by Jeff Sovern
Earlier this week, the Senate Banking Committee held a hearing on consumer arbitration clauses. The consumer side was ably represented by Paul Bland, Myriam Gilles, and Remington Gregg. I want to say something about the arguments put forth at the hearing by Senator Toomey and Professor Todd Zywicki. Professor Toomey argued that regulation of arbitration would undermine freedom of contract. And Professor Zywicki testified that “Available evidence suggests that the presence of arbitration clauses in consumer finance contracts is consistent with the operation of a competitive market with consumer choice.”
But here’s the thing: consumers don’t understand arbitration clauses. I don’t see how it can be said that consumers have freedom of contract and free choice when they don’t understand the meaning of the terms they are supposedly agreeing to. We know consumers don’t understand arbitration clauses because two studies have found that they don’t. I co-authored one. We found, among other things, that when we showed consumers a credit card contract with an arbitration clause, less than 9% of consumers understood both that the contract contained an arbitration clause and that it barred them from going to court. We also learned that at least 87% of the consumers who thought they had never agreed to an arbitration clause had in fact done so. The CFPB study also found that consumers did not understand arbitration clauses. In fact, I am not aware of any study that has found that consumers understand arbitration clauses.
In other words, arbitration clauses are about as meaningful to consumers as they would be if they were printed in a language the consumers don’t speak. Or not printed in the contract at all. That’s not freedom of choice. Freedom of choice requires that you understand enough to choose among alternatives. And as for freedom of contract, what we have is a system in which businesses have the freedom to impose on consumers contract terns they don’t understand. Businesses have freedom of contract, but consumers don’t.
Ironically, if we want to preserve freedom of choice, we should allow parties to choose whether they want to go to court or arbitration after the dispute has arisen. At that point, consumers would be more likely to consult an attorney who would help them make the choice that is in their best interests, just as businesses consult attorneys to advise them whether to insert arbitration clauses in contracts. But with forced arbitration clauses, freedom of contract and free choice are no more than a myth.