A federal agency's new preliminary report debunks the popular right-wing myth that private contracts that require people to take their complaints to an arbitrator are an effective alternative to class-action lawsuits.
Right-wing media outlets have consistently supported what are known as “forced-arbitration clauses” -- contractual provisions that often force consumers to give up their right to join a class action lawsuit and instead require them to go before an arbitrator individually, even if the amount in dispute is so small that it wouldn't make sense to pursue outside of a collective, mass action. Support on the right has grown since 2011, when the conservative majority of the Supreme Court held that such forced arbitration clauses trump consumer protection laws.
The right-wing media has relied in part on that Supreme Court ruling to dismiss criticism of forced arbitration as “unfair.” For example, Ammon Simon at National Review Online has called forced arbitration clauses “especially generous towards consumers,” and called class-action lawsuits “a cash cow for trial lawyers ... [that] don't usually help consumers, who are systemically under-compensated in such cases.” Simon continued:
While trial lawyers would benefit from strictly limiting arbitration, consumers would suffer. ... [C]lass action lawsuits last an average of 3 years from start to completion, while arbitrations last slightly under 7 months. What's more, while consumer claims go on the backburner to trial attorney fees in class action litigation, consumers can actually be successful in arbitration, and prefer arbitration to the alternatives.
Hans von Spakovsky, also an NRO contributor and a legal fellow at the ultra-conservative Heritage Foundation, argued that forced arbitration clauses are “an efficient and fair alternative to our costly and burdensome litigation system”:
Given the arbitration process's many benefits over the only real alternative -- expensive and time-consuming litigation that in many cases does more to line trial lawyers' pockets than redress consumers' injuries -- any action to curtail arbitration would only injure consumers and workers.
Simon and von Spakovsky agree that arbitration clauses provide consumers with a better chance of fair compensation than do class-action lawsuits.
But according to preliminary findings from a year-long study conducted by the Consumer Financial Protection Bureau (CFPB), forced arbitration clauses actually have the effect of denying consumers of financial products an important avenue for redress in contractual disputes. According to Alison Frankel at Reuters, “the evidence shows arbitration doesn't provide any recovery to the overwhelming majority of consumers of financial products” (emphasis added):
According to CFPB, exceedingly few consumers actually bring arbitration claims when they have a dispute with their credit card company, bank or payday lender. Tens of millions of consumers are subject to mandatory arbitration for disputes involving financial products and services, CFPB estimated, yet only 1,241 cases involving these products were filed with the American Arbitration Association between 2010 and 2012. Of those, according to CFPB chairman Richard Cordray, about 900 were filed by consumers. (The rest were initiated by banks and lenders.) CFPB offered some caveats, including the lack of data from JAMS Inc, which also hears consumer arbitrations, albeit far fewer than AAA. But the bureau isn't exactly going out on a limb when it concludes that the evidence shows arbitration doesn't provide any recovery to the overwhelming majority of consumers of financial products, especially those with small dollar claims. “Plainly, the number of arbitrations was low relative to the total populations using these products,” the report said, in a notable understatement.
The bureau set out specifically to compare consumer recoveries in arbitration to those in class actions. Using case databases and other anecdotal reports, CFPB identified eight class action settlements to serve as a basis of comparison. (The criteria: Settlements had to have been approved in the second half of 2009 or later; the contract at issue in the class action must have contained an arbitration clause; and the case must have involved credit cards, checking accounts or payday loans.) CFPB found that more than 13 million class members made claims or received payments through these eight settlements - which delivered more than $350 million in payments and debt relief to consumers.
Those aren't results to scoff at, especially considering that only 900 consumers attempted to arbitrate similar claims. Thirteen million people received payments through class actions, which is an awful lot more than the 900 who filed for arbitration with AAA, suggesting that consumers are vastly more likely to recover for their grievances through a class action than through litigation. And no matter what you think of class action lawyers, $350 million in payouts is real money.
It's not surprising that the U.S. Chamber of Commerce would support forced arbitration. The pro-business Chamber expends millions of dollars a year in an effort to curb “frivolous” lawsuits, making it more and more difficult for injured plaintiffs to seek relief in the civil court system. As Frankel points out, the report punctures the preferred Chamber narrative that forced arbitration clauses are a worthy alternative to class-action lawsuits.
Not only does arbitration fail to provide meaningful relief for wronged consumers, it also heavily favors the corporations who require it. According to consumer advocacy group Public Citizen, "[f]orced arbitration creates a systemic bias in favor of businesses while offering few, if any, meaningful deterrents against negligence or even foul play."
Now that it's become clear that forced arbitration clauses may severely limit consumers' ability to recover from corporate wrongdoers, it will be interesting to see if right-wing media will change their talking points.