Consumer advocates often contend that Congress should prohibit arbitration agreements with class action waivers because servicemembers and other consumers need class actions to effectuate their statutory rights.  However, a report issued by the Government Accountability Office (GAO) to Congress last month contains data that refutes that argument.

The GAO report studied the impact of mandatory arbitration agreements on claims by servicemembers under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) and the Servicemembers Civil Relief Act (SCRA).  The USERRA generally provides protections for individuals who voluntarily or involuntarily leave civilian employment to perform service in the uniformed services.  The SCRA generally provides protections for servicemembers on active duty, including reservists and members of the National Guard and Coast Guard called to active duty.  In particular, the GAO report examined (1) the effect that mandatory arbitration has on servicemembers’ ability to file claims under the USERRA and the SCRA, and (2) the extent to which data are available to determine the prevalence of mandatory arbitration clauses and their effect on servicemembers claims.

The GAO report concluded that existing data was insufficient to answer these specific questions definitively and that data on the outcome of specific claims pursued through arbitration were “limited.”  Nevertheless, the data that it did uncover shows that servicemembers can effectuate their USERRA and SCRA rights in an individual arbitration.  The report discussed instances in which arbitrations administered by the Financial Industry Regulatory Authority “specifically enforced servicemembers’ rights under USERRA.”  In one case, the arbitrators awarded $172,000 to a servicemember who pursued a USERRA claim against his employer.  The arbitrators also found the employer liable for the servicemember’s attorneys’ fees and costs, totaling over $262,000, as well as the costs of administering the arbitration, totaling more than $36,000.  In another case, the arbitrators ruled against a servicemember’s claim under the USERRA but assigned the costs of the arbitration to the employer, specifically citing USERRA’s protections against fees and costs.

The GAO report also shows that arbitration clauses do not preclude servicemembers from pursuing many USERRA and SCRA claims administratively, without the need for class actions.  The report stated that “mandatory arbitration clauses have not prevented DOJ [Department of Justice] from initiating lawsuits against employers and other businesses under USERRA or SCRA” and that
“[s]ervicemembers may also seek administrative assistance from federal agencies, and mandatory arbitration clauses have not prevented agencies from providing that assistance.”  Indeed, administrative remedies may benefit servicemembers even more than class actions because any recovery by the DOJ is not diminished by the 33% or more in attorneys’ fees typically siphoned off by private class counsel.

The report cites a case in which  the DOJ filed a lawsuit against and reached a settlement with a mortgage company, requiring it to pay $2.35 million for allegedly foreclosing on the houses of 17 servicemembers without court orders in violation of the SCRA.  It also cited another case in which the DOJ reached a settlement with an automobile lender in which the company agreed to pay $9.35 million for illegally repossessing over 1,100 vehicles in violation of the SCRA.  Moreover, according to the report, DOJ has filed 109 USERRA lawsuits and favorably resolved 200 USERRA complaints through consent decrees or private settlements, and DOJ officials said that none of the employers compelled a servicemember into arbitration.

The effectiveness of these administrative remedies strongly undercuts the argument of the plaintiffs’ bar that class actions are necessary to effectuate servicemembers’ statutory rights.  The GAO report notes that in addition to the DOJ, the Department of Defense and the Department of Labor also “often help informally resolve claims for servicemembers by educating employers and companies about servicemembers’ rights,” enabling the servicemembers to avoid legal proceedings altogether.

The data in the GAO report strongly supports the industry’s positions that (1) individual arbitration is more beneficial than class action litigation, and (2) administrative remedies can be sufficient to protect consumers’ statutory rights, without the need for class actions.  In its 2015 empirical study of consumer arbitration, the Consumer Financial Protection Bureau found that the consumer’s average recovery in arbitration was $5,389.  By contrast, settlement class members received a mere $32.35, while their lawyers recovered a staggering $424,495,451.  Similarly, a November 2020 study by the U.S. Chamber Institute for Legal Reform found that consumers are more likely to win in arbitration than in court, consumers receive higher awards in arbitration than in litigation, and consumer arbitration is faster than litigation.

The GAO’s preliminary data should be heeded by Congress as it weighs possible legislative or regulatory measures that would prohibit or restrict the use of class action waivers in consumer arbitration and employment agreements.  In considering such measures, Congress should be mindful not to throw the baby out with the bathwater.