Following on the heels of the Pew Foundation’s survey of consumer attitudes towards arbitration and the CFPB’s on-going empirical study of consumer arbitration, a group of professors from St. John’s University School of Law recently conducted an empirical study purporting to explore the extent to which consumers are aware of and understand the effect of arbitration clauses in their consumer contracts. According to the study, which is presently in draft form, 668 consumers completed an online survey in which they were shown a generic but supposedly “typical” credit card contract with an arbitration clause containing a class action waiver and were then asked questions about what they understood and what they thought their legal rights were in various hypothetical situations.
The study concluded that there is “a lack of understanding about the existence and effect of arbitration agreements among consumers.” It found that there are “troubling issues” about whether consumers’ consent to arbitration is “informed in any sense of the word” and whether “consumers should be bound by agreements they cannot comprehend but which strip them of their constitutional rights.” “Overall,” the authors state, “of the more than 5,000 answers we recorded to questions offering right and wrong answers [about arbitration], only a quarter were correct.”
In our view, the survey is deeply flawed because it does not even attempt to examine how consumers actually fare in individual arbitrations, or how their experience compares with how class members fare in certified or settled class actions. Before dismissing consumer arbitration clauses as “Whimsy Little Contracts with Unexpected Consequences” (the title of the study), the St. John’s study should have made a serious effort to canvas individuals who have actual first-hand experience with the arbitration process and individuals who have participated as class members in a class action. Unfortunately, the study avoids this central issue, stating that: “We will not attempt to resolve the debate over the comparative advantages of arbitration and litigation in this article.” And, “they express no opinion here about the efficacy of class actions,” although they acknowledge it is “a subject of heated debate.” Tellingly, the final question out of the 40 questions in the survey (coming after stock demographic questions about age, annual income and ethnicity) is the question that should have been first: “Have you ever been a party to or otherwise involved in an arbitration?”
It is our view that a significant measure of the fairness of arbitration is how it compares to other procedures for resolving disputes, in particular class actions. A consumer who was able to successfully resolve a dispute in a few months and with minimal expense would likely prefer arbitration (even pre-dispute mandatory arbitration) to a class action in which, after years of litigation, he or she receives a $5 check or a coupon towards a future purchase while the attorneys for the class obtain millions in “class counsel” fees. Because it focuses myopically on the “understandability” of a hypothetical arbitration clause in a hypothetical contract, the St. John’s study does not further our understanding of the critical question of whether individual arbitration is fair to consumers compared with class action litigation.
In fact, many earlier studies have concluded that consumers do fare well in arbitration, even better than they fare in litigation. For example, an Ernst & Young empirical study in 2004, which included a telephone survey, found that consumers prevailed more often than businesses in cases that went to an arbitration hearing, with 55% of the cases that faced an arbitration decision being resolved in favor of the consumer; consumers obtained favorable results (including settlements) in 79% of the cases that were reviewed; and 69% of consumers surveyed were satisfied with the arbitration process. A 2005 Harris Interactive survey of 609 adults who had participated in a binding arbitration that culminated in a decision found that arbitration was widely seen as faster (74%), simpler (63%) and cheaper (51%) than going to court; two-thirds (66%) of the participants said they would be likely to use arbitration again, with nearly half (48%) saying they were extremely likely to do so; even among those who lost, one-third said they were at least somewhat likely to use arbitration again; and most participants were very satisfied with the arbitrator’s performance, the confidentiality of the process and its length. More recently, a 2009 study by the Northwestern University School of Law of 301 American Arbitration Association consumer arbitrations concluded that arbitration is an expeditious way to resolve disputes (averaging 6.9 months) and that consumers won relief in 53.3% of the cases filed and recovered an average of $19,255.
The ultimate irony here is that even if some consumers in the St. John’s study who never participated in a consumer arbitration may purport to be confused when they are asked hypothetical questions about what arbitration is and what effect it has, consumers who have actually participated in arbitration appear to have very definite opinions about what arbitration is and what it does. They like arbitration because it works better than the court system. Eliminating their views skews the analysis and produces an artificial anti-arbitration conclusion.
In our opinion, asking consumers whether they know, based upon reading a hypothetical credit card agreement, whether they agreed to arbitrate or whether they can go to small claims court or participate in a class action does not shed any light on the ultimate question of whether individual arbitration is fair to consumers compared to class action litigation. Moreover, it is misguided to focus narrowly on whether the consumer has “consented” to the arbitration clause alone. Had the individuals who claim they were confused about the arbitration clause been quizzed about how the credit card’s daily interest rate is computed, what the parties’ respective rights are in the event of default, what their billing rights are or what information was contained in the Schumer box, they probably would have expressed the same confusion. But with rare exceptions, the law has always been that contracts are to be viewed objectively.
Typically, if an individual agrees to a contract and receives its benefit, he or she will not be heard to complain that the contract is unenforceable because it could not be understood. If a contract is understandable enough to bind a consumer to its business terms, it should be understandable enough to bind the consumer to the contract’s dispute resolution provision. Contracts as a whole are legal documents that affect the parties’ rights. Taking the arbitration clause out of context ignores that the entire contract is supposed to be based upon consent, a meeting of the minds. If anything, given the great care that most drafters make to ensure that the arbitration clause is understandable and clearly and conspicuously disclosed, the arbitration clause is likely one of the most comprehensible parts of a modern-day financial contract. In any event, ask a consumer who has prevailed in an arbitration proceeding a few months after filing a demand if he or she understands what arbitration is. That person will give a much different, and more meaningful, response than respondents who lack real-world experience with arbitration and are asked hypothetical questions.
Even before the advent of consumer arbitration clauses, many contracts contained jury trial waiver provisions. Many, if not most, states will enforce such waivers if they are disclosed in a clear and conspicuous fashion. Relinquishing a jury trial is the only “constitutional right” that is waived when a party agrees to arbitrate. Bringing or participating in a class action is not a constitutional right. It is a mere procedural right. But it is the inclusion of a class action waiver in an arbitration provision that is the root of the frenzied opposition of plaintiffs’ lawyers and consumer advocates to consumer arbitration. The St. John’s article itself expresses “doubt about the legitimacy of the class action waivers contained in arbitration clauses.”
As noted above, there are statistics that support the conclusion that a consumer fares better in an individual arbitration than as a member of a class. But even aside from statistics, consumers have much to gain from arbitration that is not reflected in the St. John’s survey questions. They can have their disputes resolved in a matter of months, not years. In most cases they pay less than what it costs to file a complaint in court. They get the opportunity to sit at a conference table with the decision maker and tell their side of the story unconstrained by the formalities of a courtroom or strict evidentiary rules. Win or lose, they are treated with courtesy and respect by the arbitrator and are given the kind of personal attention that is impossible in a courtroom setting. If those same consumers had been class members, at best they might have recovered a few pennies on the dollar, or received a coupon for a future purchase, after years of litigation, only to watch their counsel walk away with the lion’s share of the settlement or recovery. Is that more or less fair to the consumer than arbitration?
And what does a consumer really “understand” about the mechanics of class actions? When a consumer has to make an opt-out decision based upon the dense legalese in a typical class action notice, and then is referred to a 50-page or longer settlement agreement filled with even more legalese for further details, is the consumer’s understanding of his or her legal rights any clearer than after reading a arbitration clause? Is the consumer’s understanding of the right to opt out of a class action any clearer than his or her understanding of the right to opt out of an arbitration clause? Aren’t those the types of questions that the St. John’s study should have explored before castigating arbitration clauses as “whimsy little contracts” that are not “understandable” to some consumers? (The hypothetical card agreement used in the St. John’s study did not even contain an opt-out provision, although a substantial number of arbitration clauses in use today contain such a provision).
Focusing on just the hypothetical arbitration clause in a hypothetical contract presents an incomplete and distorted picture of how consumers are asked to make choices that affect their legal rights, and how they make those decisions. We hope that the CFPB takes a more balanced and comprehensive approach as it continues its study of consumer arbitration so that the fairness of consumer arbitration is not decided in a vacuum, but rather in comparison to class actions and other dispute resolution mechanisms.