also said some of the data it used when designing the rule is confidential information not suitable for publishing.

The CFPB said the OCC’s analysis is “based on flawed statistics and is contradicted by publicly available historical data that the OCC did not consider.”

As best I can tell, the CFPB report is not yet up on its web site.