Consumer Law & Policy Blog

Chunlin Leonhard Paper on How Contract Law Enabled the Subprime Crisis

Chunlin Leonhard

of Loyola University New Orleans has written Subprime Mortgages and the Case for Broadening the Duty of Good Faith., 45 University of San Francisco Law Review 621 (2011). Here's the abstract:

In the wake of “the most virulent global financial crisis” caused by defaults in subprime mortgages and derivative financial products in 2007 and 2008, much finger pointing and soul searching have been taking place on different fronts. Scholarly attention primarily focuses on the financial industry and regulations. This article argues that US contract law played an enabling, albeit hidden, role in the subprime mortgage crisis. US contract law facilitated the subprime mortgage crisis in two First, US contract law’s laissez faire paradigm has incentivized parties to pursue their self interests while failing to provide any constraint on excessive pursuit of self interests. Second, the current contract law paradigm has also contributed to the subprime mortgage crisis by having nurtured a US business culture of everyone for him or herself. contract law’s general tolerance of parties’ single minded pursuit of self interest has led to a “moral deficit.” This article proposes that US contract law adopt a more proactive paradigm by recognizing a broader duty of good faith in economic relationships prior to the formation of a contract.

 

 

Some Recent Scholarship

Raymond H. Brescia 

of Yale and Albany has written The Iqbal Effect: The Impact of New Pleadings Standards in Employment and Housing Discrimination Litigation, forthcoming in the Kentucky Law Journal.  Though it's not a study of Iqbal's impact on consumer law cases, the study sheds some light on how Iqbal might affect consumer law cases.  Here's the abstract:

In May 2009, the Supreme Court issued its decision in Ashcroft v. Iqbal, a case brought by an immigrant of Pakistani descent caught up in the worldwide investigation that followed the horrific attacks of September 11, 2001. In that decision, the Court extended the “plausibility test” first introduced two years earlier, in Bell Atlantic v. Twombly, to all civil pleadings in federal court. That test requires that, in order to satisfy federal pleading requirements, a complaint must allege a plausible set of facts. But what is plausible in a given case may be in the eye of the beholder.

In the two years since the Court reached its decision in Iqbal, that opinion has been cited roughly 25,000 times. The empirical analysis contained in this study attempts to gauge the impact of Iqbal on civil rights cases, specifically cases involving allegations of employment and/or housing discrimination. While several other studies have attempted to answer similar questions, to date, no study has analyzed this impact with reference solely to motions based on the specificity of the pleadings: which is, of course, the central issue in Twombly and Iqbal. In addition, other studies looked exclusively at quantitative results, with no assessment of the manner in which the plausibility standard was being applied by the lower courts. This empirical study attempts to fill that gap in the empirical research.

This study identified over 1850 reported decisions on motions to dismiss in employment and housing discrimination cases filed in federal district court covering the years prior to and after the Court’s decision in Twombly. From this group of cases, a smaller sub-set, totaling 634 cases, was identified by excluding those decisions — included in previous studies — that bore no relation to the issue of the specificity of the pleadings. Furthermore, despite this winnowing process, the sample size for this study was still considerably larger than those analyzed in previous studies.

This detailed study yielded the following results. Surprisingly, the dismissal rate in this class of cases during a set time-period immediately prior to the Twombly decision was actually slightly higher than the dismissal rate of decisions issued in the time period between issuance of the Twombly and Iqbal decisions, but then the rate increases considerably after Iqbal. The dismissal rates for all cases pre-Twombly was 61%; between Twombly and Iqbal, it was 56%; but then after Iqbal, it was 72%, an 18% increase from the pre-Twombly period analyzed.

In addition, even more troubling, plaintiffs were far more likely after Iqbal than either before Twombly or immediately thereafter to face a motion to dismiss challenging the sufficiency of the pleadings in the cases analyzed. Indeed, decisions on such motions were generated only 12 times in the first quarter of 2004 (the first quarter analyzed in this study), but then 61 times in the third quarter of 2010 (the last full quarter analyzed): a greater than 500% increase.

Moreover, when it comes to the substance of these decisions, something else appears to be happening. Despite the increased dismissal rate following Iqbal, oddly, in a class of cases analyzed for this study, courts rarely invoked the plausibility standard in the same manner it was utilized by the Court in Twombly and Iqbal; that is, courts rarely found that dismissal was warranted if there was an arguably more plausible, and entirely legal, basis for the challenged conduct. Finally, and similarly, judges rarely, if ever, appear to invoke their own “experience and common sense,” as urged to by the Court, when ruling on motions to dismiss in these cases.

These outcomes yield three conclusions. First, district courts are using the Iqbal precedent, though not necessarily Twombly, to dismiss employment and housing discrimination cases at an accelerated rate. Second, although courts may be invoking the Twombly/Iqbal plausibility standard in assessing the sufficiency of the pleadings in employment and housing discrimination cases, they are certainly not relying on or utilizing the plausibility standard as articulated in these two precedents. This suggests that the subjective elements of the plausibility standard may be infecting these outcomes. That is, if district court judges are dismissing cases at a higher rate post-Iqbal, yet are not relying on the guidance the Court has given such lower courts in how to deploy the plausibility standard, it would seem that such courts may feel emboldened to dismiss cases that might have survived such a motion had that motion been decided pre-Iqbal. Finally, regardless of whether there is a dramatic Twombly or Iqbal effect on outcomes, motions to dismiss challenging the sufficiency of the pleadings are much more common since Iqbal, which means that even if some plaintiffs are defeating such motions, it still comes at a price: it increases transactions costs in these cases, and may, as a result, have a chilling effect on lawyers contemplating bringing them in the first place.

Meanwhle, Jim Hawkins of Houston has been busy writing Credit on Wheels: The Law and Business of Auto Title Lending, forthcoming in Washington and Lee.  That abstract reads:

Despite the fact they are used by millions of Americans, auto title loans have received little attention in the legal literature about consumer credit. Friends and foes of title lending make confident statements about their net welfare effects, but we still lack empirical data on many of the central policy questions that title lending raises.

This Article offers new evidence about the title lending transaction, paying special attention to the risks borrowers face when they use their vehicles as collateral for the loan. I gathered this evidence by obtaining new reports from state regulators about the title lending industry, examining public disclosure statements by title lenders, interviewing title lenders, and surveying a small group of title lending customers.

Additionally, this Article organizes the different legal responses to title lending, creating a taxonomy of regulatory approaches. Based on the new data uncovered by my research, I offer tentative evaluations of these diverse regulatory strategies.

 Finally Lea Krivinskas Shepard of Loyola University Chicago has penned Creditors' Contempt, which will appear in Brigham Young.  Here's that abstract:

This Article takes a fresh look at the power of courts and creditors to force debtors to repay their obligations through in personam collection techniques. Variously known as “debtors’ examinations,” “turnover orders,” “citations to discover assets,” “supplementary proceedings,” “proceedings supplementary,” and “proceedings in aid of execution,” in personam remedies force the debtor, under threat of the court’s contempt authority, to turn over money or property directly to a creditor. Because the exercise of the court’s contempt authority can result in a debtor’s imprisonment, in personam techniques have long been regarded as a critical but potentially very coercive arrow in a debt collector’s quiver.

Recently, the Federal Trade Commission and others have endorsed major changes to a debt collection system labeled as “broken.” These reform proposals, however, have overlooked key problems in in personam proceedings, where excessive creditor leverage and insufficient protection of debtors’ procedural rights risk validating a view that the judicial system is functioning as creditors’ private collection arm.

Following the transfer of power to a newly established Bureau of Consumer Financial Protection, this Article resurrects a subject that has received virtually no attention in the scholarly literature for over a decade. It analyzes the particular features of in personam proceedings and debtor behavior that contribute to a longstanding imbalance in the leverage asserted by creditors over debtors. The Article recommends specific changes to the way courts conduct in personam proceedings to ensure that the in terrorem effects of these remedies do not upend important social policies, including the protection of exempt property and the adjudicative fairness of the collection process.

Debt collection is a fundamental component of the consumer credit system. The strength and legitimacy of its procedures, however, depend on maintaining a difficult balance between the state’s and creditors’ interest in rigorous judgment enforcement and debtors’ interest in imposing reasonable limitations on the coerciveness of debt collection.

 

 

Payday Lending Pieces

Nathalie Martin of the

 University of New Mexico has written two more payday lending articles. The first is Regulating Payday Loans: Why this Should Make the CFPB’s Short List, 2 Harvard Business Law Review Online 44 (2011).  Here's the abstract::

This article briefly describes the history of the Consumer Financial Protection Bureau (CFPB), describes payday and title loan products and their customers, describes the CFPB’s general powers, then discusses how and why the CFPB might use its particular powers to bring this industry into compliance with lending norms used throughout the rest of the civilized world.

The second, co-authored with

Koo Im Tong

 is Double Down-And-Out: The Connection between Payday Loans and Bankruptcy, 39 Southwestern Law Review  785.  Here's that abstract: 

This Article reviews the literature on the debate regarding the causal relationship between filing for bankruptcy and the use of payday loans but does not weigh in on the subject. Rather, it uses these studies, as well as a general discussion of bankruptcy filing and payday loans, as a backdrop for analyzing new data regarding the correlation between bankruptcy filing and the use of payday loans. This Article reports on an empirical study conducted in the state of New Mexico that measures rates of payday loan use among bankruptcy debtors from a large sample of publicly available bankruptcy data.

Part I of this Article discusses the payday loan industry, its business model, how the loans work, and who the likely payday lending customer is. Part II reviews the current literature regarding the connection between payday loans and bankruptcy, and suggests some ways in which the existing literature falls short of fully answering the question of whether payday lending causes bankruptcy filing. Part III describes the new empirical study from New Mexico. This Article describes the method used to conduct this study as well as its results. In summary, our data show that from 2007 to 2009, 18.9 percent of bankruptcy debtors in New Mexico reported using payday loans. Compared to the use of payday loans reported in other studies among the general population, as well as past studies on payday loan use among bankruptcy debtors, this rate of usage is extremely high. Moreover, the correlation between bankruptcy and payday loans seems to be getting stronger, as the use of these loan products appears to be growing. We find that almost double the percentage of bankruptcy debtors reported using payday loans from 2007 to 2009, than from 2000 to 2002.

Part IV of this Article concludes that while one cannot be certain that there is a causal connection between filing for bankruptcy and using payday or other short-term loans, there is a strong correlation between bankruptcy filing and payday loan use. If the increasing use of payday loans is seen as a problem, we conclude that the problem appears to be growing, despite efforts by states to cut down on the use of these loans and to curb the use of multiple loans at one time. In fact, the usage of multiple payday loans at one time also has increased drastically, as recent bankruptcy debtors, whether individuals or families, report using far more of these types of loans simultaneously than in the past. All of this indicates that the use of multiple loans at one time is increasing, a problem states are grappling with but apparently are not solving.  

And

Neil Bhutta

 of the Fed offers another view in The Effect of Access to Payday Loans on Consumers' Financial Health: Evidence from Consumer Credit Record Data.  Here's his abstract:

I test whether access to payday loans affects broad measures of consumers’ financial well-being by taking advantage of geographic variation in access to payday loans due to state lending laws. I draw on several sources of data including a large, nationally representative panel dataset of individual consumer credit records, as well as census data on the location of payday lending establishments at the ZIP code level. I find little evidence that access to payday loans affects consumers’ financial health. In particular, access does not affect credit scores levels, nor does it appear to either exacerbate or mitigate the probability of a major score decline over a two year period during the recent recession, nor does it appear to affect the dynamics of recovery from a low score. The estimated coefficients are generally very close to zero and precise, and robust to a within-state test similar to that of Melzer (2011). There is some evidence that access reduces the incidence of accounts going into collections – one component of credit scores – but the fact that that access nevertheless does not affect credit scores suggests that payday loans may have some small but hard-to-detect benefits.

Arbitration Articles Abound!

Myriam E. Gilles

 of Cardozo and

Gary B. Friedman

 of the Friedman Law Group have written After Class: Aggregate Litigation in the Wake of AT&T Mobility v. Concepcion, 79 University of Chicago Law Review (2012).  Here's the abstract:

Class actions are on the ropes. Courts in recent years have ramped up the standards governing the certification of damages classes and created new standing requirements for consumer class actions. Most recently, in Wal-Mart v. Dukes, the Supreme Court articulated a new and highly restrictive interpretation of the commonality requirement of Rule 23(a). But all of this pales in comparison to the Court’s April 2011 decision in AT&T Mobility v. Concepcion, broadly validating arbitration provisions containing class action waivers. The precise reach of AT&T warrants close scrutiny. Our analysis suggests that following AT&T, some plaintiffs will be able to successfully challenge class waivers under certain circumstances. Also, the new Consumer Financial Protection Bureau - if it is not still-born at the hands of hostile congressional midwives - is likely to eliminate some class action waivers in the financial services field. But most class cases will not survive the impending tsunami of class action waivers. And as this great mass of consumer protection, antitrust, employment and other cases is swept out to sea, the question arises: what or who can fill the resulting enforcement gap?

And here, we believe the “private attorney general” role assumed by class action lawyers over the past several decades will inevitably give way to a world in which state attorneys general make unprecedented use of their parents repatriate authority. Insulated from the threats posed by class action waivers and restrictive class action standing doctrine, AGs are now uniquely positioned to represent the interests of their citizens in the very consumer, antitrust, wage-and-hour and other cases that have long provided the staple of private class action practice. And to tackle complex cases, underfunded AG offices will make use of the private class action lawyers who have acquired expertise in originating, investigating and prosecuting class cases. Of course, there are political risks here - given the model’s dependency on contingent fee arrangements - but there are also substantial political benefits, as AGs around the country begin to take leadership positions in the sort of complex, big-ticket cases that are likely to contribute meaningfully to state coffers - and redress the injuries of consumers and employees who would otherwise have no recourse in a post-AT&T world.

Amy Schmitz

 of Colorado contributes Arbitration Ambush in a Policy Polemic, 3 Penn State Yearbook on Arbitration and Mediation 52, (2011).  Here's her abstract:

Arbitration has been demonized in the media and consumer protection debates, often without empirical support or consideration of its attributes. This has led to renewed efforts to pass the Arbitration Fairness Action, which would bar enforcement of pre-dispute arbitration clauses in consumer, employment, and civil rights contexts. It also inspired Dodd-Frank’s preclusion of arbitration clauses in mortgage contracts, along with the Consumer Financial Protection Bureau’s charge to prohibit or limit enforcement of pre-dispute arbitration agreements in consumer financial products and services contracts. Some of this negativity toward arbitration is warranted, especially in the wake of the United Supreme Court’s recent holdings highlighting a pro-business stance enforcement of arbitration agreements. Nonetheless, this does not necessarily justify abolishment of consumer arbitration. Accordingly, this Article suggest a more reasoned approach, and offers suggestions for carefully considered reforms that protect consumers without overly impeding beneficial use of arbitration. Litigation is not always the answer. Instead, it is time to rescue and revive arbitration from ambush.

Stephen E. Friedman

 of Widener adds A Pro-Congress Approach to Arbitration and Unconscionability, 105 Northwestern University Law Review Colloquy 53 (2011).  Here's that abstract::

This Essay endeavors to resolve a current controversy involving the application of the unconscionability doctrine to arbitration agreements. The pro-arbitration policies of the Federal Arbitration Act (FAA) and the anti-arbitration instincts of the unconscionability doctrine are difficult to reconcile. Instead of clarity in this area of law, we have a series of hints and clues, often contradictory, from the Supreme Court. Although Professor David Horton and I share a desire to clarify this area of the law, we have nearly opposite views about how this should be accomplished. This Essay sets forth my position and also responds to Unconscionability Wars, Professor Horton's latest thoughtful effort on the subject.

Finally, we have Texas's A

lan Scott Rau

 who has authored Arbitral Power and the Limits of Contract: The New Trilogy, American Review of International Arbitration, Forthcoming.  The abstract reads as follows:

 The American law of arbitration has for some reason been replete with what we have become accustomed to call “trilogies” – and the last two terms of the U.S. Supreme Court have curiously continued that pattern. Once again the Court has handed us three leading cases on closely-related themes – and these decisions have turned out in fact to be in many ways the most interesting of the lot. (I am referring of course to Stolt-Nielsen, Rent-A-Center, and Concepcion.)

All three amount to extended riffs on the Question of Questions – the scope of arbitral power: And so the Court has continued to dip its finger into this rich mixture – compounded of notions of judicial review, “arbitrability,” “separability,” compétence/compétence, and the preemption of state law – all of our hard-earned lore and learning is there. Apparently it is now well beyond the power of arbitrators to hold that “classwide proceedings are permitted,” at least without some pretty special authorization (Stolt-Nielsen) – while it is well beyond the power of courts to hold that they must be – certainly not when the parties have agreed to an arbitral determination (Rent-A-Center), and even when they haven’t (Concepcion).

It seems reasonably clear that these cases will continue to generate endless discussion. Undoubtedly for the moment the greatest salience will be with respect to arbitration clauses in contracts of adhesion entered into by consumers and employees – although this recent jurisprudence has the potential of sweeping far more broadly. Things now seem curiously muddled: If our law of arbitration no longer seems to have any clear unifying theme, this suggests that private adjudication – rather than presenting us as it once did us with a coherent and self-contained body of doctrine – has become a hostage to a game played out on a larger stage, a pawn of wider, systemic “political” concerns. Throughout the “trilogy” we have seen much familiar learning yoked to the service of a market-driven political agenda, in the process inevitably becoming warped and almost unrecognizable. And so – yet another untoward result – these cases will require the reevaluation of what seemed, for a while, to constitute comfortably settled certainties. Here is at least one step in that direction.

 

 

 

Stipanovich Arbitration Article

Thomas Stipanowich

of Pepperdine has written The Third Arbitration Trilogy: Stolt-Nielsen, Rent-A-Center, Concepcion and the Future of American Arbitration, American Review of International Arbitration (2012). Here's the abstract:

For the third time in the modern era, a triad of key Supreme Court decisions represents a milestone in American arbitration. In this highly controversial “Third Arbitration Trilogy,” the U.S. Supreme Court aggressively expands the “revealed” penumbra of substantive arbitration law under the Federal Arbitration Act and shores up the bulwarks of private, binding dispute resolution under standardized contracts of adhesion binding employees and consumers.

In Stolt-Nielsen S.A. v. AnimalFeeds International, 130 S. Ct. 1758 (2010), the Court, against the backdrop of an international commercial contract scheme and a unique procedural scenario, draws upon the wellspring of divined “federal substantive law” under the FAA to pronounce limits on the ability of arbitrators - or courts - to promote public policies supporting class actions. Many understood Stolt-Nielsen, correctly, as a portent of the Court’s eventual curtailment of state-law-based policies against enforcement of contractual waivers of the ability to participate in a class action when coupled with an agreement to arbitrate.

In Rent-A-Center, West v. Jackson, 130 S. Ct. 2772 (2010), the Court declares that public policies promoting enforcement of arbitration agreements effectively trump the authority of courts to deny or limit the enforcement of arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract” - or, more precisely, to police arbitration agreements for unconscionability. Once again, the Court majority “discerns” new Federal substantive law surrounding the FAA. It employs a unique variation on the principle that arbitration agreements are separable from the contracts of which they are a part, aggressively interprets Court precedents transferring from courts to arbitrators authority to resolve enforceability issues, and segregates the determination a contract has been “made” in a formalistic sense from consideration of defenses to its enforceability and validity.

In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Court once again addresses the interface between pro-arbitration policies under the FAA and the countervailing, limiting force of unconscionability doctrine. Yet again, a majority finds pro-arbitration federal policy circumscribes judicial authority to police arbitration agreements under state law. In this case, the result is to enforce a term in the arbitration agreement waiving the consumer’s right to bring a contractual claim as part of a class action.

Its staunchest adherents may insist that the Court’s actions are necessary to effectively promote pro-arbitration policies under the FAA (announced and repeatedly reinforced by the Court since the mid-1980s) while ensuring that lower courts be measured and precise in the handling of countervailing defenses. In its zeal to further its evolving vision of the FAA, however, the Court has eliminated key safeguards aimed at ensuring fundamental fairness to consumers and employees in arbitration. The Court’s most recent decisions have placed dramatic new limits on judicial oversight of arbitration agreements, making the U.S. a relative “outlier” among global sovereigns.

The Court’s extreme and inflexible posture adds momentum to Congressional efforts to dramatically restrict the use of predispute arbitration agreements. Unfortunately, these legislative responses, like the Court’s decisions, lack a solid empirical foundation. As with the Court’s jurisprudence, there is no guarantee that they will produce the best possible solution for employees and consumers.

Good decisions about the public or private resolution of employment and consumer disputes depend upon a commitment to obtain and act upon better information about the operation of specific forms of arbitration in specific transactional settings, along with comparative data respecting court processes. Recent empirical scholarship has moved us closer to this goal, but much remains to be done.

In assessing process options, policy-makers should consider the potential future role of statutory due process standards for arbitration, regulated arbitration, and arbitration that gives individuals the option of proceeding to court. To the extent public tribunals are necessary, it should not be assumed that the court system as presently structured is the most effective way of addressing consumer or employment disputes. It may be appropriate to develop public consumer tribunals or administrative employment tribunals such as those that exist in some other countries.

In assaying public and private process choices, special attention should be given to the opportunities afforded by online dispute resolution (ODR). Finally, effective policy-making in these arenas cannot ignore the primary hot-button issue, the role of class or collective action.

Journal of Consumer Affairs Table of Contents--Fall 2011

Special Issue on Aging Consumers

Aging Gracefully: Emerging Issues for Public Policy and Consumer Welfare by Vanessa G. Perry and Joyce M. Wolburg

Safe Sex After 50 and Mature Women’s Beliefs of Sexual Health by Cynthia R. Morton, Hyojin Kim,
and Debbie Treise

U.S. Retirement Financial Services Advertising's Financial Information Provisions, Communication Strategies, and Judgmental Heuristic Cues by Taejun (David) Lee, Eric Haley, Tai Woong Yun, and Wonjun Chung

Retirement Planning and the Intrinsic Rewards of Work, Future Time Perspectives, and Economic Expectations by Ting-Ying Yang and Sharon A. DeVaney

Aging Consumer Vulnerabilities Influencing Factors of Acquiescence to Informed Consent by Merlyn A. Griffiths and Tracy R. Harmon

Research Frontiers on Older Consumers’ Vulnerability by George P. Moschis, Jill Mosteller, and Choong Kwai Fatt

The Value of Retail- and Consumer-Level Fruit and Vegetable Losses in the United States by Jean C. Buzby, Jeffrey Hyman, Hayden Stewart, and Hodan F. Wells

Bits, Briefs and Applications

Health Risk Factors and Their Effect on Consumers’ Use of Nutrition Facts Panels by Laurel Aynne Cook, Scot Burton, and Elizabeth Howlett

Team Purchase: A Case Of Consumer Empowerment In China by Jeff Jianfeng Wang, Xin
Zhao, and Julie Juan Li

Editorial Postlude: Parting Perspectives of an Aging Editor (& thanks for all the fish) by Herbert Jack Rotfeld

Arbitration Articles

Shauhin A. Talesh

 of Irvine has writen The Privatization of Public Legal Rights: How Manufacturers Construct the Meaning of Consumer Law, 43 Law & Society Review 527 (2009).  Here's the abstract:

This article demonstrates how the content and meaning of California’s consumer protection laws were shaped by automobile manufacturers, the very group these laws were designed to regulate. My analysis draws on and links two literatures that examine the relationship between law and organizations but often overlook one another: political science studies of how businesses influence public legal institutions, and neo-institutional sociology studies of how organizations shape law within their organizational field. By integrating these literatures, I develop an “institutional-political” theory that demonstrates how organizations’ construction of law and compliance within an organizational field shapes the meaning of law among legislators and judges. This study examines case law and more than 35 years of California legislative history concerning its consumer warranty laws. Using institutional and political analysis, I show how auto manufacturers, who were initially subject to powerful consumer protection laws, weakened the impact of these laws by creating dispute resolution venues. The legislature and courts subsequently incorporated private dispute resolution venues into statutes and court decisions and made consumer rights and remedies largely contingent on consumers first using manufacturer-sponsored venues. Organizational venue creation resulted in public legal rights being redefined and controlled by private organizations.

Meanwhile Christopher R. Drahozal of Kansas and Samantha Zyontz of the Searle Civil Justice Institute have authored Private Regulation of Consumer Arbitration.  Here's their abstract:

Arbitration providers, such as the American Arbitration Association (“AAA”) and JAMS, have promulgated due process protocols to regulate the fairness of consumer and employment arbitration agreements. A common criticism of these due process protocols, however, has been that they lack an enforcement mechanism. While arbitration providers state that they enforce the protocols by refusing to administer cases in which the arbitration agreement materially fails to comply with the relevant protocol, the private nature of arbitral dispute resolution makes it difficult to verify whether providers in fact refuse to administer such cases.

This article reports the results of the first empirical study of the AAA’s enforcement of its Consumer Due Process Protocol. We find that the AAA’s review of arbitration clauses for protocol compliance appears to be effective at identifying and responding to those clauses with protocol violations. During the time period studied, the AAA refused to administer a substantial number of cases (almost 10% of its total consumer caseload) that involved a protocol violation. Moreover, in response to AAA protocol compliance review, over 150 businesses have either waived problematic provisions or revised arbitration clauses to remove provisions that violated the Consumer Due Process Protocol.

Our findings support the proposition that private regulation by the AAA complements existing public regulation of the fairness of consumer arbitration clauses. Any consideration of the need for future legislative action should take into account the effectiveness of this private regulation. That said, we do not assert that private regulation alone - with no public regulatory backstop, such as through court oversight - suffices to ensure the fairness of consumer arbitration proceedings. Rather, we suggest ways that courts and policy makers could reinforce the AAA’s enforcement of the Consumer Due Process Protocol as well as ways the AAA could improve its own review process.

 

Lisa Tripp's Empirical Study of Arbitration Clauses in Nursing Home Contracts

Lisa Tripp of John Marshall has written An Empirical Study of Pre-Dispute Binding Arbitration Agreements in Nursing Home Admission Contracts. Here's the abstract:

The use of pre-dispute binding arbitration agreements has been commonplace in variety of commercial contexts, such as brokerage agreements, insurance contracts and credit card contracts for many years. Health care had historically been one of the fields that had not embraced pre-dispute binding arbitration agreements. The reluctance to use pre-dispute binding arbitration agreements appears to be changing in at least one sector of the health care field. An examination of admission contracts used by North Carolina nursing homes and telephone survey of North Carolina nursing homes revealed that 43 percent of nursing homes now incorporate pre-dispute binding arbitration provisions into their admission contracts. All of the major nursing home chains operating in North Carolina use pre-dispute binding arbitration agreements in at least some of their facilities, while smaller operators use them sporadically.

The terms of these agreements vary considerably. The large chains tend to incorporate some of the provisions in the model arbitration agreement drafted by the American Health Care Association (AHCA), the nursing home industry trade organization. AHCA’s model language includes a 30-day rescission period and language that acceptance of the arbitration provision is not a precondition to admission. Some of the large chain facilities also include a provision that the arbitration will be conducted at the facility if the parties can’t agree on another location. Some of the smaller operators include provisions that limit damages and discovery, prohibit punitive damages, and expressly condition entry to the facility on signing the pre-dispute arbitration agreement.

The implications of the rising use of pre-dispute binding arbitration clauses may be significant. There are many counties in North Carolina where 50-100 percent of all of the nursing home operators use these agreements. With so many operators selecting pre-dispute binding arbitration, this may have the effect of forcing some vulnerable elders out of the public court system with all of its safeguards, and into private arbitration without those protections.

Although some of these agreements contain language stating that the agreement is voluntary or may rescinded, this language, by itself, provides no guaranteed protection that facilities are enforcing the contracts as written. This study found incidents where nursing homes were requiring new residents to sign pre-dispute binding arbitration agreements as a condition of admission, even though the language in those facilities’ agreements stated that signing the agreement was voluntary. This study also found evidence of a significant amount of confusion among staff of nursing homes using these agreements about whether their facilities were using them at all and what arbitration agreements really meant.

 

 

Colin Marks on The Possible Irony of Concepcion

Colin P. Marks

 of St. Mary's has written The Possible Irony of AT&T versus Concepcion.  Here's the abstract:

Irony is defined as, “the use of words to express something other than and especially the opposite of the literal meaning.” Though many other definitions of the word exist, in light of the Supreme Court’s majority opinion in AT&T v. Concepcion, this definition comes to mind. Read broadly, the decision strikes a blow to the ability of consumers to bring suits against companies, both inside and outside of arbitration. But that was not the intent behind the federal act which the Court relied upon to justify its decision.

In 1925, when Congress passed the Federal Arbitration Act (FAA), its intended purpose was to promote enforcement of arbitration clauses. Congress did not sweep away all state-created defenses to contract; however; quite the contrary, Congress inserted a savings clause that arbitration provisions could be stricken just as any other contract could, “upon such grounds as exist at law or in equity.” It was upon this basis that the Ninth Circuit upheld a decision to strike down a clause in an agreement between AT&T and the Concepcions which required not only that the Concepcions submit all disputes to arbitration, but also forbade them from forming a class within that arbitration. On appeal to the Supreme Court, AT&T argued that the FAA preempted the unconscionably finding, despite the savings clause, as California law discriminated against arbitration clauses in violation of the FAA. Justice Scalia, writing for the majority, agreed that the unconscionably finding under California law was preempted by the FAA. In overruling the Ninth Circuit, he repeated the theme of the need to promote arbitration. Throughout the majority opinion, he introduced, as a corollary, the desire to promote expedited resolution of disputes.

The majority opinion is itself open to multiple interpretations, however. Read narrowly, the opinion may do nothing more than restate the already established principle that states cannot strike down arbitration clauses simply by virtue of their existence. But the decision can also be read much more broadly. A broad reading of the opinion suggests that any attempt by a court or state legislature to limit the method and means of arbitration in a way inconsistent with what Congress envisioned is preempted by the FAA. Thus, according to the majority opinion, Congress’ desire to promote bilateral arbitrations preempted the California courts’ rulings that clauses limiting the ability to form class actions are unconscionable.

And therein lies the irony.

If the opinion is read broadly, in striking down the defense of unconscionably to class actions waivers as inconsistent with the purposes of the FAA, the majority opinion, in effect, has denied a large swath of individuals the realistic opportunity to ever bring their claims, in arbitration or otherwise. In the aftermath of this decision, every corporation will be inserting class action waivers into their arbitration clauses, if they haven’t already, and may be emboldened to go much further. Thus, while the majority opinion cites, as the reason for its decision, to a broad policy of encouraging arbitration and the expeditious resolution of disputes, the effect will be quite the opposite.

This essay explores the possible dual readings of AT&T v. Concepcion in light of the FAA and its interpretation, including Supreme Court precedents. This essay concludes that, though there is support for interpreting the Concepcion decision narrowly, it is more likely that a broader interpretation was intended, but the metes and bounds of this opinion have yet to be explored. Nonetheless, under this broad interpretation, the effect on consumers will be to discourage individuals from seeking redress for their claims. The decision may actually encourage businesses to breach contractual obligations with impunity when the individual sums owed are too small to justify, in the mind of a reasonable consumer, the time and effort to seek a remedy.

 

Peter Holland on Debt Buyers and Robo-Signing

Peter A. Holland

 of Maryland has written The One Hundred Billion Dollar Problem in Small Claims Court: Robo-Signing and Lack of Proof in Debt Buyer Cases, 6 Journal of Business & Technology Law  101 (2011). Here's the abstract:

Recent years have seen the rise of a new industry which has clogged the dockets of small claims courts throughout the country. It is known as the "debt buyer" industry. Members of this $100 billion per year industry exist for no reason other than to purchase consumer debt which others have already deemed uncollectable, and then try to succeed in collecting where others have failed. Debt buyers pay pennies on the dollar for this charged off debt, and then seek to collect, through hundreds of thousands of lawsuits, the full face value of the debt. The emergence and vitality of this industry presents several legal, ethical and economic issues which merit exploration, study and scholarly debate.

This article focuses on the problem of robo-signing and the lack of proof in debt buyer cases. Although this problem has received limited attention from the media and from regulators, there is a paucity of legal scholarship about debt buyers in general, and this problem in particular. This article demonstrates that robo-signing and fraud are rampant in this industry, and that the debt buyers who pursue these claims often lack proof necessary to show that they own the debt, and often lack proof even that a debt was ever owed in the first place. The fact that this lack of proof has led to consumers being sued twice on the same debt demonstrates the due process concerns which are implicated when courts enter judgments against consumers based on robo-signing and insufficient proof.

This article calls on courts to hold plaintiffs in debt buyer cases to the same standards required of other litigants. Courts must require a demonstration of personal knowledge of the matter at issue before any affidavit is accepted, before any person testifies, and before any documents are admitted into evidence.