Consumer Law & Policy Blog

Three Articles on Arbitration and Class Actions

Sarah Rudolph Cole has written The Federalization of Consumer Arbitration: Possible Solutions, University of Chicago Legal Forum No. 271. Here's the abstract:

Over the past fifteen to twenty years, businesses dramatically increased the use of arbitration clauses in contracts with consumers. Although commentators criticize the use of arbitration to resolve consumer disputes because arbitration lacks the due process protections inherent in traditional litigation, efforts to regulate or eliminate the use of arbitration in this context have failed miserably. This failure to due in large part to the Supreme Court’s embrace of arbitration and the corresponding lack of federal legislative interest in addressing this issue. The Supreme Court’s arbitration jurisprudence, particularly as it applies to consumer disputes, is the surest example of the “federalization” of an area of law that federalism principles dictate traditionally belong to the states. Interpreting the Federal Arbitration Act (FAA), the Court routinely applies a preemption doctrine that effectively precludes states from regulating the use of arbitration to resolve consumer disputes. As a result, enforcement of state laws regulating the use of arbitration to resolve consumer disputes has become the exception rather than the rule.

This Article will focus on the Supreme Court jurisprudence that led to the current situation in which state law plays a minimal role in arbitration doctrine. While state legislatures traditionally regulate contract law issues, the Supreme Court’s interpretation of the FAA has resulted in an anomalous situation in which federal law routinely trumps state laws attempting to reform arbitration. The Article will also explain how the Court’s Stolt-Nielsen (2010) and Concepcion (2011) decisions took the anti-federalism approach a step further – by permitting preemption in areas the FAA does not address. This expansion of the preemption doctrine further undermines the states’ ability to substantively regulate arbitration by defining arbitration in a very specific way and then declaring preempted any regulation or decision that is not consistent with the definition. Moreover, this expansion, together with Congress’ lack of interest in regulating arbitration, makes it quite likely that private dispute resolution providers will be the only institutions able to reform the arbitration process. Recognizing that arbitration law is largely federalized, this Article will then identify a number of possible reforms private dispute resolution providers could implement and review one of the more promising avenues of reform – arbitrator opinion-writing – in greater depth. This reform would have a number of beneficial effects. It would provide transparency in the arbitration process, address problems perceived to exist in the arbitrator selection process, make clear whether the parties received due process during the arbitration, and ensure that awards are carefully considered and evidence properly balanced.

Christopher R. Leslie of Irvine has written The Arbitration Bootstrap 94 Texas Law Review (2015). Here's that abstract:

Arbitration clauses in contracts require consumers to waive their rights to bring litigation in court. The clauses are often unavoidable because firms include arbitration clauses in contracts of adhesion. In recent years, firms have begun to load their arbitration clauses with unconscionable terms unrelated to arbitration itself. For example, firms insert terms that shorten statutes of limitations, reduce damages, or prohibit injunctive relief. These contract terms are considered unconscionable – and, thus, unenforceable – in many states. However, the Supreme Court has interpreted the Federal Arbitration Act (the FAA) to require judicial deference to arbitration clauses. Consequently, many courts allow firms to bootstrap unenforceable contract terms into an enforceable arbitration clause in order to make those unconscionable contract terms enforceable.

The Supreme Court has invoked the legislative intent of the 1925 Congress in order to assert that the FAA applies to consumer contracts. Courts have further suggested that Congress intended arbitration clauses to be enforced as written and that this requires deference to anti-consumer terms that would otherwise be found unconscionable under state law. Finally, the Supreme Court has asserted that the FAA preempts all state efforts to police arbitration clauses, including basic notification requirements.

This Article examines the actual legislative history of the FAA and explains that Congress never intended the FAA to apply to consumer contracts. Congress was exclusively concerned with the enforceability of arbitration agreements between sophisticated businesses in commercial disputes. Congress never considered the possibility that retailers would impose mandatory arbitration clauses on their customers, let alone that these arbitration clauses would be structured to limit damages, to truncate statutes of limitation, or to otherwise remove procedural protections from consumers. The congressional intent that courts should enforce anti-consumer terms in arbitration clauses is an imagined one.

The Article concludes that courts should stop asserting that the FAA mandates enforcement of unconscionable terms so long as they reside in an arbitration clause. When confronting unconscionable terms in arbitration clauses, courts can take one of three actions: enforce the unconscionable terms; sever the unconscionable terms; or strike the arbitration clause as a whole because it is so overrun by unconscionable terms. The Article explains why only the latter two options are consistent with Congressional intent and good public policy.

Meanwhile, Jason Scott Johnston of Virginia weighs in with High Cost, Little Compensation, No Harm to Deter: New Evidence on Class Actions Under Federal Consumer Protection Statutes.  Here's his abstract:

Working from a sample of all consumer class actions filed in the Northern District of Illinois over the period 2010-2012 (totaling 510), this paper reports and analyzes data on class actions under four federal consumer protection statutes, the Electronic Funds Transfer Act (EFTA) the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA), and the Telephone Consumer Protection Act (TCPA). Even coding all TCPA cases as alleging actual harm to the named plaintiff, over half the cases in the sample analyzed here seek statutory damages without an allegation of harm to the plaintiff. For most case types, only 15 percent or less of the class receive compensation, and the aggregate compensation paid to the class is far less than the stated or nominal class settlement fund amount. Because courts award attorney fees based on the nominal settlement amount, attorney fees are a very large fraction of the amount paid to the class and for some case types attorney fees average 300-400 percent of the amount paid to the class. The findings of this article have the following implications for class actions under federal consumer protection statutes: i) due to statutory damage provisions, there are no “small dollar” filings under such statutes; ii) such cases are never tried, rarely generate binding legal precedent and may well be individually viable; iii) with low class compensation rates and attorney fees to class counsel that often dwarf total class compensation, such class actions are both highly ineffective and inefficient; iv) statutory damages provisions with no requirement to even plead harm incentivize class counsel to pursue claims where there is no harm to compensate or deter, and even cases with allegations of harm (as under the TCPA) may actually involve no harm as courts have created a presumption of harm (as in presuming the lack of consent under the TCPA).

Galle Paper: Externalities, Internalities, and When to Use Nudges

Brian D. Galle of Georgetown has written The Problem of Intra-Personal Cost.  Here is the abstract:

“Externalities”, or harms to others, provide a standard justification for government intervention in the private market. There is less agreement over whether government is justified in correcting “internalities,” or harms to self the self is largely powerless to avoid. While some of the internality dispute is philosophical, some is practical. Critics suggest government lacks information to regulate internalities, and that any intervention would inefficiently distort a private market for self-help. In this Article, I show that these critiques of regulation overlook well-established tools of externality regulation, as well as a burgeoning literature on the measurement of internalities.

Having answered the “should” question, I move on to “how?” I examine the established tools of externality regulation, and consider to what extent the standard advice of the externality literature extends to internality regulation. I find some surprising results, such as that “carrots” may at times be an attractive alternative to “sticks,” and that even large taxes on internalities can produce a so-called “double dividend.” I also compare the traditional regulatory options to “nudges” and other forms of cognitively-informed government interventions. I show a set of cases in which nudges may be preferable to either taxes or command and control regulation.

Thus, my analysis also helps to resolve a second, related, debate over the propriety of nudges. The nudge debate has almost exclusively revolved around whether nudges avoid philosophical objections to paternalistic government regulation. I offer instead a new reason to employ nudges in some cases: they are more efficient.

Gold Article on Compensation's Role in Class Actions

Russell M. Gold of NYU and Wake Forest has written Compensation's Role in Deterrence, forthcoming in 91 Notre Dame Law Review (2016). Here is the abstract:

There are plenty of non-economic reasons to care whether victims are compensated in class actions. The traditional law and economics view, however, is that when individual claim values are small, there is no reason to care whether victims are compensated. Deterring wrongdoing is tort law’s primary economic objective. And on this score, law and economics scholars contend that only the aggregate amount of money that a defendant expects to pay affects deterrence. They say that it does not matter for deterrence purposes how that money is split between victims, lawyers, and charities. This Article challenges that claim about achieving tort law’s primary objective and argues that there is an economic reason to care whether victims are compensated in class actions. It offers reason to think that compensating victims deters more wrongdoing than the same amount of relief in other forms, at least in damages class actions.

Put a different way, this Article contends that the primary objectives of class actions — compensation and deterrence — are intertwined in ways that scholars have not previously recognized. Compensation affects the amount of reputational harm that class actions inflict on defendants, and anticipating that reputational harm provides a source of deterrence. Because the public values compensating victims in civil litigation, if class actions were frequently to slight compensation that would undermine public perception of the class device; class actions would come to seem more like plaintiffs’ lawyers’ extortion mechanisms than legitimate means of redressing harm. Diminished procedural legitimacy makes the class action a less powerful signal about the validity of the underlying claims, which undermines reputational deterrence.

Erichson Article on Class Action Settlement Issues

Howard M. Erichson of Fordham has written Aggregation as Disempowerment, 92 Notre Dame Law Review (Forthcoming).  Here is the abstract:

Class action critics and proponents cling to the conventional wisdom that class actions empower claimants. Critics complain that class actions over-empower claimants and put defendants at a disadvantage, while proponents defend class actions as essential to consumer protection and rights enforcement. This article explores how class action settlements sometimes do the opposite. Aggregation empowers claimants’ lawyers by consolidating power in the lawyers’ hands. Consolidation of power allows defendants to strike deals that benefit themselves and claimants’ lawyers while disadvantaging claimants. This article considers the phenomenon of aggregation as disempowerment by looking at specific settlement features that benefit plaintiffs’ counsel and defendants without benefiting class members. Recognizing that protection of disempowered class members lies with judges who review settlement agreements, the article identifies red flags to alert judges to problematic settlements and fee requests. By showing how certain settlement features reflect defendants’ cooption of the power of aggregation, the article offers a framework for thinking about class action power dynamics in the age of settlement.

 

 

Christopher Article on Mobile Banking and the Unbanked

Catherine Martin Christopher of Texas Tech has written Mobile Banking: The Answer for the Unbanked in America? 65 Catholic University Law Review, (2015 ).  Here is the abstract:

In the U.S., the poor often lack access to mainstream banking services. Instead, they rely on expensive, poorly regulated alternatives like check cashers, payday lenders, pawn shops, and auto title lenders. These financial products jeopardize poor people’s financial and physical security.

Both government officials and private enterprise have attempted to craft solutions to the banking access problem by pushing adoption of traditional banking products, but so far these attempts have fallen short. This Article asserts that mobile banking may be a transformative technology that can significantly increase financial inclusion in the United States.

The Article discusses current statistics and demographics of mobile phone ownership in the United States, the success of overseas mobile banking programs aimed at helping the poor, and the current prepaid card industry in the United States. The Article draws lessons from these case studies and asserts that bringing the unbanked into the regulated banking system is worth private investment in mobile banking products and platforms. (The Article also argues that if private entities do not find it fiscally feasible to pursue this market, public funds can and should be expended.) The Article recommends specific account features that would benefit the currently unbanked, such as having an option for transaction accounts in addition to savings accounts, providing mobile applications that provide financial education, and allowing for users to open accounts over their mobile phones. It also proposes that customer identification procedure can be relaxed for small-balance accounts designed specifically to increase financial inclusion.

Center for Responsible Lending Study Finds MD and NC Collection Reforms Didn't Impair Consumer Credit

Here.  Here is the Executive Summary:

Debt buyers, specialized debt-collection companies, purchase defaulted consumer debt from creditors such as credit card companies for pennies on the dollar. Debt buyers then attempt to collect the debt, often by suing borrowers in court. Unfortunately, because debts are typically sold to debt buyers without fully verifying the accuracy of the borrower’s identity, amount of the debt, or status of repayment, the information used as a basis to collect from consumers may be faulty. As a consequence, borrowers can find themselves facing a default judgment from court on a debt that they do not in fact owe.

Two states—North Carolina and Maryland—have tried to address these issues through substantive reforms to debt-collection processes in their respective courts. At the time these reforms were being debated, the debt-buying industry claimed that these regulations would result in less credit being made available in those states. However, our analysis of the change in new credit card extensions in North Carolina and Maryland after reforms took effect does not show any negative impact to consumer credit. Specifically, we find that:

• Credit availability in North Carolina and Maryland appears to follow national trends rather than being impacted by regulatory changes.

• North Carolina and Maryland consumers seeking new credit cards generally fared better than consumers in peer states.

• Sub- and near-prime consumers in North Carolina and Maryland fared at least as well as those nationally and in peer states regardless of debt-buying reforms.

State and federal officials should continue to strengthen the rules and laws for debt collection and debt buying to better protect consumers. Debt collectors should be required to possess and review full documentation about a borrower and the borrower’s obligations before pursuing collections or a lawsuit. In addition, court rules should be strengthened to ensure adequate evidence is presented for a debt collector to prevail in court.

 

Business Lawyer Survey of Consumer Auto Finance Developments

Kevin M. McDonald of VW Credit Inc., and Kenneth J. Rojc of Nisen & Elliott, LLC have written the Business Lawyer's annual survey of consumer auto finance developments, this year called Automotive Finance: The Regulatory Cup Spilleth Over.  Here is the abstract:

Almost every aspect of the life cycle of retail contract and lease transactions, from marketing and account originations to servicing and collections, has received heightened regulatory attention during the past year (2015), since our previous Survey. This Survey highlights the most significant developments since the spring of 2015, including the Bureau of Consumer Financial Protection’s (“CFPB”) enactment of a larger market participant rule and the expansion of its Examination Procedures for automobile finance lenders. On the fair lending front, this Survey addresses consent orders entered by the U.S. Department of Justice (“DOJ”) with American Honda Finance Corporation (“AHFC”) and Evergreen Bank Group (“Evergreen”); the CFPB’s white paper on the proxy methodology it uses in fair lending cases; and its announcement that consumers subject to alleged credit discrimination by Ally Financial, Inc. and Ally Bank (“Ally”) will be receiving instructions on how to apply for restitution. On the servicing front, this Survey examines enforcement actions by the CFPB against First Investors Financial Services Group, Inc. (“First Investors”) in connection with credit reporting activities and Security National Automotive Acceptances Company (“SNAAC”) related to collection activities involving servicemembers. This survey also reports on the New York Attorney General’s enforcement actions against vehicle dealers’ with regard to their sale and financing of ancillary products.

Marotta-Wurgler Surveys Privacy Policies

Florencia Marotta-Wurgler of NYU has written Understanding Privacy Policies: Content, Self-Regulation, and Markets. Here is the abstract:

The current regulatory approach to consumer information privacy is based on a “notice and choice” self-regulation model, but commentators disagree on its impact. I conduct a comprehensive empirical analysis of 261 privacy policies across seven markets and measure the extent to which they comply with the self-regulatory guidelines of the Federal Trade Commission (FTC), US-EU Safe Harbor Agreement, and others. I track terms involving notice, data collection, sharing, enforcement, security, and other practices, and create a measure of substantive protections. The average policy complies with 39% of the FTC guidelines issued in 2012, and there is no evidence that firms have updated their policies in response to these guidelines. Terms that require firms to bear costs or constrain their behavior are less likely to be included. Protections vary widely across markets, however: Adult sites offer the clearest notice of practices and report less data collection and sharing than other sites, while cloud computing firms report more extensively on data security practices. Overall, the results suggest that privacy policies are being shaped as much by market forces as by the current regulatory regime.

 

 

Beales & Murris on the FTC

Howard Beales of George Washington University's School of Business and Timothy J. Muris of George Mason have written FTC Consumer Protection at 100: 1970s Redux or Protecting Markets to Protect Consumers? 83 George Washington Law Review 2157(2015).  Here is the abstract:

Throughout most of the Federal Trade Commission’s (“FTC” or “Commission”) history, the agency has been condemned as ineffective. Indeed, the prestigious 1969 American Bar Association Report said that the FTC should either change or be abolished. The disastrous decade of the 1970s followed, in which the FTC tried to become the second most powerful legislature in Washington. The Commission then finally developed a bipartisan regulatory program, recognizing that the FTC was not the star player in the economy but had an important role in enforcing the rules that facilitate market interactions. Following the ABA report’s recommendation, the program’s consumer protection foundation was a systematic and aggressive attack on consumer fraud.

This Article discusses this modern FTC, providing details on programs involving fraud, conventional advertising, and privacy. We explain how, embracing a more limited role and recognizing its past mistakes, the FTC became one of the world’s most widely respected government agencies. Unfortunately, the agency has recently lost its way in regulating traditional advertising, threatening to restrict truthful information to consumers that is vital to the optimal performance of competitive markets. We also discuss the newest part of the FTC’s mission, protecting consumer privacy. The heart of the program has been to prevent harmful misuse of sensitive information, most notably the National Do Not Call Registry, one of the most popular government initiatives ever. In attempting to broaden the basis for protection of privacy, the agency currently threatens to impede rapidly evolving information technology markets. 

Imre Szalai on Direct TV and Jedi Mind Tricks

Imre S. Szalai of Loyola New Orleans has written DIRECTV, Inc. v. Imburgia: How the Supreme Court Used a Jedi Mind Trick To Turn Arbitration Law Upside Down, 32 Ohio State Journal on Dispute Resolution, 1, (2016 Forthcoming). Here's the abstract:

The Federal Arbitration Act (FAA) is the primary federal statute governing millions of arbitration agreements that have mushroomed in every nook and cranny of modern American society. The Supreme Court of the United States has grossly erred when construing and applying the FAA in a long series of cases spanning the last few decades, and these flawed decisions have encouraged this explosion of arbitration agreements across America. In its most recent FAA decision from December 2015, DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015), the Supreme Court continued its awkward tradition of issuing preposterous FAA rulings. However, the Court in DIRECTV reached a new low, a result so extreme and “dangerous,” according to the dissenting Justices, that the Court’s DIRECTV decision turns arbitration law completely upside down.

This Article explores the Supreme Court’s deeply flawed interpretation of the FAA in DIRECTV. The Court’s decision desecrates the most fundamental principle of arbitration law, that arbitration must be based on the agreement of the parties. The Court in DIRECTV overrides the intent of the parties in this case, as well as the intent of Congress in enacting the FAA. The first part of this Article explains the background of the DIRECTV case. The second part of the Article closely examines the deep, multiple flaws in the opinion. Finally, the Article concludes by addressing how DIRECTV’s holding applies to some common hypotheticals in order to demonstrate the broader impact of this case in shutting off access to America’s civil justice system.