by Jeff Sovern
Earlier this week, Senator Elizabeth Warren issued a press release about the responses she had received from Bank CEOs to her questions about the CFPB's arbitration rule, Responses from Bank CEOs Demonstrate Positive Impact of CFPB Arbitration Rule, Undermine Industry Case for Reversal. The press release contains a lot of interesting information, but this post is about just a few sentences and the response it elicited. First, the sentences:
[C]onsumers rarely pursue individual arbitration. Of the tens of millions of consumers covered by mandatory arbitration agreements, consumers filed an average of only 616 arbitration cases a year. In contrast, over the five-year period studied by the CFPB, 34 million consumers were eligible to receive more than $1 billion in cash payments from class actions.
Alan Kaplinsky and Mark Levin, of the Ballard Spahr firm, responded with a blog post, Senator Warren’s Numbers Don’t Add Up, which also included interesting information. But here's the paragraph I found most intriguing:
Senator Warren’s press release states that “consumers rarely pursue individual arbitration.” But that is because most consumers resolve disputes through the use of companies’ informal dispute resolution procedures and also through on-line complaint portals provided by federal and state agencies including the CFPB itself. Moreover, although the CFPB has a Consumer Education and Engagement division and virtually unlimited resources, it did not spend a single dollar trying to educate consumers about arbitration.
I interpret that as agreement with the statement in the press release about the infrequency of consumers bringing arbitration actions because Messrs. Kaplinsky and Levin have not exactly been shy elsewhere in their blog post about disagreeing with Senator Warren. And it would be hard to disagree with the Senator's statement in light of the fact that the CFPB, the New York Times, and the Horton\Chandrasekher studies all found exactly the same thing. But what about the Kaplinsky/Levin explanation? Is it true that informal dispute resolution has obviated consumer arbitration? If so, why wouldn't that also be true for consumer class actions? A more plausible explanation is that consumers simply don't bother filing arbitration claims or even complaining to customer service over small amounts. Empirical literature shows just that. See, e.g., Arthur Best & Alan R. Andreasen, Consumer Response to Unsatisfactory Purchases: A Survey of Perceiving Defects, Voicing Complaints, and Obtaining Redress, 11 LAv & Soc'Y REV. 701, (1977). In truth, that problem also bedevils class action claims because many consumers likewise don't file claims forms in the class action context when small amounts are at issue. But that problem goes away when damages are automatically deposited into consumer accounts. In addition, class actions also deter misconduct in a way that arbitration claims don't. In any event, I identified ten problems with the idea that customer service eliminates the need for class actions in a recent article. For a further example, there is no publicly available evidence indicating that consumers injured by Wells Fargo's unauthorized account scandal obtained redress until the regulators reached a consent decree with Wells and the class action settlement was agreed to (it still has not been finalized). If informal dispute resolution was such an effective way of dealing with that problem, why haven't we heard about it? Wouldn't Wells, which has suffered a huge black eye because of that scandal, have wanted to publicize it?
As for the claim about education, I am not aware of any evidence that consumers can be usefully educated about arbitration. Teaching people that they can make claims if they want to doesn't change their behavior if they conclude that their winnings won't be worth the effort it takes to get them.
Finally, I notice that Messrs. Kaplinsky and Levin have not come forward with statistics showing how many consumers who are included in their clients' class action settlements complained to their clients' informal dispute resolvers, and how many never complained. If informal dispute resolution were a satisfactory alternative to class actions, wouldn't class members already have obtained what they were entitled to that way? And wouldn't the overlap between class action claimants and consumers who used the informal dispute resolution mechanisms be an effective way to show that the class action didn't add value? Sometimes, silence speaks loudly.