March 11, 2015

The Trial Lawyer Financial Protection Bureau?

The CFPB’s arbitration report puts plaintiffs’ lawyers ahead of consumers

The Consumer Financial Protection Bureau’s (CFPB) report on arbitration released this week has one very clear conclusion: litigation is better than arbitration. This raises the question of whether the exercise has been less about protecting consumers and more about helping the plaintiffs’ lawyers.

Let’s consider some of the report’s major findings:

  • Finding: Three out of four consumers surveyed did not know if they were subject to an arbitration clause.
    • Fact: The CFPB’s survey of 1,000 consumers did not ask whether consumers’ awareness of dispute resolution clauses was greater or lesser than their awareness of other provisions of the agreement. All of us consumers have low awareness of everything in contracts and agreements. Without a broader probe, it is impossible to know whether awareness of arbitration clauses is unusually low compared to overall contract knowledge. 
  • Finding: Consumers are very reluctant to bring claims against companies on their own, particularly small claims.
    • Fact: Individual legal claims are a very difficult path for consumer relief. When it comes to lawsuits in court, we agree. The CFPB’s conclusion, however, is wrong. The agency suggests that the only alternative to individual litigation is a class-action lawsuit, but ignores the fact that very few consumer claims are even eligible for a class action lawsuit. That is because to certify a lawsuit as a class action, there must be common allegations of harm across the entire class. The vast majority of consumer complaints would be ineligible. For such complaints, arbitrationoffers a straightforward way for many small-dollar consumer claims to be vindicated. By contrast, without arbitration, consumers are stuck with individual lawsuits, which can easily cost more money and time than arbitration. 
  • Finding: Roughly 32 million consumers on average are “eligible” for relief through consumer financial class action settlements each year.
    • Fact: This finding suggests more consumers are getting relief through class actions than arbitration. The key word here is “eligible.” The report doesn’t address the fact that a tiny fraction of those eligible actually take their share of money from a class action settlement. This can be because they aren’t aware that either they were harmed or that they have a settlement available, or because they believe the “award” for them (which commonly is just a few dollars) isn’t worth it. In most consumer class actions, less than ten percent of consumers claim benefits. Eligibility and consumer relief are not synonymous. 
  • Finding: There is no evidence arbitration leads to lower prices.
    • Fact: Arbitration in consumer contracts has kept costs lower than if consumers were left with litigation. As law professor Stephen Ware has explained, “it is inconsistent with basic economics” to suggest that consumers do not benefit from arbitration provisions “because whatever lowers costs to businesses tends over time to lower prices to consumers.” 
  • Finding: Arbitration affects a large number of consumers.
    • Facts: The Bureau seems to conclude that consumers today can’t avoid arbitration clauses and still participate in the modern financial world. Yet even their report acknowledges that half of all credit card debt and checking account deposits are subject to arbitration clauses. That means half are not. Furthermore, the report fails to mention that all consumers can readily find a whole range of products without arbitration agreements. 

A more complete report might have included empirical studies that have repeatedly shown arbitration is at least as likely, and often more likely, than lawsuits to result in positive outcomes for consumers.

The report might also have included that arbitration creates incentives for companies to settle individual claims or disputes even before the filing of a formal arbitration proceeding. For example, AT&T’s consumer arbitration agreement contains bonus payments to customers of $10,000, plus attorneys’ fees and other costs, if the consumer does better in an arbitration proceeding than the company’s final settlement offer.

The arbitration system for the Kaiser Foundation Health Plan in California gets high marks from those amongst its more than seven million members who have been involved in arbitration proceedings, most of them over medical malpractice claims.

According to a 2013 survey conducted by Kaiser’s independent arbitration administrator, almost 50 percent of the parties and attorneys who went through arbitrations that year reported that the arbitration system was better than going to court, another 38 percent reported that it was the same as going to court and only 14 percent reported it was worse.

A complete examination of arbitration versus litigation would have shown that class action litigation is actually a worse path to justice. In a U.S. Chamber Institute for Legal Reform-sponsored empirical study, of the 148 class actions in federal court in 2009, none went to trial, nearly all were dismissed or withdrawn, and the fraction that remained saw well less than 10 percent of consumers actually submit claims on the settlement.

The Bureau’s report contains almost no new research and is mostly a collection of other studies that appear to support a pre-determined outcome. At the CFPB field hearing in Newark, New Jersey, where the report was unveiled, only two of the eight speakers represented perspectives other than pro-litigation.

The CFPB’s report is less of an open examination of the facts, and more of a mile marker on the highway toward banning consumer arbitration in favor of lawsuits. Consumers are the last ones who should be cheering. It’ll be the lawyers, not consumers, who will win in this game — which raises the question of exactly whom the CFPB is protecting.

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