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January 7, 2016

The New York Times Doesn’t Like Arbitration, But It Really Likes Plaintiffs’ Lawyers

The New York Times launched another attack on arbitration just before the holidays. Like the other installments, this piece uses selected anecdotes to support a preconceived story line: reflexive hostility to arbitration and blind faith in the benefits of class actions and the plaintiffs’ lawyers who bring them. (We are not alone in criticizing the Times for reporting-by-anecdote: former Obama press secretary Jay Carney explained how the Times constructed a false picture of Amazon’s workplace; a USA Today columnist documented another example; as did a former Times reporter—and former Washington Post publisher Donald Graham.)

The latest polemic argues that debt collectors are advantaged unfairly by being able to sue in court; that debt collectors can invoke arbitration whether or not the debtor has signed an arbitration contract; and that class actions are essential to protect consumers against unscrupulous debt collectors. It is wrong on each count.

Consumers Do Better in Debt Collection Arbitration Than in Debt Collection in Court

The Times begins by asserting that Clifford Cain Jr. was treated unfairly in a debt collection proceeding in court. But the entire premise of the Times’ anti-arbitration campaign is that courts are fair and arbitration is not. If courts can be unfair in debt collection proceedings, why are they so certain to be paragons of fairness in other cases?

The reporters ignore this basic contradiction.

And for good reason: Empirical research shows that, while consumers rarely succeed in debt collection cases, they do at least as well in arbitration—if not better—than they do in court: “the likelihood of creditors winning in arbitration is less than in court.”

Borrowers usually do not show up in court to defend themselves, and debt collectors may be seeking to collect on a debt that is no longer collectible. In arbitration, the matter can be resolved through a much more convenient telephonic hearing or written submissions. A (costly) lawyer is not needed to navigate arbitration’s streamlined procedures, but is critical in court. These advantages of arbitration are not unique to debt collection; they apply to all categories of claims.

The Times says (quoting unnamed “[c]onsumer lawyers”) that debt collectors are “having their cake and eating it, too” by suing in court to collect debts but invoking arbitration when sued by plaintiffs’ lawyers in class action lawsuits.

Not so.

Many debt collection actions were arbitrated until 2010, when the American Arbitration Association—the leading arbitration provider—adopted a moratorium on debt collection arbitrations in part at the urging of so-called consumer advocates. Debt collectors bring actions in court because that is the only place such claims can be brought—because of anti-arbitration advocacy.

More Proof That Class Actions Benefit Lawyers, Not Consumers

But what about the class action? In discussing Mr. Cain’s story and the allegations against Midland Funding, the debt collector in that case, the Times emphasizes the bar on class claims in arbitration, implying that a class action against Midland would have produced significant benefits for consumers such as Mr. Cain.

We know that isn’t true, however, because—although the reporters fail to mention it—there was a class action filed against Midland. And, as Daniel Fisher explains in Forbes, the class action settlement was “woefully inadequate for consumers and unjustifiably lucrative for the lawyers who negotiated it.”

The settlement provided $1.5 million to the plaintiffs’ lawyers—nearly 29% of the overall fund—while awarding individual class members a paltry $17.38, which the Sixth Circuit called “perfunctory at best.” Worse yet, only 9.2% of the class members filed claims, meaning that more than 1.2 million members of the class received no relief whatsoever. Midland would have obtained a release of all claims that class members might have against it, preventing class members from using Midland’s alleged violations of the law as a defense to collection of their debts. The settlement was so abusive that the U.S. Court of Appeals for the Sixth Circuit overturned it.

After the Sixth Circuit sent the case back to the district court, the district judge approved a slightly modified settlement little better than the first one. The attorneys general of 33 states are opposing this new settlement, which is before the Sixth Circuit again.

The Times’ failure to mention the Midland settlements is both puzzling and troubling. Fisher observes: “[t]he Times reporters say they reviewed thousands of documents and interviewed hundreds of lawyers, plaintiffs, industry consultants and judges to produce their series in celebration of class actions. So why, for a second time, did they leave the key players in this drama, class-action lawyers, out of the story? I don’t know, but perhaps an editor at the Times should Google some of the characters and cases before the next one goes to print.”

The Times’ unwillingness to report the realities of class actions is incomprehensible. The lion’s share of benefit goes to lawyers, not consumers, and all the Times can do is repeat, without any substantiation, the plaintiffs’ lawyer talking point that class actions are “the only realistic way to bring a case against a deep-pocketed corporation.”

That ignores the well-documented abuses of the class action device, which we’ve already discussed in detail and are exemplified in the Midland case. As James Copland recently explained in the Wall Street Journal: “No individual plaintiff has enough money at stake to monitor the lawyers, and defendant companies have every incentive to minimize their total payouts. So plaintiffs’ lawyers structure settlements to pay most of the actual dollars awarded to themselves.”

And the Times is just plain wrong in suggesting that parties can be required to arbitrate their disputes even if they “cannot produce a copy of the [arbitration] agreement in court.” The law (never discussed by the Times) makes clear that a court must be given evidence that an arbitration agreement exists. In the Clifford Cain case, the court found an agreement to arbitrate only after holding a trial on the question.

Government Regulators Can and Do Intervene

One more thing is missing from the Times story—the role of government enforcement actions. Debt collectors are frequent targets of enforcement actions by state and federal regulators, state attorneys general, and the U.S. Department of Justice.

Mr. Cain’s situation pre-dates the creation of the Consumer Financial Protection Bureau (CFPB). Today, he or his lawyer could call the CFPB hotline to seek the agency’s assistance. The very purpose of creating the CFPB—with its $600 million+ annual budget—was to increase enforcement in this area. The CFPB’s most recent report on the enforcement of the Fair Debt Collection Practices Act states that the Bureau exercises supervisory authority over 175 debt collectors and recovered more than $500 million in relief for consumers in just one year.

That’s a much more “realistic” avenue for relief than lawyer-controlled class actions that produce millions for lawyers but no real benefits for consumers.

Conclusion

Reporting by anecdote is a treacherous business. Once the full story is revealed, the pre-determined conclusion—arbitration, bad; class actions, good—collapses. It is sad that the full story didn’t appear in the Times.

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