A Reply to the CFPB Monitor Comments on the St. John’s Arbitration Study

by Jeff Sovern

I am pleased to report that Ballard Spahr’s Alan Kaplinsky and Mark Levin have commented on our arbitration study  at their very informative and useful blog, CFPB Monitor  (We’re still in the stage of soliciting comments and hoping to receive useful feedback which we can use to improve the draft, so if others have comments, please let me know). In this post, I want to respond to four of the Monitor’s claims.

1. The Monitor states:

[G]iven the great care that most drafters make to ensure that the arbitration clause is understandable and clearly and conspicuously disclosed, the arbitration clause is likely one of the most comprehensible parts of a modern-day financial contract.

Well, no.  The Consumer Financial Protection Bureau Study  found that the mean Flesch-Kincaid grade level for credit card arbitration clauses was 14.2 and the median grade level was 14.7. It also reported that the mean Flesch-Kincaid grade level for the non-arbitration term portions of credit card contracts with arbitration clauses was 10.8 with a median of 11. In other words, you need about three and a half more years of education to understand arbitration clauses than to understand the non-arbitration clause part of the same contracts. 

But let’s assume that the Monitor claim is true.   (I want to be clear that I have no trouble believing the statement that most drafters take great care to ensure arbitration clauses are understandable.  Probably the poor reading scores are the result of the difficulty of writing understandable arbitration clauses.)  The arbitration clause we used was conspicuous.  It was referred to in bold on the contract’s second page, and appeared in bold on the sixth and seventh pages, meaning that it was referred to on three of the seven contract pages in bold, with some parts in italics and ALLCAPS.  The contract’s second page even directed consumers to read the arbitration clause carefully.  In addition, it was slightly more readable than the average arbitration clause, and was shorter, meaning that it would have taken less time to read it.  With all that, respondents still couldn’t understand it.  So we are still left with the question: should contracts that consumers can’t understand strip them of constitutional and other key rights?  I address that issue below.

2. The Monitor evidently believes we should have focused on those who have experience with arbitration.  Thus, it says:

Tellingly, the final question out of the 40 questions in the survey (coming after stock demographic questions about age, annual income and ethnicity) is the question that should have been first: “Have you ever been a party to or otherwise involved in an arbitration?” . . . . The ultimate irony here is that even if some consumers in the St. John’s study who never participated in a consumer arbitration may purport to be confused when they are asked hypothetical questions about what arbitration is and what effect it has, consumers who have actually participated in arbitration appear to have very definite opinions about what arbitration is and what it does.  

 While the studies the Monitor cites support that claim, we didn’t see any evidence of it.  In fairness, we didn’t ask about respondents’ opinions about the relative merits of arbitration and litigation or whether respondents liked arbitration. But we did ask eight questions about the effect of arbitration clauses, and a t-test did not show a statistically significant difference (at the .05 level) in the average percentage of correct answers between the 57 respondents who said they had been involved in an arbitration and the 590 respondents who said they had not been. Put another way, the respondents with experience with arbitration didn’t understand arbitration clauses any better than those without such experience. Interestingly, the respondents with arbitration experience were more likely to say that they looked to see if contracts included an arbitration clause than other respondents—but apparently their increased attentiveness still did not affect whether they understood arbitration clauses.

3. The Monitor post says:

[I]t is misguided to focus narrowly on whether the consumer has “consented” to the arbitration clause alone.  Had the individuals who claim they were confused about the arbitration clause been quizzed about how the credit card’s daily interest rate is computed, what the parties’ respective rights are in the event of default, what their billing rights are or what information was contained in the Schumer box, they probably would have expressed the same confusion.

We didn’t ask questions about those specific disclosures and so we aren’t able to compare the results.  Still, the fact that when we asked respondents to identify five items from the contract that they remembered, the average respondent mentioned nearly three items, and only about 3% of the respondents referred to either arbitration or something in the arbitration clause, suggests that arbitration is far less salient than many other terms in the contract.  Thus, it’s plausible that consumers do indeed understand some terms better than arbitration.  But assuming that the results for the different terms would have been similar, those other clauses don’t strip consumers of constitutional rights like the right to a jury trial or to a day in court.  Even assuming that consumers should be able to agree to contracts they don’t understand, constitutional rights are so important that consumers should not be able to waive them without even understanding that they are doing so.  Our study indicates that consumers are surrendering those rights without even knowing it.

 4. The Monitor post also claims that consumers are better off having disputes resolved in arbitration than under class actions.  As the Monitor notes, our study didn’t attempt to resolve that question, and I won’t attempt to do so here, though plenty of others disagree with the Monitor’s position. Rather, in my opinion, the Monitor’s argument simply misses the mark because our study suggests that predispute arbitration clauses lack legitimacy. The default mechanism in our dispute resolution system is the court.  Courts get their legitimacy from constitutions. But arbitration gets its legitimacy from consent. If consumers give a knowing consent, then arbitration is completely legitimate. But our study suggests that they don’t.  Indeed, our study indicates that many consumers believe they retain their constitutional right to go to court even when they agree to arbitration clauses.  If consumers have not given an informed consent to arbitration, there is no point in discussing whether arbitration may be better than litigation, because arbitration cannot be imposed on people without consent.

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