Consumer Law & Policy Blog

More Dramatic Times Coverage of Arbitration Clauses: This Time, It's Nursing Homes

Here. A heart-breaking story.

 

Study of Repeat Players in Mutidistrict Litigation

Elizabeth Chamblee Burch of Georgia and Margaret S. Williams of the Federal Judicial Center have written Repeat Players in Multidistrict Litigation: The Social Network.  Here's the abstract:

To promote pretrial efficiency, the Judicial Panel on Multidistrict Litigation has transferred 36 percent of the entire federal courts’ civil caseload to transferee judges for coordinated handling. Transferee judges then pick plaintiffs’ attorneys to lead and manage those cases, and the same attorneys appear in proceeding after proceeding. While past studies have considered repeat play on the plaintiffs’ side, the current study is the first comprehensive empirical investigation of repeat play on both sides.

We found robust evidence of repeat play among both plaintiff and defense attorneys and, using social-network analysis, established that a cohesive multidistrict-litigation leadership network exists. That there are repeat players in multidistrict litigation matters considerably. Lead lawyers control the litigation, dominate negotiations, and design settlements. To consider repeat players’ influence, we examined the publicly available nonclass settlements these attorneys negotiated, looking for provisions that one might argue principally benefit the attorneys, and not one-shot plaintiffs. By conditioning the deal on achieving a certain claimant-participation rate and shifting the deal-making entities from plaintiffs and defendants to lead lawyers and defendants, repeat players tied all plaintiffs’ attorneys’ financial interests to defendants’ ability to achieve closure.

Over a 22-year span, we were unable to find any publicly available nonclass settlement that didn’t feature at least one closure provision (which benefits the defendant), and likewise found that nearly all settlements contained some provision that increased lead lawyers’ fees. Based on the limited settlements available to us, we found reason to be concerned that when repeat players influence the practices and norms that govern multidistrict proceedings — when they “play for rules,” so to speak — the practices they develop may principally benefit them at the expense of one-shot plaintiffs.

The Economist Compares US and EU Consumer Dispute Resolution

Here. (HT: Gregory Gauthier)

Sunday's NY Times Haggler Column and Class Actions

(Also take note of the engaging debate in the Comments.)

by Jeff Sovern

Every other week, the Sunday Times Business Section runs a column called The Haggler, written by David Segal (who may be better known to law professors as the author of several critical articles on law schools).  This week's version is headed A Little Walmart Gift Card for You, A Big Payout for Lawyers, and as the headline implies, the column is critical of some class action plaintiffs' lawyers.  The Haggle describes a scenario in which he says "it sound[s] as though the lawyers for Walmart and those for the plaintiffs had devised a settlement that would pump up fees for the latter while limiting outlays from the former."

I don't know if the facts are as reported in the column, though I have no reason to doubt it.  And the article can be criticized on several grounds: it gives considerable space to the views of class-action critic Ted Frank without giving any space to supporters of class actions (Segal reports that the lawyers for the plaintiff class, BakerHostetler, declined his interview request).  It doesn't note that even class actions that return little to the class members may benefit them and consumers generally by deterring future misconduct. 

But the article makes a good case that the lawyers found a loophole in CAFA's restriction on coupons in class action settlements by agreeing to an award of gift cards instead (class members had the choice of requesting a check, but for slightly less than the gift card amount; Frank claims that class members could request the gift card online, but had to ask for a check via snail mail, and that that pushed them to get the gift card). Because, according to the article, the lawyers' fees were based on the amount awarded in checks and gift cards, rather than the amount of those gift cards redeemed, the lawyers probably got more than they would have received if fees were based only on the amounts redeemed.  I don't know about you, but I have gift cards that I have never redeemed, and I bet plenty of the class members have them too.

More on Debt Collection and Arbitration

by Jeff Sovern

Richard posted a link last week to the Times article about how debt collectors first sue in court and then when consumers sue them, use arbitration clauses to block the consumer law suit.  Today the Times published four letters responding to the article, including mine. I want to comment on two of the other letters. Joseph H. Weber wrote:

Class-action litigation is certainly not the answer. The only people who benefit from class-action litigation are the lawyers.

One problem with this assertion is that it overlooks that class actions deter misconduct.  To the extent that they do so, consumers of the product benefit even if they do not obtain redress themselves. Weber also wrote:

There are other options for people who believe they are being cheated by debt collectors in addition to arbitration, such as disputing the original claim in small claims court.

Except that consumers don't always know that they have been sued in the first place, as was reportedly true of the consumer described in the article's lead. It's hard to defend against a claim that you don't know about.

Another letter-writer, Eric Hodson, urged Congress to "pass legislation requiring that any consumer credit agreement include a prominent warning that the consumer will be confined to arbitration of any disputes, and that arbitration can be expensive and the outcomes usually favor the business over the consumer."

But our arbitration study found that consumers generally did not understand arbitration clauses and many did not think they could take away their right to sue.  In fact, considerable empirical evidence indicates that consumer disclosures are ineffective.  Perhaps it is possible to write an effective disclosure along the lines Hodson suggests, but no evidence suggests that it is, and a fair amount of empirical evidence suggests that it is not.

A Reply to Alan Kaplinsky's Comment on My Claim about the Industry's Supposed Love of Arbitration

by Jeff Sovern

In a recent American Banker essay, I argued that businesses praise arbitration not because they genuinely value it, but because it enables them to block class actions.  I said that for two reasons: first, that if businesses truly believe arbitration is superior to litigation, as they say they do, they should prefer arbitration even for resolving disputes in individual actions when class actions are not available.  Yet financial industry organizations have stated that if they cannot use arbitration to block class actions, they will not use arbitration at all in consumer disputes. Second, a study found that in business-to-business contracts, where class actions are rare and so not relevant to deciding whether to use arbitration, companies use arbitration clauses far less often than in their consumer contracts, suggesting that they don’t see value in arbitration except when class actions are a possibility.

In return, Alan Kaplinsky, a leading arbitration advocate and financial industry lawyer, responded in an American Banker piece of his own. But he never actually grapples with my claim that the actions of businesses show they prefer litigation to arbitration when class actions are off the table.  In fact, his argument proves my point.

First, Mr. Kaplinsky argued that “arbitration is superior to class action litigation for consumers and companies alike [emphasis mine].” The Consumer Financial Protection Bureau study disagreed, but I understand that Mr. Kaplinsky claims the bureau went off the track on that one.  However, my essay was based on what businesses want to do with disputes when class actions are not involved. As I noted above, they want to litigate, not arbitrate. 

Second, Mr. Kaplinsky wrote that I said “the evidence points to few individual arbitrations occurring in the first place.”  He then stated that there had been thousands of such individual actions, including the 1,750 the CFPB studied.  Well, that might have been a good argument if I had actually said that few individual arbitrations have occurred. Except that I didn’t.  It’s irrelevant.

Moving on from that straw man, Mr. Kaplinsky says that businesses incur extra expenses in defending claims in arbitration and that they would not be willing to incur those expenses if they must also pay for class actions.  In other words, Mr. Kaplinsky agrees that if arbitration clauses can’t prevent the use of class actions, business won’t want to use arbitration.   But as I said in my original piece, if businesses genuinely believe arbitration is superior to litigation, shouldn’t they choose arbitration whenever they can, whether or not it enables them to avoid class actions?

But what about the arbitration expense Mr. Kaplinsky cites?  Is that the explanation?  Ask yourself why businesses are willing to assume that expense now.  It’s not to sell their products: no business advertises that you should choose them because they pay for arbitration if you have a dispute with them.  Rather, it’s because they get some other benefit out of assuming that expense. And that benefit, of course, is blocking class actions. What else could it be?

In short, businesses prefer arbitration because, as CFPB Director Richard Cordray said, it gives them a “free pass” to avoid accountability to their customers. It enables them to block class actions.  Maybe it’s time they admitted it.

Times: Bipartisan Bill Would Protect Service Members’ Right to Avoid Arbitration

Here.

S.I Strong Chapter: Incentives for Large-Scale Arbitration

S.I. Strong of Missouri has written Incentives for Large-Scale Arbitration: How Policymakers Can Influence Party Behaviour.  Here's the abstract:

At this point, the future of large-scale arbitration (i.e., class, mass and collective procedures) can best be described as mixed. On the one hand, class arbitration has been curtailed in the United States as a result of various US Supreme Court decisions upholding waivers of large-scale suits in arbitration. On the other hand, mass and multiparty arbitration in investment proceedings appears to be on the rise. Collective arbitration seems to exist somewhere between these two extremes, since there are an increasing number of collective procedures around the world (for example, various types of collective arbitration can currently be found in Spain, Germany and the United States) but parties appear to use such mechanisms relatively infrequently.

The uneven status of large-scale arbitration raises the question of why parties and states choose to use or develop class, mass or collective procedures. To answer this question, it is necessary to analyse the legal and social environments in which these procedures exist to determine whether parties have sufficient incentives to pursue large-scale arbitration and whether states can or should do more to promote these forms of dispute resolution.

This chapter attempts to address these concerns by considering the use and availability of incentives for large-scale arbitration and in particular whether and to what extent lawmakers can or should seek to influence party behaviour through default rules and other policymaking tools. In so doing, this chapter attempts to provide parties, practitioners and policymakers with a better understanding of how class, mass and collective arbitration operate within various legal and social environments and how the choice of certain legal frameworks can optimize both public and private values.

More From the Times on Arbitration: Efforts to Rein In Arbitration Come Under Well-Financed Attack

Here. Excerpts:

[T]he U.S. Chamber of Commerce, the most powerful business lobby in the country, started a new effort to block the Consumer Financial Protection Bureau by lobbying lawmakers to attach a rider to the federal budget bill that would force the regulator to conduct a new study before issuing any rule, according to people with direct knowledge of the strategy.

* * *

On Wednesday, the Justice Department issued a proposal to protect military service members from arbitration requirements. Earlier this month, Senator Al Franken, Democrat of Minnesota and a longtime opponent of arbitration, renewed his push for Congress to pass a bill he introduced this year that would prevent companies from requiring employees to go to arbitration.

Several Democrats are expected to introduce bills intended to more widely curtail the use of arbitration clauses, according to the people. But with Congress deeply divided, some Democrats are calling on President Obama to use his executive authority to prevent federal contractors from including arbitration clauses in their contracts with customers and employees.

My Latest American Banker Op-ed: CFPB Arbitration Plan Provokes Dubious Industry Claims

 by Jeff Sovern

Here.  Excerpt:

[C]ompanies can use class action waivers to block consumer protection laws unless consumer protection laws find a way to block class action waivers.

* * *

Last month, the bureau made public a proposal to block class action waivers in arbitration clauses. A leading advocate for arbitration in the financial industry, Alan Kaplinsky, responded with [a] forecast of how the industry would respond: "We firmly believe that, should the CFPB enact its proposal to ban class action waivers, most companies will abandon arbitration with the result that arbitration will no longer be available as a quick, efficient and inexpensive way of resolving disputes."

But if the industry truly believes that arbitration is so much better than litigation at resolving disputes, shouldn't it prefer arbitration to litigation for resolving individual disputes, where there is not a threat of a class action? Or should we be shocked, shocked, to discover the industry's love of arbitration is about barring class actions?