Recently, the blog posted two items (here and here) arguing that the Consumer Financial Protection Bureau should issue a rule barring the use of arbitration clauses unless consumers opt in to them. The second item was in reply to Mark Levin's blog post at Ballard Spahr's Consumer Finance Monitor blog response to our first blog post. Mark Budnitz, Georgia State Professor of Law Emeritus, has contributed the following guest post to the debate:
Opt-in is the only fair method of obtaining a consumer’s consent in pre-dispute arbitration agreements: It is impossible for consumers to make a knowing and intelligent pre-dispute waiver of their right to a judicial forum except in rare circumstances. That rare situation is where the consumer knows for a certainty what type or types of disputes they may have with the company, and there is no way arbitration is not the superior route to take.
Otherwise, the consumer cannot know, pre-dispute, which forum is better.
Discovery is one example. Does the dispute depend on documents within the sole possession of the company? If so, the limited discovery in arbitration should be avoided. Would it help the consumer prove their case to be able to make motions to produce documents, submit interrogatories, take depositions? There’s no way to know pre-dispute.
Will the company be suing the consumer, or will the consumer be suing the company? Will both have claims against the other? If the consumer may be the plaintiff or have a counterclaim, does the consumer have a sound legal argument for punitive damages? Does the arbitrator have the authority under the arbitration service rules or case law to award them? There’s no way to know pre-dispute if punitives are even an issue.
Does the consumer need a lawyer? She may not be able to retain one unless she has a claim against the company and can get into court and file a class action. Most consumer disputes do not involve enough money for it to be worthwhile for consumers to hire a lawyer whether they are the plaintiff or the defendant.
Pre-dispute, it is impossible for the consumer to know if she will have a dispute that can be brought and awarded satisfactory damages in small claims court. I know that some companies give consumers the option of arbitration or filing in small claims court. But if the consumer has a claim for substantial damages, she will not be able to recover what she is entitled to in small claims court. In addition, it is reasonable to assume many agreements do not provide that choice.
Which route will be less expensive for the consumer? Does the agreement require a panel of three arbitrators, all of which charge by the hour with the costs split between the parties? The answer is in the rules that govern arbitration under the agreement. Often the agreement merely provides a link to the arbitration service or services and depends on the consumer to read the rules of the services. How likely is it that consumers will do that before a dispute arises; if they do, how likely is it they will understand the full significance of the provisions?
Arguably AAA and JAMS are reputable and fair within the constraints of their rules. However, in doing research for an article years ago, I found arbitration agreements specifying that AAA’s Commercial Rules would apply, not its Consumer Rules. Some agreements just provided that AAA’s rules apply and did not specify which rules.
We should not forget that there are other arbitration services besides AAA and JAMS, and they may be of questionable legitimacy. Remember NAF? They were the darling of industry and often the sole arbitration service allowed under arbitration agreements. NAF was so corrupt that they completely shut down their consumer arbitrations within a week of being sued by the Minnesota A.G. for its illegal operations. Swanson v. Nat’l Arbitration Forum, (Minn. Dist. Ct., July 14, 2009). I don’t know what the situation is now, but for many years in Georgia the builders of all new homes required consent to pre-dispute consumer arbitration agreements. The arbitrations were administered by a service that was controlled by the builders, and in which consumers rarely won.
And of course, the arbitration services are not subject to any specific regulations governing their rules and can change their rules and procedures at any time without first obtaining approval from any government body.
Arbitration is private. After a dispute arises, the consumer may want the dispute to be public; she may want a public airing of her grievances in court. She may hope that, even if she loses her case, other consumers will learn of her dispute and take action if they have similar experiences. With today’s social media and some disputes going viral, consumers have more opportunities to make their grievances public. A company’s reputation is often its most precious asset. Pre-dispute, the consumer has no way to know if she may have a dispute that she wants to make public.
A favorable arbitration award has no precedential effect. A consumer may believe, after a dispute arises and consulting with her lawyer, that she has a strong case that would make an important precedent benefiting thousands of consumers if it were adjudicated in court.
Levin argues that agreeing post-dispute “would severely curtail consumer arbitration [because]…one side or the other, or both inevitably use the in terrorem ‘threat’ of expensive and prolonged litigation as a negotiating tool.” Levin assumes consumers can obtain legal representation. Consumers cannot make this threat persuasively if they don’t have a lawyer, but most don’t because unless the dispute involves a substantial amount of money, hiring a lawyer does not make financial sense.
It is interesting and revealing that Levin admits companies engage in this threat. Unlike consumers, when a company makes the threat, it really has an in terrorem effect because the company has a lawyer so the threat can be carried out. And the company has the resources to make the threat a realistic possibility, unlike most consumers.
Many years ago when I used to debate with industry lawyers at PLI and ABA conferences, they would argue that arbitration was much better for consumers than going to court because of supposedly lower cost, quicker resolution, etc. I countered that if it’s so wonderful, companies could easily convince consumers, post-dispute, to agree to arbitration. Whereupon the industry lawyers would immediately acknowledge that consumers would always choose court over arbitration if given the choice post-dispute.
For all of these reasons and probably many more, there’s no way for consumers to intelligently and knowledgeably decide, pre-dispute, if they should agree to arbitration. Therefore, opt-in is the only fair method to provide consumers in pre-dispute agreements.
