Three Articles on Arbitration and Class Actions

Sarah Rudolph Cole has written The Federalization of Consumer Arbitration: Possible Solutions, University of Chicago Legal Forum No. 271. Here's the abstract:

Over the past fifteen to twenty years, businesses dramatically increased the use of arbitration clauses in contracts with consumers. Although commentators criticize the use of arbitration to resolve consumer disputes because arbitration lacks the due process protections inherent in traditional litigation, efforts to regulate or eliminate the use of arbitration in this context have failed miserably. This failure to due in large part to the Supreme Court’s embrace of arbitration and the corresponding lack of federal legislative interest in addressing this issue. The Supreme Court’s arbitration jurisprudence, particularly as it applies to consumer disputes, is the surest example of the “federalization” of an area of law that federalism principles dictate traditionally belong to the states. Interpreting the Federal Arbitration Act (FAA), the Court routinely applies a preemption doctrine that effectively precludes states from regulating the use of arbitration to resolve consumer disputes. As a result, enforcement of state laws regulating the use of arbitration to resolve consumer disputes has become the exception rather than the rule.

This Article will focus on the Supreme Court jurisprudence that led to the current situation in which state law plays a minimal role in arbitration doctrine. While state legislatures traditionally regulate contract law issues, the Supreme Court’s interpretation of the FAA has resulted in an anomalous situation in which federal law routinely trumps state laws attempting to reform arbitration. The Article will also explain how the Court’s Stolt-Nielsen (2010) and Concepcion (2011) decisions took the anti-federalism approach a step further – by permitting preemption in areas the FAA does not address. This expansion of the preemption doctrine further undermines the states’ ability to substantively regulate arbitration by defining arbitration in a very specific way and then declaring preempted any regulation or decision that is not consistent with the definition. Moreover, this expansion, together with Congress’ lack of interest in regulating arbitration, makes it quite likely that private dispute resolution providers will be the only institutions able to reform the arbitration process. Recognizing that arbitration law is largely federalized, this Article will then identify a number of possible reforms private dispute resolution providers could implement and review one of the more promising avenues of reform – arbitrator opinion-writing – in greater depth. This reform would have a number of beneficial effects. It would provide transparency in the arbitration process, address problems perceived to exist in the arbitrator selection process, make clear whether the parties received due process during the arbitration, and ensure that awards are carefully considered and evidence properly balanced.

Christopher R. Leslie of Irvine has written The Arbitration Bootstrap 94 Texas Law Review (2015). Here's that abstract:

Arbitration clauses in contracts require consumers to waive their rights to bring litigation in court. The clauses are often unavoidable because firms include arbitration clauses in contracts of adhesion. In recent years, firms have begun to load their arbitration clauses with unconscionable terms unrelated to arbitration itself. For example, firms insert terms that shorten statutes of limitations, reduce damages, or prohibit injunctive relief. These contract terms are considered unconscionable – and, thus, unenforceable – in many states. However, the Supreme Court has interpreted the Federal Arbitration Act (the FAA) to require judicial deference to arbitration clauses. Consequently, many courts allow firms to bootstrap unenforceable contract terms into an enforceable arbitration clause in order to make those unconscionable contract terms enforceable.

The Supreme Court has invoked the legislative intent of the 1925 Congress in order to assert that the FAA applies to consumer contracts. Courts have further suggested that Congress intended arbitration clauses to be enforced as written and that this requires deference to anti-consumer terms that would otherwise be found unconscionable under state law. Finally, the Supreme Court has asserted that the FAA preempts all state efforts to police arbitration clauses, including basic notification requirements.

This Article examines the actual legislative history of the FAA and explains that Congress never intended the FAA to apply to consumer contracts. Congress was exclusively concerned with the enforceability of arbitration agreements between sophisticated businesses in commercial disputes. Congress never considered the possibility that retailers would impose mandatory arbitration clauses on their customers, let alone that these arbitration clauses would be structured to limit damages, to truncate statutes of limitation, or to otherwise remove procedural protections from consumers. The congressional intent that courts should enforce anti-consumer terms in arbitration clauses is an imagined one.

The Article concludes that courts should stop asserting that the FAA mandates enforcement of unconscionable terms so long as they reside in an arbitration clause. When confronting unconscionable terms in arbitration clauses, courts can take one of three actions: enforce the unconscionable terms; sever the unconscionable terms; or strike the arbitration clause as a whole because it is so overrun by unconscionable terms. The Article explains why only the latter two options are consistent with Congressional intent and good public policy.

Meanwhile, Jason Scott Johnston of Virginia weighs in with High Cost, Little Compensation, No Harm to Deter: New Evidence on Class Actions Under Federal Consumer Protection Statutes.  Here's his abstract:

Working from a sample of all consumer class actions filed in the Northern District of Illinois over the period 2010-2012 (totaling 510), this paper reports and analyzes data on class actions under four federal consumer protection statutes, the Electronic Funds Transfer Act (EFTA) the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA), and the Telephone Consumer Protection Act (TCPA). Even coding all TCPA cases as alleging actual harm to the named plaintiff, over half the cases in the sample analyzed here seek statutory damages without an allegation of harm to the plaintiff. For most case types, only 15 percent or less of the class receive compensation, and the aggregate compensation paid to the class is far less than the stated or nominal class settlement fund amount. Because courts award attorney fees based on the nominal settlement amount, attorney fees are a very large fraction of the amount paid to the class and for some case types attorney fees average 300-400 percent of the amount paid to the class. The findings of this article have the following implications for class actions under federal consumer protection statutes: i) due to statutory damage provisions, there are no “small dollar” filings under such statutes; ii) such cases are never tried, rarely generate binding legal precedent and may well be individually viable; iii) with low class compensation rates and attorney fees to class counsel that often dwarf total class compensation, such class actions are both highly ineffective and inefficient; iv) statutory damages provisions with no requirement to even plead harm incentivize class counsel to pursue claims where there is no harm to compensate or deter, and even cases with allegations of harm (as under the TCPA) may actually involve no harm as courts have created a presumption of harm (as in presuming the lack of consent under the TCPA).

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