Consumer Law & Policy Blog

Two Revealing Quotes from the Times Arbitration Report

by Jeff Sovern

 Deepak posted earlier about the extraordinary Times story on arbitration.  I have been studying arbitration for some time, and yet some items in the story were new to me. Though the entire article demands to be read, here are two especially revealing quotes:

Since no government agency tracks class actions, The Times examined federal cases filed between 2010 and 2014. Of 1,179 class actions that companies sought to push into arbitration, judges ruled in their favor in four out of every five cases.

[B]y assembling records from arbitration firms across the country, The Times found that between 2010 and 2014, only 505 consumers went to arbitration over a dispute of $2,500 or less.

Putting those quotes together yields the conclusion that businesses are able to use arbitration clauses to defeat claims where individual consumers have lost small amounts--meaning businesses are free to cheat consumers out of small amounts, unless regulators stop them.

Klonoff Predicts the Future for Class Actions

Robert H. Klonoff of Lewis & Clark has written Class Actions in the Year 2025: A Prognosis, Forthcoming in the Emory Law Journal. Here is the abstract:

In this Article, I reflect on what the federal judiciary has done in recent years, and I attempt to predict what the class action landscape will look like a decade from now. My predictions fall into several categories:

First, I discuss whether the basic class action framework — Federal Rule of Civil Procedure 23 — is likely to be revamped in the next decade. I predict that there is little chance that the basic structure of Rule 23 will change.  Calls by some scholars to rewrite Rule 23 will not make headway.  The only caveat to this prediction is that either Congress or the Supreme Court could repudiate so-called no injury classes — i.e., classes in which some unnamed class members suffered no harm — a result that would not change the text of Rule 23 but would adversely impact certain kinds of class actions, such as consumer cases.

Second, I examine the likely state of class action jurisprudence in the year 2025.  In that regard, I make several predictions: Securities class actions will continue to flourish, but consumer, employment, and personal injury class actions will continue to decline. The Supreme Court will curtail the ability of plaintiffs to establish liability or damages through expert statistical sampling (referred to frequently as “trial by formula”). The “ascertainability” requirement imposed by the Third Circuit will be repudiated by the Supreme Court or by the Third Circuit itself. The Supreme Court will conclude, as have numerous circuits, that an unaccepted offer of judgment to a class representative pursuant to Federal Rule of Civil Procedure 68 is a legal nullity and does not moot the individual’s claim or the putative class action. Defendants will advance several arguments against class certification that, until now, have had only limited success.  These will include expansive applications of Rule 23’s typicality, predominance, and superiority requirements. Although defendants will not be fully successful with these arguments, they will succeed in erecting some additional barriers to class certification. During the next decade, courts addressing class certification and the fairness of settlements will give greater weight to allegations of unethical behavior by class counsel and by counsel representing objectors to settlements. The future of class actions will ultimately lie in the hands of a small number of appellate court judges who have a special interest and expertise in aggregate litigation.

Third, I focus on the administration and resolution of class actions and offer two predictions: (1) by 2025, a significantly larger number of class action cases will go to trial than at any time since 1966; and (2) technological changes will fundamentally alter the mechanics of class action practice, offering more sophisticated tools for notice, participation by class members, and distribution of settlement proceeds.

Michael Barr Article on Arbitration

Michael S. Barr of Michigan has written Mandatory Arbitration in Consumer Finance and Investor Contracts, 11 New York University Journal of Law and Business (2015). Here is the abstract:

Mandatory pre-dispute arbitration clauses are pervasive in consumer financial and investor contracts — for credit cards, bank accounts, auto loans, broker-dealer services, and many others. These clauses often ill serve households. Consumers are typically presented with contracts on a “take it or leave it” basis, with no ability to negotiate over terms. Arbitration provisions are often not clearly disclosed, and in any event are not salient for consumers, who do not focus on the importance of the provision in the event that a dispute over the contract later arises, and who may misforecast the likelihood of being in such a dispute. The lack of salience means that there is no meaningful competition over arbitration provisions or likely any price effect. Some arbitration proceedings lack procedural protections, and unbiased arbitrator selection essential for fair outcomes. In addition, many arbitration provisions contain “gag” rules barring disclosure of reasoning, evidence, or outcomes. Moreover, arbitration clauses typically preclude consumers from banding together in aggregated actions, which diminishes redress and weakens deterrence. In the wake of the financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the new Consumer Financial Protection Bureau and the U.S. Securities and Exchange Commission to prohibit or condition the use of arbitration clauses in consumer finance and investment contracts, respectively. It is well past time for these agencies to use this authority.

Some Comments on Comments on the CFPB Arbitration Study

by Jeff Sovern

Earlier this week, I posted a link to the Ballard Spahr comments, on behalf of various industry trade associations, on the CFPB Arbitration Study .  Their thesis is that the Bureau Study indicates that consumers fare better in arbitration than litigation in general and class actions in particular. For example, here is one excerpt from their comments:

Consumers who received cash payments in class action settlements obtained an average of only $32.35. * * *

By contrast, customers who prevailed in arbitration recovered an average of $5,389, compared to the $32.35 obtained by the average class member in class action settlements. Thus, the average customer who prevailed in arbitration received 166 times more in financial payments than the average class member in class action settlements.

Sounds like a big difference, except for one thing.  In the words of Director Cordray introducing the study:

For those consumers who do use arbitration, we observed that very few of them filed arbitration claims for small-dollar amounts. For example, there are almost no disputes over amounts less than $1,000.

And here's a quote from the Study itself (Section 1, p. 12):

The average consumer affirmative claim amount in arbitration filings with affirmative consumer claims was around $27,000. The median was around $11,500. Across all six product markets, about 25 disputes a year involved affirmative consumer claims of $1,000 or less.

Unfortunately, the CFPB was not able to gather much information about class action claim amounts.   But class actions are often brought to compensate individual consumers in amounts much smaller than $1,000, an amount that evidently is not even enough to cause consumers to file for arbitration.  In other words, the Ballard Spahr comments show that when consumers bring arbitration claims averaging $27,000, and almost never for under a thousand, they recover larger amounts than they do in class actions in which individual consumers have suffered far more modest damages.  Not exactly a surprise. Such an apples-to-oranges comparison is hardly evidence that consumers do better in arbitration than in class actions.

 

 

Horton & Chandrasekher Reply to Kaplinsky & Levin on Empirical Study of Arbitration

Guest Post by Professors David Horton & Andrea Cann Chandrasekher:      

We recently posted our draft article, After the Revolution: An Empirical Study of Consumer Arbitration, 104 Geo. L.J. -- (forthcoming 2015) on the Social Science Research Network.  On June 22, well-known corporate defense lawyers Alan S. Kaplinsky and Mark J. Levin published a critique of the piece on their CFPB Monitor Blog.  Although we appreciate Kaplinsky and Levin taking the time to engage our work, they don’t do it justice.   

For starters, Kaplinsky and Levin misunderstand After the Revolution’s goals.  The paper analyzes 4,839 cases filed by consumers with the American Arbitration Association (AAA) between July 2009 and December 2013.  In part, it tries to accomplish the ultra-benign task of improving our understanding of what happens inside the arbitral forum.  How many consumers file claims?  What percentage reach the award stage?  Who wins, and how much?  How long do cases usually take?  As one might imagine, the answers to these questions are often nuanced and can’t be reduced to talking points.  Bizarrely, though, Kaplinsky and Levin insist on casting After the Revolution as an anti-arbitration polemic.  They call our encouraging discoveries “admissions” and contend that our gloomier data betray our lack of objectivity. But the article fails as a saw-toothed indictment of alternative dispute resolution for a simple reason—it’s not supposed to be one.

In addition, After the Revolution examines the impact of the U.S. Supreme Court’s April 2011 decision in AT&T Mobility LLC v. Concepcion.  As most readers know, Concepcion effectively required plaintiffs to arbitrate low-value complaints on an individual basis, rather than as part of a class action.  So do consumers abandon these small-dollar grievances or pursue them in bilateral arbitration?  We find that filing levels moderately increased after Concepcion, largely because some plaintiffs’ lawyers have initiated numerous individual arbitrations against the same company.  In turn, these class action-style claims have transformed some companies into “extreme” repeat players, who arbitrate dozens or even hundreds of times.  Using several regression analyses, we prove that extreme repeat players win more often and pay less in damages than other defendants.    

It’s this last finding—the extreme repeat player advantage—that draws most of Kaplinsky’s and Levin’s ire.  Notably, they don’t engage it on its own terms.  Indeed, they couldn’t—our conclusions are statistically significant and robust to various model specifications.  Instead, they attempt to impugn it by saying that we “purport[] to find a ‘repeat player’ effect favoring companies that previous researchers, including the Consumer Financial Protection Bureau (CFPB) itself, have not discerned.” 

This assertion is flawed to the core.  Where to begin?  For starters, nearly every “previous researcher[]” has uncovered a repeat player effect in arbitration.  See, e.g., Lisa B. Bingham, Employment Arbitration: The Repeat Player Effect, 1 Emp. Rts. & Emp. Pol’y J. 189 (1997); Lisa B. Bingham, On Repeat Players, Adhesive Contracts, and the Use of Statistics in Judicial Review of Employment Arbitration Awards, 29 McGeorge L. Rev. 223 (1998); Alexander J. S. Colvin, An Empirical Study of Employment Arbitration: Case Outcomes and Processes, 8 J. Empirical Legal Stud. 1 (2011); cf. Searle Civil Justice Inst., Consumer Arbitration: Before the American Arbitration Association 76-82 (2009) (finding a repeat player advantage in consumer arbitration under one definition of “repeat player” but not another).  Likewise, section 5.6.12 of the CFPB’s recent Arbitration Study does discover that repeat-playing companies win more often than one-shot firms—although, to be fair, the Bureau doesn’t highlight this effect, perhaps because their sample sizes are small. 

Moreover, Kaplinsky and Levin play ostrich with the fact that After the Revolution takes the repeat player debate to the next level.  Prior commentators define “repeat player” as a firm that arbitrates more than once.  Rather than employ this crude rubric, we create tiers of repeat players based on how often a company appears in our data.  In addition, with the exception of Colvin, existing studies do not use multivariate regression analysis to tease out the effect of repeat player status on win rates and damage amounts, which has the advantage of being able to hold other confounding factors constant.  This means that they can’t rule out the possibility that an apparent repeat player advantage stems from a source other than the company’s repeat player status.  Conversely, our regressions allow us to control for a wide array of variables.  Here’s just one example:  near the end of their contribution, Kaplinsky and Levin gesture toward the fact that the CFPB found that any repeat player boon “was counter-balanced by the fact that counsel for the consumers were also usually repeat players in arbitration.”  But (even ignoring the fact that this arguably distorts the CFPB’s conclusions), the Bureau simply tallies up results in cases along the binary dimensions of whether or not a company or a consumer’s lawyer are repeat players.  After the Revolution, on the other hand, compares arbitration outcomes across different levels of consumer lawyer experience—all the while controlling for other factors (claim amount, documents only submission, telephonic hearing, and case length) that could confound the consumer lawyer effect.  In this more detailed investigation, we are able to uncover the result that having a highly seasoned plaintiffs’ attorney isn’t the panacea that Kaplinsky and Levin claim it is.  In fact, we show that it often hurts consumers. 

Ultimately, the glowing question isn’t whether extreme repeat playing companies thrive in the extrajudicial forum; it’s why they do so.  One hypothesis that has been kicking around for years is that arbitrators follow their wallets, and thus rule in favor of big companies in the hopes of being selected again in the future.  As we explain in the paper, we’re skeptical of that theory.  Not surprisingly, Kaplinsky and Levin heavily emphasize our discussion of this topic.  But they misleadingly frame it as though it’s somehow a “contradiction[]” or hiccup in our agenda, rather than just straight-up empirical and legal analysis.  That’s emblematic of their response—it accuses us of missing a mark we never set out to hit.        

       

Empirical Study of Arbitration and Repeat Player Effect

David Horton and Andrea Cann Chandrasekher both of California, Davis, have written After the Revolution: An Empirical Study of Consumer Arbitration, 104 Georgetown Law Journal (Forthcoming 2015). Here's the abstract:

For decades, mandatory consumer arbitration has been ground zero in the war between the business community and the plaintiffs’ bar.  Some courts, scholars, and interest groups argue that the speed, informality, and accessibility of private dispute resolution create a conduit for everyday people to pursue claims.  However, others object that arbitration’s loose procedural and evidentiary rules dilute substantive rights, and that arbitrators favor the repeat playing corporations that can influence their livelihood by selecting them in future matters.  Since 2010, the stakes in this debate have soared, as the U.S. Supreme Court has expanded arbitral power and mandated that consumers resolve cases that once would have been class actions in two-party arbitration.  But although the Court’s jurisprudence has received sustained scholarly attention, both its defenders and critics do not know how it has played out behind the black curtain of the extrajudicial tribunal.

This Article offers fresh perspective on this debate by analyzing nearly 5,000 complaints filed by consumers with the American Arbitration Association between 2009 and 2013.  It provides sorely-needed information about filing rates, outcomes, damages, costs, and case length.  It also discovers that the abolition of the consumer class action has changed the dynamic inside the arbitral forum.  Some plaintiffs’ lawyers have tried to fill this void by filing numerous freestanding claims against the same company.  Yet these “arbitration entrepreneurs” are a pale substitute for the traditional class mechanism.  Moreover, by pursuing scores of individual disputes, they have inadvertently transformed some large corporations into “extreme” repeat players.  The Article demonstrates that these frequently-arbitrating entities win more and pay less in damages than one-shot entities.  Thus, the Court’s consumer arbitration revolution not only shields big businesses from class action liability, but gives them a boost in the handful of matters that trickle into the arbitral forum.

Joanna Schwartz Paper on Whether Class Actions Coerce Settlements

Joanna C. Schwartz of UCLA has written The Cost of Suing Business, forthcoming in the DePaul Law Review. Here's the abstract:

To listen to the Chamber of Commerce, one would think that class actions are the most significant scourge on business ever conjured up by man. In brief after brief to the Supreme Court, the Chamber of Commerce and other business amici tell the same story: Meritless class actions, filed by rapacious plaintiffs’ attorneys for the ostensible benefit of consumers, employees, and shareholders, are so devastatingly expensive to defend against, and threaten such financial ruin if plaintiffs prevail, that corporate defendants cannot help but accept “blackmail settlements” that harm both businesses’ bottom lines and society at large. In this Essay for the 2015 Clifford Symposium, I examine the empirical support for these claims about the deleterious effects of class actions.

Although there is very little reliable empirical information about any aspect of modern civil litigation, at least some available information challenges business amici's assertions about the costs and burdens of class action suits.  Class actions, as a whole, appear no more coercive to defendants than any other kind of litigation. Businesses appear to spend even more money suing each other than they do defending against class actions. There is no reason to believe that class actions are more often frivolous than other types of cases, or that plaintiffs’ attorneys who bring class actions are any more unscrupulous than the other members of their profession. And claims about the costs and burdens of class action litigation underestimate the costs of restricting plaintiffs’ access to the courts. For these reasons and others, prevailing depictions of the costs and burdens of class actions appear to be both unfounded and incomplete.

More on How Consumers Fare Under Class Actions

The CFPB arbitration report found that class actions can return significant sums to consumers. Adding to the literature on that topic, Brian T. Fitzpatrick of Vanderbilt and Robert C. Gilbert have written An Empirical Look at Compensation in Consumer Class Actions.  Here is the abstract:

Consumer class actions are under broad attack for providing little in compensation to class members.  One response to this charge is the argument that one of us has made elsewhere: consumer class actions should not be measured by their compensatory value but by their deterrence value.  But here we take up this critique of consumer class actions on its own terms: can they serve a meaningful compensatory role?  Scholars have taken up this question before, but they have been stymied by the lack of available data.  In this article, we present original data on the distribution of class action settlements in fifteen related small-stakes consumer class action lawsuits against some of the largest banks in the United States.  We obviously can make no claim that these settlements are representative of most consumer class actions.  Nonetheless, we believe our findings support the notion that, under certain circumstances, consumer class actions can indeed serve a meaningful compensatory role: when they eschew claim forms in favor of automatic distributions and when they rely on direct deposits or standard-sized checks rather than the cheaper, postcard-sized variety to make those distributions.

 

Fitzpatrick article on "The End of Class Actions?"

Prolific class action scholar (and former Scalia clerk) Brian Fitzpatrick of Vanderbilt Law has just posted to SSRN an interesting new paper foreseeing and lamenting the effects of his former boss's handiwork in AT&T Mobility v. Concepcion and American Express v. Italian Colors (both cases in which I had the privilege of representing the losing plaintiffs). Fitzpatrick's article is especially timely because it buttresses the CFPB's recently released study on the effects of mandatory arbitration clauses in consumer contracts. Here's the abstract of Fitzpatrick's piece, which is forthcoming in the Arizona Law Review:

In this Article, I give a status report on the life expectancy of class action litigation following the Supreme Court’s decisions in Concepcion and American Express. These decisions permitted corporations to opt out of class action liability through the use of arbitration clauses, and many commentators, myself included, predicted that they would eventually lead us down a road where class actions against businesses would be all but eliminated. Enough time has now passed to make an assessment of whether these predictions are coming to fruition. I find that, although there is not yet solid evidence that businesses have flocked to class action waivers — and that one big category of class action plaintiffs (shareholders) remain insulated from Concepcion and American Express altogether — I still see every reason to believe that businesses will eventually be able to eliminate virtually all class actions that are brought against them, including those brought by shareholders.

Vairo on Class Actions

Georgene M. Vairo of Loyola Los Angeles haw written Is the Class Action Really Dead? Is that Good or Bad for Class Members? 64 Emory Law Journal 477 (2014). Here's the abstract:

Recent Supreme Court decisions have tightened up the standards for obtaining class certification and virtually eliminate class arbitration as well. However, while the Court has made it more difficult for plaintiffs’ attorneys to use class resolution of claims as a prosecutorial tool, the lower federal courts appear to relax certification standards when the parties seek to certify a settlement class. Because of the preclusive power of a class action, which binds all class members who do not opt out, the class action remains a potent settlement tool. The 2014 Randolph W. Thrower Symposium panel that served as the foundation for this paper, “Binding the Future: Global Settlements and the Death of Representative Litigation,” asked, however, whether class settlements are bad for class members.

This Article begins by analyzing the Supreme Court’s certification decisions and agrees with most commentators that although class actions are not dead, the device’s utility as a prosecution tool has been compromised. However, the Article then shows that certification of class actions for settlement purposes is alive and well. Finally, the Article identifies possible alternatives to the use of class actions. Although much attention has been (and should be) directed at the fairness of proposed settlements, the Article suggests that it is fortunate that the lower federal courts are not applying class certification standards as stringently in the class settlement context. This is because, despite all the problems inherent in class action practice, class actions remain the best of a range of options for protecting the rights of class members, particularly in low-value claim cases.