You know what rarely rises to the top of my “to do” list?  Reading scholarly articles and studies about arbitration.  Blech.  But, since I haven’t seen any good court decisions lately, it is time to visit the neglected pile of articles.  Turns out, I should have read some of them right away.  Below are summaries of five new-ish articles that have crossed my desk.  A few offer peeks into arbitration data that is generally not available and some conclusions to chew on over this Thanksgiving holiday.

First is “Arbitration Nation,” an empirical study of 40,775 consumer, employment and tort cases filed with four different arbitration providers between 2010 – 2016 (AAA, JAMS, ADR Services and Kaiser).*   The data came from two sources: public data that the State of California requires arbitration providers to file, as well as a cache of data  gathered by the New York Times.  After reviewing the data, the authors conclude: 1) arbitration is faster that court litigation and generally more affordable for plaintiffs; 2) there was no surge in arbitration filings after the Concepcion decision, but there is evidence of at least a few mass-individual filings (same law firm filing 200 – 1300 individual arbitrations against the same defendant in the same time period); 3) plaintiffs win at a lower rate in arbitration than in court, and pro se plaintiffs “struggle mightily” in arbitration; and 4) the concerns about “repeat-player bias” are “well-founded” — but those repeat players are both defendants who appear often, as well as plaintiffs-side law firms who appear often.  For example, within the JAMS set of data, the authors report that a consumer’s probability of winning increased 79.9% if it was represented by a “super repeat-player” law firm (as compared to appearing pro se), and an employee’s probability of winning increased 55.1% if he was represented by a “high-level” repeat player firm.  (See pp. 42-43.)  Read this article if you: want to compare JAMS and AAA (on cost and speed); want to see data on how Concepcion affected arbitration filings; or want to see statistical evidence of “repeat player” bias.

Second, “Inside the Black Box” reflects findings from surveys of construction arbitrators, advocates, and industry representatives.  Although some of the survey findings just confirmed what most people would expect (like party-appointed arbitrators are not always neutral), there are some unexpected nuggets.  For example, I found it interesting that 68.5% of construction arbitrators report allowing depositions in “regular” sized cases, and 88.9% of arbitrators report allowing them in large, complex cases.  And 75% of arbitrators allow prehearing subpoenas.  Furthermore “advocates prefer more discovery than arbitrators are allowing in … cases in which claims are below $1 million.”  (p. 59)  Furthermore, the authors say “summary judgment motions in construction arbitrations perhaps have been over-criticized.  If a healthy majority of 63.7% of arbitrators found they were useful half the time or more..it is hard to argue their use should be constrained.” (p. 65)  I also like this one: 44.6% of the arbitrators who responded said that evidentiary objections have no impact on their view of the evidence or their deliberations.  So, stop shouting “Objection: hearsay” in arbitration! Read this article if you: are a construction litigator and want to understand the norms in this industry’s arbitration practice.

Third, “Arbitration in the Americas” reports findings from surveys of arbitration “practitioners” across the Americas.  Amusingly, of the 212 U.S. respondents, 60.45% describe legislators as “having a Low or Very Low understanding of arbitration.”  In keeping with the “Arbitration Nation” study above, “U.S. respondents reported that arbitration in the United States is faster than litigation, with 44.32% describing it as Slightly Faster, and a further 43.24% describing it as Much Faster.” (p. 60)  More surprisingly, “U.S. respondents overwhelmingly described arbitration as on average cheaper than litigation, with 49.19% describing it as Slightly Cheaper and a further 22.70% describing it as Much Cheaper.” (61).  Read this article if you want to compare perceptions of how well arbitration works and is supported in this country with perceptions in other countries.

Fourth, “The Black Hole of Mandatory Arbitration” argues that between 315,000 and 722,000 potential employment arbitrations are “missing in action”.   As the abstract states: “The great bulk of employment disputes that are subject to [mandatory arbitration agreements] simply evaporate before they are ever filed. They are “MIA,” or “missing in arbitration.” That conclusion emerges from a comparison of the tiny number of employment claims that are filed in arbitration with an estimated number of claims one would expect to see given the number of employees who are covered by MAAs and the volume of employment litigation by those who are free to litigate.”  Read this article if you like public policy and are concerned about current SCOTUS jurisprudence.

Fifth, “Running It Twice“, proposes new types of baseball arbitration, in which separate arbitrators (or panels) decide the same dispute to ensure no rogue result.  Read this article if you like shiny new things and sports analogies.

*You didn’t read that wrong; the article’s name is the same as this blog.  I gave them permission.

Happy Thanksgiving all!

Today the Consumer Financial Protection Bureau proposed the rules that it previewed last fall, following up on its Arbitration Study. Those rules would essentially ban class action waivers from consumer financial agreements, as well as requiring arbitral institutions to provide data on consumer financial disputes to the CFPB.  (As an aside, the proposal is 377 pages long. Are all proposed notices of rulemaking so long??  If so, I am very happy not to practice in administrative law.)

There will be lots of analysis of the rules and their potential impact in the coming days, but for now here are the deets on the proposal, with direct quotes from it where appropriate:

What Do the Proposed Rules Say? Two things.

  •  First, financial consumers will be entitled to participate in class actions in court, even if the governing agreements call for arbitration generally:

 “A provider shall not seek to rely in any way on a pre-dispute arbitration agreement . . . with respect to any aspect of a class action that is related to any of the consumer financial products or services covered by § 1040.3 including to seek a stay or dismissal of particular claims or the entire action, unless and until the presiding court has ruled that the case may not proceed as a class action and, if that ruling may be subject to appellate review on an interlocutory basis, the time to seek such review has elapsed or the review has been resolved.”

The arbitration agreement must clarify:

“We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”

  • Second, providers of arbitration services must submit redacted copies of the following documents to the CFPB for its continuing monitoring:

“In connection with any claim filed in arbitration by or against the provider concerning any of the consumer financial products or services covered by § 1040.3;

(A) The initial claim and any counterclaim;

(B) The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;

(C) The judgment or award, if any, issued by the arbitrator or arbitration administrator”

 CFPB’s Authority:  “In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the [Arbitration] Study (hereinafter Study), to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers.”   In particular, the Bureau relies on sections 1022(b) and (c), and 1028(b) of the Dodd-Frank Act.

Why CFPB is Proposing the Rule (in its own words):

“The Bureau preliminarily concludes, consistent with the Study and based on its experience and expertise, that: (1) the evidence is inconclusive on whether individual arbitration conducted during the Study period is superior or inferior to individual litigation in terms of remediating consumer harm; (2) individual dispute resolution is insufficient as the sole mechanism available to consumers to enforce contracts and the laws applicable to consumer financial products and services; (3) class actions provide a more effective means of securing relief for large numbers of consumers affected by common legally questionable practices and for changing companies’ potentially harmful behaviors; (4) arbitration agreements block many class action claims that are filed and discourage the filing of others; and (5) public enforcement does not obviate the need for a private class action mechanism.”

Which entities are affected: “[P]roviders of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money.” This includes entities that provide credit to consumers (banks, credit card issuers), extend auto leases, provide debt relief services, collect debts, provide check cashing services, and provide credit reports.

When would the rule take effect?  “Compliance with this part is required for any pre-dispute arbitration agreement entered into after” 211 days after the final rule is published in the federal register.  (So, affected entities likely have about a year to prepare.)

What Other Agencies are Doing on Arbitration:  CFPB spends three pages of its proposal explaining what other agencies have done, or are doing, to protect consumers in the context of arbitration.  The most recent examples are from the Centers for Medicare and Medicaid Services (in the context of long-term health care facilities) and the Department of Education (in the context of college enrollment agreements).

Deadline for comments: The public has 90 days to comment on this proposed rule.

These proposed rules are a continuation of the battle between the executive and judicial branches of the federal government over arbitration.  If passed, they will undoubtedly lead to a significant increase in consumer financial class actions.  It will be interesting to see if they also affect the willingness of companies to include arbitration agreements at all.

In my last post, I shared some of the highlights from the first half of the new CFPB Arbitration Study.  This post covers the second half of the report, with juicy information gleaned from CFPB’s analysis of almost 2,000 actual consumer arbitrations and its comparison of those results to actual consumer court actions.

Arbitration Outcomes

The AAA gave the CFPB access to information about 1850 total disputes filed with it in 2010, 2011, and 2012 relating to credit cards, checking accounts, payday loans, (GPR) prepaid cards, student loans, and auto loans.  The average claim made by a consumer was $27,000, and the average claim made by the financial institution was $16,011 (debt collection).  The bulk of the claims related to credit cards, with auto loans and students loans following a distant second and third.  Arbitration was usually completed within 5-8 months. Of the disputes resolved by arbitrators, 74% were resolved by an arbitrator who also was appointed on at least one other consumer arbitration in the sample set.

32% of the consumer arbitrations filed in 2010 and 2011 were resolved on the merits.  (The rest either settled or ended in another fashion.)  Of the 158 cases in which the consumer had an affirmative claim, arbitrators provided consumers with relief in 20% of them, with an average award around $5,400.  “When consumers were provided relief on their claims, consumers won an average of 57 cents for every dollar they claimed.”  In contrast, of the 244 affirmative claims by companies that resulted in an award, arbitrators provided the companies relief in 93% of those disputes, with an average award of $12,500 (“companies won 98 cents for every dollar claimed” in the cases where companied were provided relief).  (That could be read as indicating bias.  But, it could also mean that an unpaid debt is inherently easier to prove than a FDCPA (or other consumer) claim.)

If you’ve ever wondered how often the AAA appoints a new arbitrator after receiving a “factual objection” to the arbitrator’s service, the CFPB found that happened in response to 68% of objections in these consumer arbitrations.

With respect to attorneys’ fees, consumers who were represented and took their claims all the way to an award received fees in 14% of those cases, with an average fee award of $8,148.  Companies also received attorneys’ fees in 14% of disputes resolved by the arbitrators, with an average award of $3,387.

Litigation Outcomes

Individual Federal Court Claims 2010-2012

If there were about 2,000 individual consumer arbitrations filed in these six areas in three years, how many individual federal actions were filed?  3,462 — and 2,621 of those related to credit cards.  A whopping 87% of the individual actions asserted FDCPA claims.  And 93% of the individual plaintiffs requested a jury.  The individual federal cases were concluded in an average of 171 days.

Of those individual claims that were resolved within the study period, 48% resolved by settlement, 3.7% were dismissed on a dispositive motion, 6.8% resulted in a judgment in favor of the consumer (another 41% of cases may have settled, but the docket did not clearly indicate).  Most of the cases that the consumer won were by default (78 of 82).  The average amount awarded the consumer was $13,131.  (The CFPB could not calculate the ratio of damages to claim, because unlike arbitration demands, complaints generally have generic statements about their damages like “more than 75,000.”)

Class Actions in State and Federal Court 2010-2012

In addition to the individual cases, CFPB found 470 putative class actions filed in federal court (and another 92 filed in state courts with searchable electronic records — OR, UT, OK, and NY, plus individual counties in IL, TX, FL, and CA).  Juries were requested in 80% of the class actions.  Almost half of those cases related to credit cards.  And the majority of the claims were federal or state statutory claims (FDCPA, TCPA, TILA, Deceptive Trade Practice, etc.)  The median time to close a federal class action was around 215 days (though MDL classes took around 600 days).  Class actions in state court took longer than federal court — about 400 days on average.

Most class cases settled — either by non-class settlement (CFPB estimates 60%) or a class settlement approved by the court (12%).  Another 10% of cases ended when the defendant won a dispositive motion.  Consumers obtained a judgment in their favor in only 1.8% of class cases, usually through default judgment.  No class action in the sample went to trial.

In 94 of those putative class actions, companies moved to compel arbitration, and courts granted the motion half of the time. In the 46 classes that were compelled to arbitration, CFPB was able to identify only 12 that subsequently demanded arbitration, two of which filed as putative classes in arbitration.  Similarly, for the six individual cases that were compelled to arbitration, CFPB found only one that subsequently went to arbitration.

Small Claims Court

In an effort to see if consumers are taking advantage of their arbitration carve-outs allowing claims to proceed in small claims court, CFPB searched for filings in jurisdictions where those records are accessible.  It found that credit card issuers are filing many debt collection matters in small claims court, but very few consumers are filing affirmative claims.  For example, there were 7,905 credit card debt collection cases in Harris County, Texas alone, but 870 small claims court cases filed by consumers across 31 jurisdictions combined.

Class Action Settlements 2008-2012

 To determine the benefit of class litigation, CFPB analyzed consumer financial class action settlements that took place from 2008-2012.  The 419 settlements in that time period involved more than 350 million class members (not necessarily 350M unique people) and resulted in $2.7 billion in total relief.  For the 105 settlements where a determination was possible, the average claims rate was 21% (i.e. the plaintiffs recovered 21% of the dollars they sought).  On average, it took the classes 690 days to get to a settlement.

Which Comes First — Private or Public Action?

The report presents findings about whether public enforcement of consumer protection statutes usually comes before or after similar class actions filed by private citizens.  It found that where there are overlapping actions, “public enforcement activity was preceded by private activity 71% of the time.  In contrast, private class action complaints were preceded by public enforcement activity 36% of the time.”  So, don’t knock the creativity of the plaintiffs’ bar.

Does Arbitration Lead To Cheaper Products?

The final section of the report analyzes whether arbitration agreements in financial products leads to lower prices for consumers.  After acknowledging that it is difficult to test that assertion on a broad level, the report looked at one example to test the cause and effect.  In that example, a number of credit cards agreed to remove their arbitration clauses for three and a half years as a result of a settlement.  The CFPB found no statistically significant evidence that those companies raised their prices more or differently from comparable companies with no change in ADR.

What Have We Learned?

My brain is a little fried from all the numbers and graphs and words, but here are some initial reactions from the information in the report:

  • Individual consumer actions settle more often in court than in arbitration.  Put differently, more cases get heard on the merits in arbitration.  (32% of cases are resolved on merits in arbitration, compared to about 10% in court.);
  • Arbitrators are repeat players, just like financial institutions, and plaintiffs’ lawyers;
  • Arbitration is not necessarily faster than litigation (comparing individual arbitrations to individual federal litigation);
  • Parties who don’t show up will lose — both in arbitration and in court (the volume of defaults surprised me);
  • Courts grant more damages to consumers than arbitrators do;
  • A large percent of plaintiffs will not bother prosecuting their claims if they have to go to arbitration (instead of remaining in court); and
  • Eliminating class actions can be a huge financial benefit to the financial institutions.  Whether you think that is also a benefit to the economy overall or not likely depends on your politics.

Watch this space for news on what the CFPB recommends going forward.

 

The Consumer Financial Protection Bureau released an “Arbitration Study” exceeding 700 pages to Congress this week.  You have likely heard the headlines – most commentators assume that the CFPB will use the study to support an effort to restrict or regulate the use of “pre-dispute” arbitration in financial transactions.  But, let’s not get ahead of ourselves.  The study itself is worth digging into; the CFPB was able to access lots of information that us regular folks cannot.  Indeed, one complaint about arbitration is that it happens inside a black box, out of reach of statistical analysis or scholarly study, and precluding development of legal precedent. Here’s part one of my peek inside that black box, courtesy of the CFPB.

What the Cool Kids Are Putting in Their Arbitration Clauses

About a year ago, CFPB published its findings on the frequency of arbitration agreements in financial agreements.  This report does not add much in that area.  But, it has new information on the features of arbitration clauses that are prevalent in contracts in the industries studied (credit cards, checking accounts, general purpose reloadable prepaid accounts, private student loans, payday loans, and mobile wireless third-party billing).

  • Would you guess that 50% of payday loan agreements and 83% of private student loan agreements allowed their customers to opt out of arbitration? I was surprised. More than a quarter of credit cards and checking account agreements did also.
  • A majority of all types of financial agreements carved out small claims from their arbitration agreements.
  • The AAA is king. It is listed as either the sole provider or an arbitral option in about 9 out of 10 financial agreements (other than student loans). By comparison, JAMS is an option for about half of the agreements (but only 14% of mobile).
  • Roughly 9 of 10 arbitration clauses in these industries preclude class actions in arbitration. Most also stated that if the class waiver is unenforceable, the entire arbitration clause is unenforceable as well. (CFPB calls it the “anti-severability provision.”)
  • What are financial institutions not putting in the agreement? They are not shortening statutes of limitations often, they are not limiting damages very often, they are not authorizing the arbitrator to award attorneys’ fees to the prevailing party often, and they are generally not addressing confidentiality.

What the Public Understands About those Arbitration Clauses

The CFPB surveyed 1007 people about their dispute rights with respect to their credit cards, and found they know *nothing.*  And this should surprise no one.  (I am not pointing fingers.  If you asked me whether I could sue one of my credit card issuers in court, I would not know either.)  The study explains partly why that is: dispute resolution clauses do not factor into a consumer’s choice of credit card.  When all 1007 people were asked what features they considered in acquiring their credit cards, literally no one mentioned the ADR clause.

The 1007 people were asked what credit cards they had, and whether they could sue the company if there was a dispute.  The people who thought they could sue their credit card issuer in court were wrong 80% of the time.

The most surprising thing about the survey results to me were just how passive people are about disputes.  When confronted with a hypothetical example of a credit card refusing to correct a billing mistake, most people would cancel their cards and take no further action. Only 2% of people would consider going to court or talking to an attorney.

In the next post (part two), I will highlight statistics and findings from the CFPB’s comparison of how consumer disputes are resolved in arbitration and how they are resolved in court.

A new article is out with more detail about how opinions among counsel for Fortune 1000 companies have changed over the last 15 years with respect to arbitration and mediation.  (I posted initial info here last spring.)

By comparing results of a 1997 survey of Fortune 1,000 corporate counsel with results of a 2011 survey of Fortune 1,000 corporate counsel, Professors Thomas Stipanowich and J. Ryan Lamare conclude that “[b]inding arbitration … reached its tipping point: while some longstanding concerns about arbitration processes have lessened, fewer major companies are relying on arbitration to resolve many kinds of disputes … and are evenly divided regarding its future use.”

In particular, the number of companies using arbitration to resolve disputes in the following areas dropped over that 15 year period: commercial, employment, environmental, intellectual property, personal injury, real estate and construction.  In some areas, the drop was significant.  In 1997, for example, 85% of companies had arbitrated a commercial or contract dispute in the past three years.  In 2011, that figure dropped to 62%.  In 1997, 62% of companies had recently arbitrated an employment dispute, and in 2011 that figure was about 39%.

The authors note that “the statistics meaningfully signal very different trends in mediation and arbitration.  Mediation usage is expanding and arbitration usage contracting in most conflict settings.  Key exceptions to the downward trend for arbitration are consumer disputes and products liability cases, which probably reflect expanded use of binding arbitration agreements in standardized contracts for consumer goods and services.”

Even if the companies had not recently used arbitration, would they use it in the future?  In 1997, 71% of counsel thought their company was likely or very likely to use arbitration in the future.  By 2011, only about 50% of counsel saw arbitration of corporate disputes in their future.

Why are corporate counsel less enamored with arbitration?  Data from the 2011 survey suggests that “leading concerns included: the difficulty of appeal, the concern that arbitrators may not follow the law, the perception that arbitrators tend to compromise, lack of confidence in neutrals, and, increasingly, high costs.”

Just a few months after its first Director took office in January of 2012, the Consumer Financial Protection Bureau is embarking on a study of arbitration.  The CFPB announced on April 24 that it invites the public to send information about “how consumers and financial services companies are affected by arbitration and arbitration clauses,” so that it can eventually determine whether to flex its rule-making muscle.

This request for information does not signal any particular bias of the new Director, Richard Cordray.  Instead, it shows the new agency is fulfilling its mandate under the Dodd-Frank Act to study the use of pre-dispute arbitration agreements in the consumer financial arena.

The agency, however, is starting its study with the speed of a tortoise and in the style of a professor wearing tortoise shell glasses.   Instead of diving right in, the CFPB is holding off its real study while it decides how to choose the questions.  For example, it is seeking information about 1) how to assess how prevalent pre-dispute arbitration agreements are in consumer financial agreements; 2) what data it should seek from what sources; and 3) whether it should find out whether consumers who arbitrated disputes against financial services companies were satisfied with the process.  (Let me publicly answer that last question: Yes!  Of course!  Please ask both consumers and companies whether they were satisfied with the process.)

While I am excited about the prospect of this new agency investigating and publicizing important data about consumer arbitrations that is currently inaccessible, the CFPB’s current list of questions makes me wonder whether it is up to the task.