READ BEFORE BURNING: Congress should examine the latest arbitration study before torching an 84-year-old method of consumer justice

As Congress once again attempts to pass legislation that would potentially nullify hundreds of millions of arbitration agreements in consumer contracts, they should carefully review the mounting…

As Congress once again attempts to pass legislation that would potentially nullify hundreds of millions of arbitration agreements in consumer contracts, they should carefully review the mounting evidence that verifies the benefits of arbitration.  

This week, the Searle Civil Justice Institute, a unit of the Northwestern University School of Law, released an independent study confirming that the 84-year old arbitration system remains a fair, inexpensive and unbiased option for millions of American consumers.

Undertaking one of the most comprehensive empirical research projects to date on the use of consumer arbitration, Searle analyzed hundreds of cases brought before the American Arbitration Association (AAA), a leading provider of arbitration services.  Unlike previous studies, which only looked at credit card arbitration cases, this study reviewed cases involving a wide array of goods and services across the economy.

Refuting the myth about arbitration’s price tag, the data reveals that consumers paid an average of only $96 in cases with claims of less than $10,000 and $219 for claims up to $75,000.

Not only is arbitration relatively inexpensive, the Searle study shows that it provides consumers a level playing field in dealing with businesses—even those businesses that regularly use arbitration to settle their consumer disputes.  Consumer claimants seem to fare just as well when dealing with businesses that had never previously been before an AAA arbitrator as those who were repeat customers.     

Most importantly, the Searle analysis demonstrates that arbitration provides consumers true access to justice.  In the cases it tracked, consumers won relief in more than 53 percent of the cases they filed, recovering an average of more than $19,250.  Additionally, AAA actively promotes consumer fairness by strictly enforcing their due process rules and refusing to administer arbitration in cases where businesses were repeat violators of the AAA’s protocol.  

Now that Searle has analyzed the cost and fairness of the arbitration system, it has announced that its next step is to examine how consumer cases are resolved in the courts.  That comparison data could add to the growing body of evidence showing that, for most consumers, arbitration is a better way to resolve disputes than being forced into court. 

The Searle analysis comes at a key time in the arbitration-versus-lawsuit debate. 

Over the past few sessions of Congress, those that favor more lawsuits, with the help of the American Association for Justice (formerly known as the Association of Trial Lawyers of America) have pushed bills that would effectively wipe out arbitration.

This includes the ironically named Arbitration Fairness Act, sponsored by Senator Russ Feingold (D-Wis.) and Congressman Hank Johnson (D-Ga.).  This bill would bring “fairness” to the arbitration system by invalidating all arbitration agreements in current consumer contracts and prohibiting future consumers from agreeing to arbitration up front.

The national trial lawyer lobby has said that eliminating arbitration is one of most important steps Congress can take.  But important for whom?  Consumers or the trial lawyers themselves?

The fact is, removing alternative dispute resolution forces the consumer with the average complaint into one of two bad options: receiving less money in a settlement as part of a class action lawsuit; or, having no access to justice because the dollar amount of the case is less than the cost of litigation, so no lawyer will take the case.

During a hearing last year, Congressman Johnson admitted that his special interest legislation is designed to encourage the filing of class action lawsuits.  His bill would open the door for trial lawyers to bundle together the most lucrative cases that can be turned into class action suits—reaping huge fees for themselves but only pennies on the dollar, or sometimes just coupons, for their clients.

A lawsuit against Blockbuster Video demonstrates this strategy.  The company settled a suit over excessive late fees, and the class members were awarded coupons for free video rentals, while the lawyers representing them pocketed $9.25 million in cash.

But in many instances, consumer disputes against companies are unique and cannot be lumped together into massive class action suits.  If anti-arbitration legislation is enacted, these consumers would be forced to wait until their cases are heard in already overwhelmed state courts—that is, if they can find a lawyer to take their suits. 

Studies have found that, at least in the employment context, plaintiffs’ attorneys generally require upwards of $75,000 in potential damages before they are willing to take a case—and there is no reason to think this is limited solely to employment cases.  Common sense tells us that lawyers cannot take on small consumer cases if they cannot make a profit off them. Yet, eliminating arbitration would force all consumers to either give up or navigate the legal system without the aid of an attorney.

Trial lawyers and their friends have been peddling studies and anecdotes to make the case for anti-arbitration legislation. The Searle study—which looked at a broad array of disputes, including credit card cases and cases involving products and services across the economy—refutes their contentions that arbitration is costly for consumers and biased in favor of businesses. 

Before passing far-reaching legislation that would effectively eliminate arbitration, Congress owes it to the American consumer to look past the rhetoric and examine all the facts.  If they do, they will find there is good reason that arbitration has been around for 84 years.  It helps consumers by providing them a path to justice other than the one through our overcrowded courts, where the only sure winners are the trial lawyers.