Recently, Professor Jeff Sovern sent an email to the editor of the Consumer Financial Services Law Report commenting on an article we published in the August 9, 2015 issue of the Report titled, “CFPB Makes Consumer Arbitration a Numbers Game – and the Numbers Overwhelmingly Support Consumer Arbitration.” In that article (as well as in several prior blog entries) we discussed, among other things, an online survey conducted in 2014 by Professor Sovern and other St. John’s University School of Law professors purporting to explore the extent to which consumers are aware of and understand the effect of arbitration clauses in their consumer contracts. The survey essentially concluded that consumers are not aware of and do not understand arbitration clauses and, therefore, should not be bound by them. We criticized the survey (as well as the CFPB’s recent empirical Study of consumer arbitration) for not interviewing consumers who actually had participated in arbitrations and who would likely have positive comments about their experience. Writing to “set the record straight,” Professor Sovern asserts that we “do not question his findings” and “should focus on what we found, rather than on things they wish we had found.”
We focused on things we wish the survey had done, in particular, examine the actual experiences of individual consumers who have gone through arbitration, so that apples-to-apples comparisons can be made comparing how consumers fare in arbitration and how they fare in class action litigation. Professor Sovern disregards that consumer understanding of what terms are in the contract when the contract is entered into is only one part of the picture; just as important, in our view, is whether the arbitration clause benefits the consumer when the consumer is in a position to invoke it after a dispute has arisen and the consumer is looking for a speedy, economical and efficient way to resolve the dispute.
This point is underscored by Professor Sovern’s comment that it would be difficult for us to question the survey findings since “an industry group, the American Financial Services Association, has acknowledged both that consumers usually do not read contracts and that it is unlikely they are aware of credit card arbitration clauses.” We observe that this comment about AFSA is taken out of context. AFSA had written to the CFPB in August 2013 to comment on the CFPB’s proposed telephone survey of consumers. In its letter, AFSA noted that many prior studies had already concluded that “consumers do not generally read contracts.” From those studies, AFSA deduced that “if consumers do not read contracts generally, there is no reason to assume they may read an arbitration provision, in particular.” AFSA then went on to make the following salient point:
“Given that the Survey is likely to show that consumers are not generally aware of the arbitration provision in their credit card agreement, AFSA is concerned that the CFPB will use the results of the Survey to improperly prohibit or restrict the use of arbitration agreements. It is not important for consumers to memorize the dispute resolution provisions in their card agreements. It is enough that consumers can find the dispute resolution provisions in their cardholder agreements when they need to, which they can obviously do, as consumers have brought many arbitrations. Dispute resolution provisions are like car jacks: everyone has one and could read the instructions on how to use it when they need it, but without needing it, very few people could say for sure how to use it or even what it looks like. The absence of people who can say how to use car jacks and what they look like does not prove that car jacks are not useful; it only proves that most people do not know how to use them or what they look like until they need them.”
That is precisely the point that Professor Sovern and his colleagues seem to have missed – do arbitration clauses help consumers when consumers actually have a need to resolve a dispute? The data presented on that point strongly suggests that arbitration does benefit consumers far more than class action litigation. For example, according to statistics in the CFPB Study, consumers who prevailed in an individual arbitration recovered an average of $5,389, and the entire arbitration process was concluded through hearing or settlement in an average of 2-7 months. By contrast, the CFPB Study found that consumers who received cash payments in class action settlements got a paltry $32.35 on average after waiting for up to two years, while their lawyers recovered a staggering $424,495,451. And, as few as 4% of the class members who were eligible to receive benefits conditioned on submitting a claim form actually filed a claim.
Statistics such as these may help explain the results of a 2005 Harris Interactive online poll of 609 individuals who had actually participated in an arbitration that reached a decision. That poll found, inter alia, that: (i) arbitration was widely seen as faster (74%), simpler (63%) and cheaper (51%) than going to court; (ii) 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, a third said they were at least somewhat likely to use arbitration again; (iii) most participants were very satisfied with the arbitrators’ performance, the confidentiality process and its length; and (iv) although winners found the process and outcome very fair and losers found the outcome much less fair, 40% of those who lost were moderately to highly satisfied with the fairness of the process and 21% were moderately to highly satisfied with the outcome.
We urge Professor Sovern and his colleagues to study next what consumers understand about class actions and class action settlement notices. That would put the St. John’s survey findings in a more meaningful context.