An Overseas Look at Binding Arbitration Clauses

Bruce Wardhaugh of the School of Law–Queen's University Belfast haas written Unveiling Fairness for the Consumer:  The Law, Economics and Justice of Expanded Arbitration, forthcoming in the Loyola Consumer Law Review. Here is the abstract:

In recent years, the US Supreme Court has rather controversially extended the ambit of the Federal Arbitration Act to extend arbitration’s reach into, inter alia, consumer matters, with the consequence that consumers are often (and unbeknownst to them) denied remedies which would otherwise be available.  Such denied remedies include recourse to class action proceedings, effective denial of punitive damages, access to discovery and the ability to resolve the matter in a convenient forum.

The court’s extension of arbitration’s ambit is controversial.  Attempts to overturn this extension have been made in Congress, but to no avail.  In contrast to American law, European consumer law looks at pre-dispute agreements to arbitrate directed at consumers with extreme suspicion, and does so on the grounds of fairness.  In contrast, some argue that pre-dispute agreements in consumer (and employment) matters are consumer welfare enhancing:  they decrease the costs of doing business, which is then passed on to the consumer.  This Article examines these latter claims from both an economic and normative perspective.

The economic analysis of these arguments shows that their assumptions do not hold.  Rather than being productive of consumer surplus, the use of arbitration is likely to have the opposite effect.  The industries from which the recent Supreme Court cases originated not only do not exhibit the industrial structure assumed by the proponents of expanded arbitration, but are also industries which exhibit features that facilitate consumer welfare reducing collusion.

The normative analysis addresses the fairness concerns.  It is explicitly based upon John Rawls’ notion of “justice as fairness,” which can provide a lens to evaluate social institutions.  This Rawlsian analysis considers the use of extended arbitration in consumer matters in the light of the earlier economic results.  It suggests that the asymmetries present in the contractual allocation of rights serve as prima facie evidence that such arbitration-induced exclusions are prima facie unjust/unfair.  However, as asymmetry is only a prima facie test, a generalized criticism of the arbitration exclusions (of the sort found in Congress and underlying the European regime) is overbroad.