Professor Jeff Sovern recently proposed that the CFPB issue a supposedly “new” arbitration rule “that prevents companies from blocking consumers from suing in court unless consumers specifically opted in to the arbitration clause” after being given a CFPB-mandated disclosure that if they do not sign and their rights are violated, they “may still sue us in court or later agree to arbitration.”   In truth, there is nothing “new” about this proposal.  It is just the latest spin on the decades-old argument by consumer advocates that arbitration agreements should only be entered into after a dispute has occurred, not before, because consumers are not fully cognizant of their rights until then.

The proponents of post-dispute arbitration agreements have never made a convincing case, nor does Professor Sovern.  Limiting consumer arbitration to post-dispute controversies would severely curtail consumer arbitration because once a dispute has arisen, one side or the other, or both, inevitably use the in terrorem “threat” of expensive and prolonged litigation as a negotiating tool.  That tactic is eliminated if the parties have agreed to arbitrate the dispute prior to the dispute arising.  Thus, although post-dispute arbitration is a theory that may sound superficially appealing, it fails in real life.  An empirical study by researchers at the University of California at Berkeley concluded that the “overriding problem” with post-dispute arbitration is that “it is extremely rare for both the plaintiff’s and defense’s attorneys in a case to select arbitration after the dispute has arisen” and, accordingly, both businesses and individuals “are hurt by a post dispute system.”  David Sherwyn, “Because It Takes Two: Why Post-Dispute Voluntary Arbitration Programs Will Fail to Fix the Problems Associated with Employment Discrimination Law Adjudication,” 24 Berkeley Journal of Employment and Labor Law 1, 7, 68 (2003).  By contrast, “[p]re-dispute arbitration agreements ensure that both parties are on the ‘same page’ regardless of the particulars of any subsequent dispute.”  Victor E. Schwartz and Christopher E. Appel, “Setting the Record Straight About the Benefits of Pre-Dispute Arbitration,” 34 Legal Backgrounder No. 7, Washington Legal Foundation (June 7, 2019).

In addition, Professor Sovern’s proposal is predicated on three fundamental fallacies.  First, Professor Sovern argues that giving consumers the right to “opt out” of arbitration is ineffective because consumers don’t understand arbitration clauses and fail to comprehend that they are waiving their constitutional right to a jury trial.  That simply ignores that most arbitration clauses contain clear and conspicuous disclosures about the arbitration process and its legal consequences, including the fact that if a claim is arbitrated, there will be no right to a jury trial.  Moreover, as the U.S. Supreme Court has held, under the Federal Arbitration Act if the business terms of a consumer contract are enforceable, the arbitration clause should also be enforced and cannot be singled out for special treatment.  Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995) (“[w]hat States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause”).  Professor Sovern makes no effort to explain how his suggestion that the arbitration clause “be read out loud to the consumer” would work when millions of consumers typically receive their account agreements with arbitration provisions by mail.

Second, Professor Sovern incorrectly assumes that the CFPB would agree to recommend to consumers that they “NOT” opt in to arbitration because it is an “abusive practice.”  This contradicts both the CFPB’s 2015 empirical study of consumer arbitration and its 2017 final arbitration rule, neither of which found the arbitration process to be per se harmful to consumers or to society as a whole.  Indeed, contrary to Professor Sovern’s statement that “class actions … make economic sense,” the data in the CFPB study demonstrated not only that arbitration is faster and less expensive than litigation, but that consumers who arbitrate fare much better, recovering an average of $5,389 in individual arbitration compared to $32.35 recovered by the average class member.  Class actions only make economic sense to counsel for the class, who according to the CFPB study recovered a whopping $425 million in fees compared to the pittance their clients received.  Notably, the CFPB has encouraged its own employees to use alternative dispute resolution to resolve workplace disputes because it provides “faster and less contentious results” as well as “confidentiality.”  United States Government Accountability Office, Report to Congressional Requestors, Consumer Financial Protection Bureau Additional Actions Needed to Support a Fair and Inclusive Workplace, pp. 48-49 (May 2016).  At its core, Professor Sovern’s proposal embodies an ill-disguised  policy preference for class action litigation over individual arbitration.  Thus, despite his protestations to the contrary, it would be barred by the Congressional Review Act because it is “substantially the same” as the earlier CFPB rule barring the use of class action waivers that Congress vetoed.  Allowing the consumer to opt in to an arbitration program, particularly one which the CFPB warns consumers not to do, is tantamount to a rule barring the use of arbitration altogether, something which is unsupported by the CFPB’s own record which demonstrated that arbitration is fair to consumers.

The third fallacy in Professor Sovern’s proposal is his insistence that arbitration agreements generally, and opt-out clauses specifically, fail to “explain to consumers why an arbitration clause is preferable” and incentivize companies “not to say anything about the matter.”  The reality is that most companies strive to provide informative disclosures about arbitration to the consumer and typically give the consumer a period of 30 to 60 days to decide whether to opt out.  That allows substantial time for consumers to consult in private with their lawyer, family or friends or spend time on the internet investigating the pros and cons of arbitration in order to make an informed decision.  Most arbitration clauses also make clear that there is no penalty for opting out of the arbitration provision.  And, asking a consumer to send a short opt-out notice back to the company if they wish to reject the arbitration provision is no more burdensome than asking putative class members to send back a written opt-out notice if they do not want to participate in the certified class – a procedure that passes constitutional muster as the U.S. Supreme Court has held.  Phillips Petroleum Company v. Shutts, 472 U.S. 797, 812 (1985) (“due process requires at a minimum that an absent plaintiff be provided with an opportunity to remove himself from the class by executing and returning an ‘opt out’ or ‘request for exclusion’ form to the court”).

In sum, the CFPB would be well advised to disregard Professor Sovern’s proposal.