Originally published in the April 2015 issue of Alternatives to the High Cost of Litigation (a CPR/Wiley Periodicals, Inc. joint publication)
The following article is adapted from a Ballard Spahr blog post, as well as prepared remarks by the author, who participated in a panel at the Consumer Financial Protection Bureau's March 10, Newark, N.J., “Field Hearing on Arbitration,” which followed the Bureau's release earlier the same day of its report to Congress on arbitration, available at http://1.usa.gov/19cVrvE. The full versions of the blog analysis and the author's remarks are available at www.cfpbmonitor.com.
This author pioneered the use of consumer arbitration clauses in bank and credit card agreements in the mid-1990s. My clients considered the legal system to be broken. They were being sued in locations that are commonly referred to as “judicial hellholes,” where a big company cannot get a fair shake in the court system.
In many cases, my clients would find out about a class action at the same time they received a court order certifying the class.
My partners and I fought vigorously to have consumer arbitration agreements enforced, and played a central role in what became a great debate over the role of arbitration as a forum for resolving consumer disputes.
And while we were advocating on behalf of our company clients, I have always personally and professionally believed that arbitration is good not only for companies, but also for consumers and the public at large.
The vast majority of consumer disputes are resolved without either arbitration or court litigation. Most consumers are able to resolve disputes with companies using help lines or informal dispute procedures, or third parties such as the Better Business Bureau—or even the complaint portals maintained by the Consumer Financial Protection Bureau and most state attorneys general.
But if a dispute escalates beyond that point, we need to ask the question—what does the average consumer really want for himself or herself in a dispute resolution process? What has been the experience of consumers who have actually participated in arbitration?
The March 10 CFPB report has completely ignored this critical question. That is unfortunate, because actual consumer satisfaction is central to the question of whether consumer arbitration is in the public interest.
While it was widely reported in the hours after the report was released that the CFPB results show that arbitration agreements are detrimental to consumers, a closer reading of the 728-page study reveals that it would be incorrect for Congress or the CFPB to draw that conclusion.
In fact, the study confirms that arbitration does benefit consumers.
FOCUS ON FAIR
From the very beginning I counseled clients to implement arbitration programs that were fair, so that both parties, whether they won or lost, would view dispute resolution in a positive way.
Arbitration is a great solution for both consumers and companies because everyone benefits from a process that is faster, cheaper and more efficient and congenial than court litigation.
At the same time, we were aware of arguments that consumers should not be bound by arbitration clauses contained in form contracts, so we even urged clients to give consumers an unconditional right to opt out of the arbitration clause without affecting any other contract terms.
I am pleased to say that the vast majority of our clients accepted that advice.
I have witnessed firsthand the many benefits that consumers realize from arbitration. In what other forum can a consumer sit down at a conference table with the decision maker and tell his or her story virtually without interruption?
In what other forum can the consumer get a result in a matter of months rather than years?
And, arbitration costs for the consumer are far less than what it costs to file a lawsuit in court.
In my experience, in terms of results, consumers really do fare at least as well in arbitration as in court, and probably better. And if you were to ask consumers to describe their actual experience with arbitration—as opposed to asking people who never experienced it what their hypothetical views are as the CFPB did—I think you would hear a lot of positive things about arbitration.
But again, the Bureau's study does not reflect actual interviews with people who went through arbitration.
‘IN ITS INFANCY’
Compared to the court system, consumer arbitration is in its infancy. It is not really probative to say that consumers must not like arbitration because there are relatively few arbitrations compared to the number of court cases, because the benefits of arbitration are only beginning to be recognized.
The Business ‘Pro’ Argument
The position: Supporting mandatory pre-dispute arbitration.
Why? It's a better deal for clients AND consumers.
This side wins because … Notwithstanding the U.S. Supreme Court's strong backing, when actually used, the ADR process is more efficient and at least equally productive for consumers. As well as the business clients.
Another reason for this is that many plaintiff's lawyers don't like arbitration and have railed against it. This is basically a public relations problem. It has dissuaded consumers from getting a complete picture of what arbitration is, and what benefits it can offer.
This is where the CFPB could play a constructive role by having its Consumer Education and Engagement arm explain to consumers in a neutral way how the court system works and how arbitration works. And also remind consumers that there are contracts that go along with credit cards and loans and other consumer accounts.
The Bureau's press release that accompanied the release of its report emphasizes that more than three out of four consumers that it surveyed did not know if they were subject to an arbitration clause.
But we in the industry have bent over backwards to clearly and conspicuously disclose to consumers if a contract has an arbitration clause. So if the Bureau's statistics are correct, to us, it means that consumers are not reading what we are disclosing. The cure for that, in our view, is to better educate consumers to pay some attention to what they are signing.
We also believe that if the Bureau fairly presents consumers with the facts, consumers will choose arbitration over litigation in many cases. And part of this education should be a balanced presentation of not just the benefits, but also the drawbacks, of class actions.
Yes, there are drawbacks. After litigating class actions for most of my career, I can say from experience that consumers rarely obtain any meaningful benefit, especially when compared to what they can recover in arbitration.
Many class actions have flawed legal theories and are brought to try to force a settlement in which the plaintiff's lawyer receives a windfall. By contrast, if the consumer prevails in arbitration, the consumer can be made whole.
I did not see in the Bureau's initial press release, or in the study itself, any analysis of the negative aspects of class actions.
But another lengthy empirical study that looked at class actions over the past several years concluded, “The hard evidence shows that class actions do not provide class members with anything close to the benefits claimed by their proponents, although they can (and do) enrich attorneys.”
In two-thirds of the class actions studied by the Bureau, the plaintiffs either settled individually or the court dismissed the case, meaning that the class members got nothing. And the cases tended to linger for years.
But the study does not discuss the plight of the millions of class members who got nothing, or next to nothing, from class actions.
Congress itself, when it enacted the Class Action Fairness Act of 2005, spoke about the “parade of abuses” in class actions. It stated that “[a] mounting stack of evidence … demonstrates that [these] abuses are undermining the rights of both plaintiffs and defendants” in class actions.
he study does not discuss these abuses, either.
THE REPORT'S EFFICIENCY
Moreover, the report data itself supports arbitration's efficiency. It demonstrates that arbitration is faster and more economical than litigation.
According to the study, the median desk arbitration—defined as an arbitration based on just a review of relevant documents—was resolved in four months; the median telephone arbitration was resolved in five months; and the median in-person hearing was resolved in seven months.
When the case resulted in a settlement, the median arbitration proceeding lasted only two to five months. By contrast, the average class action settlement received final court approval in an average of 690 days (1.89 years); federal multidistrict litigation class actions closed in a median of 758 days (2.07 years) for cases filed in 2010; and state court class actions filed that year had a median time to closure of 407 days (1.11 years).
- During the 2010–2012 period studied by the CFPB, the American Arbitration Association capped the consumer's share of administrative and arbitrator costs at $125; the company paid the rest. Under the new AAA Consumer Rules that became effective in September 2014, the consumer's share is capped at $200. (By comparison, the filing fee for a complaint in federal court is $350). Under the AAA Rules, the consumer can also request a waiver of those fees based on financial hardship, and many arbitration agreements provide that the company will pay the consumer's share. Even when consumers initially paid a modest share of the fees, in 56 of 123 arbitrations examined by the study, they were reimbursed in the arbitrator's award for at least some of the fees.
- In its press release announcing the issuance of the study, the CFPB stated: “Today, the Consumer Financial Protection Bureau released a study indicating that arbitration agreements restrict consumers' relief for disputes with financial service providers by limiting class actions.” But the statistics actually contradict the CFPB's concern that arbitration clauses are a barrier to class actions.
- Of the 562 federal and state class action cases filed from 2010 to 2012 analyzed in the study, the defendant company moved to compel arbitration in only 94 (16.7%) of the cases. In particular, in 2010, 27 motions to compel arbitration were filed in 172 class actions; in 2011, 40 such motions were filed in 193 class actions; and in 2012, 27 such motions were filed in 197 class actions. Moreover, these motions were granted in only 46 of the 94 cases (49%) in which they were filed. According to the CFPB's own statistics, arbitration was thus a factor in only 8% of the class actions studied.
- Of the class actions studied, 25% were resolved through individual settlements, while 35% included a withdrawal by plaintiffs or a failure to prosecute. Approximately 15% obtained final settlement approval. No class cases went to trial during the period studied, either on a class or an individual basis. Given that 60% of the “class actions” settled individually or just fizzled, it is clear that most were filed primarily to force an individual settlement or were marginal at best. In other words, in 60% of the class actions, the putative class members got nothing. And none of the class actions went to trial. By contrast, of 341 cases that were resolved by an arbitrator, in-person hearings were held in 34% of the cases, and there were at least 146 cases in which arbitrators reached a decision on the merits of the parties' claims. The CFPB has it backwards—it is class actions that are a barrier to consumers obtaining meaningful relief in arbitration.
- In arbitrations where consumers obtained relief on their affirmative claims and the CFPB could determine the award amount, the average grant of relief to the consumer was $5,389, meaning an average recovery of 57 cents for every dollar claimed. Based on 73 of 74 individual federal court claims in which a judgment was entered for the consumer, the average amount awarded to the consumer was $5,245. So consumers fare just as well in arbitration as in court, and perhaps even better.
- Regrettably, there are no comparable statistics for individual class members. The financial numbers for class actions are stated in gross terms—e.g., “in the 60% of settlements where there was enough data to report the value of cash relief … the value of cash payments was $1.1 billion.” Or, “some 34 million class members had received or were scheduled to receive cash relief as a result of the filing of a claim or receiving an automatic distribution of relief.” But the critical question is how each class member fared individually compared to how the consumer would have fared in an individual arbitration. Did each one get a few dollars? A coupon? If 10 million consumers receive a few dollars each, that means little to the individual consumer, even though the aggregate numbers look large. Moreover, how many years did consumers have to wait to get that modicum of relief? Did they even bother to cash the tiny checks they received?
- Even class members entitled to benefits frequently fail to obtain them. The study found that in “claims made” class action settlements, the unweighted average claims rate was 21% and median was 8%. The weighted average claim rate was only 4%. Moreover, claims rates fell nearly 90% if documentary proof was required. Presumably, the funds not distributed to the class members either reverted to the company or were used for a cy pres distribution.
- One thing is clear—class action attorneys were paid well. Attorneys' fees awarded to class counsel in settlements during the period studied amounted to a whopping $424,495,451.
The study is overflowing with statistics. In his prepared remarks, CFPB Director Richard Cordray called it “the most comprehensive empirical study of consumer financial arbitration ever conducted.” But as the Scottish scientist James Clerk Maxwell wrote, “If we betake ourselves to the statistical method, we do so confessing that we are unable to follow the details of each individual case. …”
That is the study's Achilles' heel: like the CFPB's preliminary study issued in December 2013, it fails to examine the actual experiences of consumers who have gone through arbitration.
In ascertaining whether consumer arbitration is in the public interest, real consumers' actual experiences with arbitration and class action proceedings is at least as important as a telephone survey asking randomly selected consumers about their awareness of arbitration clauses in their credit card contracts, if not more so.
I sincerely hope that the Bureau takes these important points into account in considering what, if any, regulation it believes will further the public interest.
As Alternatives went to press late last month, Ballad Spahr prepared a webinar, “The CFPB's Final Arbitration Study: What's the Real Story?” which was scheduled at www.ballardspahr.com for March 18.
The author, a partner at Ballard Spahr LLP in Philadelphia, is chairman of the firm's Consumer Financial Services Group, which has more than 100 attorneys. Kaplinsky and the group are frequent participants in federal arbitration litigation matters, and he has written and spoken extensively on arbitration. The group produces a blog, CFPBMonitor.com, which focuses on the activities of the Consumer Financial Protection Bureau.>>
© 2015 by Institute for Conflict Prevention & Resolution and Wiley Periodicals, Inc. Reprinted with permission. The original article can be found here, at www.altnewsletters.com or in the Wiley Online Library (http://bit.ly/1BUALop).
Alan S. Kaplinsky