Last Tuesday, I had the great privilege of testifying before the Senate Judiciary Committee at its “Arbitration in America” hearing. As I told the Committee members in my opening remarks, arbitration is a topic that’s very near and dear to my heart. The hearing lasted about two hours and only two Committee members were present for the entire hearing, Committee Chairman Lindsay Graham and Senator Richard Blumenthal who served as the Acting Ranking Member in place of Ranking Member Senator Dianne Feinstein. Many of the Committee members seemed to be present only when it was his or her turn to question the witnesses.
Although Republicans control the Committee by a 12-10 majority, Democratic members (who had an animus towards consumer or employee arbitration) played a dominant role, with many using their time to make statements against arbitration rather than to ask questions. When questions were asked, Democrats directed them only to “friendly’ witnesses (which meant they avoided me.) I was asked only a few questions by Chairman Graham and Senator Grassley.
The hearing’s format allocated five minutes to each witness to give oral testimony. The oral testimony was followed by questioning by Committee members. Witnesses could not respond to questions asked by Senators of other witnesses, nor could a witness comment on the response of another witness. For that reason, through this blog post, I want to share the following comments that I would have made at the hearing if the format had permitted me to do so:
- Senator Whitehouse cited several historical texts to demonstrate that the right to a jury trial was viewed as fundamental by the nation’s founders. While Senator Whitehouse’s historical perspective is correct, his suggestion that Congress should not allow predispute arbitration agreements because they constitute a waiver of the right to a jury trial is inconsistent with the extensive body of case law upholding such waivers. Federal and state courts throughout the country, while characterizing the right to a jury trial as fundamental, have also held that the right to a jury trial can be waived. The United States Supreme Court recently held that “the primary characteristic of an arbitration agreement [is] … a waiver of the right to go to court and receive a jury trial.” Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1427 (2017). In this case, the Supreme Court enforced the arbitration clause.
- Senator Booker commented that arbitration is not “quick, efficient, or cheap” and Senator Klobuchar suggested that the cost of an individual arbitration is “so high” that “even if you win, you don’t win.” With regard to speed, several studies have demonstrated that consumer arbitration is faster than litigation. Indeed, the Consumer Financial Protection Bureau’s (CFPB) exhaustive empirical study of consumer arbitration showed arbitration to be up to 12 times faster than consumer class action litigation. With regard to efficiency, surveys have shown that the vast majority of consumers view arbitration as simpler, less hostile, and more convenient than going to court. With regard to cost, arbitration is less expensive for consumers than going to federal court. The American Arbitration Association (AAA) and JAMS, the nation’s leading national arbitration administrators, have capped the arbitration fees paid by a consumer at $200 and $250, respectively. The company pays the remainder of the fees. By contrast, it costs $400 to file a federal court complaint.
Moreover, both the AAA and JAMS will waive even those modest fees if the consumer has a financial hardship. In addition, the arbitration agreements used by many companies typically provide that the company will pay or advance the consumer’s share of the administrative and arbitrator fees. In any event, the CFPB found that consumers who prevailed in arbitration recovered an average of almost $5,400. Given that the consumer at most has paid $200 or $250 to start the arbitration, consumers clearly win by going to arbitration instead of to court. And, as discussed in the next bullet point, consumers do in fact “win” in arbitration.
- Senator Booker commented that corporations win arbitrations “93% of the time.” That statistic is derived from a so-called “fact sheet” published on August 1, 2017 by the Economic Policy Institute titled “Correcting the Record–Consumers fare better under class actions than arbitration.” Unfortunately, these statistics create the misimpression that consumers fare very poorly in arbitration compared to class action litigation. That is not the case. In its 2015 study of consumer arbitration, the CFPB examined 1060 consumer financial services arbitrations administered by the AAA filed in 2010 and 2011. Of those 1060 arbitrations, 246 arbitrations (23.2%) settled, 362 arbitrations (34.2%) ended in a manner consistent with settlement, and 111 arbitrations (10.5%) ended in a manner inconsistent with settlement although it is possible that settlements occurred. Just because a case settles does not mean that the consumer did not come away with a monetary payment or some amount of debt forbearance.
In fact, the opposite is likely true — a case settles because the parties found a way to compromise their positions and resolve their dispute. Moreover, the CFPB noted 32 arbitrations in which consumers recovered an average of about $5,400. Therefore, of the 1060 arbitrations filed in 2010-2011, consumers either did or may have come away with a monetary payment or some amount of debt forbearance in as many as 71% of the arbitrations. Notably, Professor Christopher Drahozal, who served as a Special Advisor to the CFPB in connection with its arbitration study, also conducted a study of more than 300 AAA arbitrations in 2009 for the Northwestern University Searle School of Law. He concluded that consumers won relief in 53.3% of the arbitrations. It turns out that the 93% figure is referring to debt collection claims asserted by companies in which the consumer either defaulted or had no defenses or very weak ones. What the fact sheet fails to state is that the result would not have been any different in court. This precise point was made by the Maine Bureau of Consumer Protection in a 2009 report to the Maine Legislature on consumer arbitrations:
[I]t is important to keep in mind that although credit card banks and assignees prevail in most arbitrations, this fact alone does not necessarily indicate unfairness to consumers. The fact is that the primary alternative to arbitration (a civil action in court) also most commonly results in judgment for the plaintiff. Although certainly there are cases in which a consumer has a valid defense to the action, it is also correct to say that most credit card cases result from a valid debt and a subsequent inability of the consumer to pay that debt.
- Senator Booker commented that the “deck is stacked” against consumers in arbitration because arbitrators have a pro-industry bias. Professor Gilles suggested that consumers have no role in selecting the arbitrator for their disputes and Mr. Bland also suggested that often the arbitration rosters are all industry people. However, it simply is not the case that arbitrators have a pro-industry bias or that consumers have no role in selecting the arbitrator and no recourse if they object to the arbitrator selected. Most consumer arbitration agreements require the AAA or JAMS to administer the arbitration. Both are well known and highly respected organizations that have earned the respect of the courts for many decades. Those administrators either appoint an arbitrator drawn from their national roster of arbitrators or allow the parties to select an arbitrator from a list of three or more provided. Thus, both the consumer and the business have exactly the same rights in selecting an arbitrator, and the deck is not stacked in favor of either party.
Both the AAA and JAMS require all of their arbitrators to be neutral, impartial, and independent. The arbitrators are required to disclose any conflicts, and there is a procedure whereby a party (consumer or company) can object to the appointed arbitrator or move to disqualify the arbitrator if there is even a hint or suspicion of bias or impartiality. See AAA Consumer Arbitration Rules 15-19; JAMS Streamlined Arbitration Rule 12. Moreover, under Section 10 of the Federal Arbitration Act, a court can vacate the arbitrator’s award for “evident partiality,” among other things.
- Professor Gilles, citing statistics about the number of individuals who filed individual arbitrations to resolve disputes during a specified period, suggested that the reason more individuals did not initiate arbitrations was because they are not “worth the cost.” As indicated above, the typical cost of an arbitration to a consumer is quite modest and substantially less than initiating a court action. The fact is that most consumer disputes are resolved without the need for arbitration through the internal dispute resolution procedures that companies have in place.In its arbitration study the CFPB noted the “relatively low” number (1,847) of arbitration proceedings filed by consumers against financial services companies, compared to court cases. However, no inference should be drawn that consumers prefer litigation to arbitration or that arbitration is an ineffective remedy compared to class actions. In reality, the vast majority of consumer disputes are resolved by informal methods without the need for arbitration or litigation (even small claims litigation). Such procedures include error and dispute resolution procedures provided by federal and state law, customer complaint mechanisms maintained internally by businesses, such as toll-free customer complaint telephone numbers and website “contact us” links, as well as procedures such as complaint portals offered by regulatory agencies, state agencies, and private organizations such as the Better Business Bureau to help consumers resolve disputes with businesses.
In particular, most financial services companies maintain internal complaint resolution programs which, unlike class actions, can address consumer disputes quickly and efficiently. Financial services providers are driven to support robust complaint resolution systems by the desire and need to satisfy customers in order to survive in a competitive environment. And in today’s world, where stories and complaints may be quickly and widely broadcast through the press and social media, companies have powerful incentives to resolve disputes fairly and quickly, especially small dollar disputes. Banks and other companies that are subject to federal or state supervision, in particular, have additional incentives to support strong complaint management systems and ensure complaints are resolved fairly because of the emphasis given to complaints in the examination process. There are also other reasons the number of consumer arbitrations is relatively small in comparison with court filings: (a) many plaintiffs’ lawyers and consumer advocates have sent consistently negative messages about arbitration for almost two decades and have done their best to dissuade consumers from arbitrating, (b) consumer arbitration is still “the new kid on the block” compared to litigation, (c) vigorous governmental enforcement actions eliminate the need for consumers to bring private actions, (d) individuals are turning increasingly to on-line arbitration and mediation resources to resolve small-dollar customer complaints, and (e) government agencies have failed to educate consumers about the many benefits that arbitration can offer as opposed to litigation.
- Several Senators indicated that national standards are needed for arbitration agreements. However, the industry has already created standards protective of consumers that effectively function as national standards. Both the AAA and JAMS have adopted consumer due process protocols and consumer rules and fee schedules to ensure that the consumer will be treated fairly, that arbitration will be affordable to the consumer, and that the arbitrator will apply applicable substantive law and corresponding remedies. Moreover, companies have gone to great lengths to make their arbitration programs fair, even to the point of giving consumers the unconditional right to reject arbitration within 30 or 45 days after entering into the transaction. In addition, state and federal courts rigorously strike down arbitration agreements that they find to be overreaching, unfair, or abusive to consumers, and enforce those that are reasonable and legally and equitably sound. This existing “checks and balances” system operates dynamically and very successfully to protect the rights of all parties to the consumer arbitration agreement, consumer and company alike.
- Senator Graham indicated that Congress needs to take a look at class actions. I wholeheartedly agree. The data analyzed in the CFPB’s study clearly demonstrates that individual arbitration produces more tangible benefits to consumers than class action litigation. First, the study demonstrated that consumer arbitration is up to 12 times faster than consumer class action litigation and that arbitrations are concluded in months, while class actions take years. Second, the study showed that consumers pay far less to arbitrate than to sue in court. Third, the study showed that consumers recover more in arbitration than in class action litigation. According to the study, the consumer’s average recovery in arbitration was $5,389 (an average of 57 cents for every dollar claimed).In sharp contrast, the average recovery for class members in consumer class action settlements was a mere $32.35. Thus, the consumer’s average recovery in arbitration was 166 times greater than the average putative class member’s recovery. The study further found that attorneys’ fees awarded to class counsel in settlements during the period studied amounted to $424,495,451. In addition, the study concluded that in 87% of the 562 class actions the CFPB studied, the putative class members received no benefits whatsoever. The study also showed that consumers are more likely to obtain decisions on the merits in arbitration than in class action litigation.
The CFPB’s findings mirror the conclusions reached by the U.S. Chamber of Commerce, Institute for Legal Reform in a December 2013 empirical study of class actions titled “Do Class Actions Benefit Class Members?” After analyzing 148 putative consumer class action lawsuits filed in or removed to federal court in 2009, the Chamber’s report found, inter alia, that:
- None of the class actions ended in a final judgment on the merits for the plaintiffs or even went to trial, either before a judge or a jury.
- The vast majority of cases produced no benefits to most members of the putative class – although in a number of those cases the lawyers who sought to represent the class were paid substantial amounts.
- Over one-third (35%) of the class actions that were resolved were dismissed voluntarily by the plaintiff. Many of those cases settled on an individual basis, meaning a payout to the named plaintiff and the lawyers who brought the suit, even though the class members received nothing.
- Just under one-third (31%) of the class actions that were resolved were dismissed by a court on the merits, meaning that class members received nothing.
- For those cases that settled, there was often little or no benefit for class members.