Arbitration: Our Position

September 15, 2017

Preserve Arbitration: A Cost-Effective Alternative to Litigation

 

How do consumers resolve disputes?

Overwhelmingly, disputes between consumers and companies are resolved through informal channels and do not elevate to formal proceedings. Companies have strong incentives to maintain deep, well-informed, mutually satisfactory relationships with customers. Disputes rise to the level of a formal action in court or arbitration only a fraction of the time.

 

What is arbitration?

Arbitration occurs when two parties in a dispute select an unbiased third person(s) or “arbitrator(s)” to hear both sides and issue a decision. Since the Federal Arbitration Act1 passed in 1925, federal law has protected—and the Supreme Court2 has confirmed—the benefits of arbitration as a faster and (on average) higher recovery alternative to class action litigation for consumers. Pre-dispute arbitration occurs when consumers and companies agree in advance to resolve a dispute through arbitration.

 

The American Arbitration Association (AAA) limits arbitration fees for consumers, and companies often cover the cost of the total bill. Today, arbitration provisions can be found in a wide variety of consumer agreements, including those for credit cards, checking accounts, cell phones, cable television, internet access, and even gym memberships.

 

What is going on?

  • Dodd-Frank Act § 1028 mandated the CFPB conduct a study on arbitration and authorized the Bureau to write a rule to restrict or even prohibit the use of arbitration if it is “in the public interest and for the protection of consumers” and consistent with the results of the study.
  • March 15, 2015 | The CFPB released its study, which was highly critical of arbitration and unabashed in its preference for class actions lawsuits. After further review of the study, however, many of the Bureau’s findings are inconclusive due to a small sample size and improper comparisons between arbitration and litigation.
  • May 5, 2016 | The CFPB announced a proposed rule that will restrict the use of pre-dispute arbitration by banning the use of class action waivers.
  • July 10, 2017 | The CFPB announced a final rule to ban the use of class action waivers, effective 60 days from publication in the Federal Register. Compliance is required 181 days thereafter on all new contracts.

 

 

So… Who Really Benefits from Class Actions?

According to the CFPB’s own study, class action attorneys raked in a whopping $424,945,451 during the period studied.

 

 

Arbitration: Myth v. Fact

 

 

Arbitration is a procedure wherein two parties involved in a dispute select an unbiased third person(s) or “arbitrator(s)” to hear both sides and issue a decision. Since the Federal Arbitration Act was passed in 1925, federal law has protected—and the Supreme Court has confirmed—the benefits of arbitration as a faster and (on average) higher recovery alternative to class action litigation for consumers. On July 10, 2017, the CFPB announced a final rule restricting the use of arbitration agreements in contracts for financial products and services.

 

 

Myth: Class action lawsuits outperform arbitration in providing consumer relief.

 

 

Fact: According to the CFPB’s study,1 a consumer recovers on average $5,389 when using arbitration. In contrast, when participating in a class action suit, a consumer recovers $32.352. One reason for this disparity is the fee class action attorneys take from their clients’ cash recoveries. The CFPB’s study noted attorneys take on average 21 percent of the cash award, though some take as much as 63 percent. Arbitration also is a significantly quicker process, typically taking months while class actions can take years.

 

 

Myth: Arbitration deprives consumers of their “day in court” and prevents them from attaining justice.

 

 

Fact: Overwhelmingly, disputes between consumers and companies are resolved through internal channels and do not elevate to formal proceedings. Only a fraction of the time does a dispute rise to the level of a formal action. When it does, arbitration is a cost-effective alternative to litigation. For many consumers, pursuing litigation is complicated, time-consuming and requires a lawyer to navigate the process. In addition, many claims may be too small to attract contingency fee lawyers. As Supreme Court Justice Breyer has said, without arbitration, “the typical consumer who has only a small damage claim (who seeks, say, the value of only a defective refrigerator or television set) [would be left] without any remedy but a court remedy, the costs and delays of which could eat up the value of an eventual small recovery.”

 

 

Myth: Class actions are the only way for customers to fight back against big business.

 

 

Fact: Keeping customers happy is a vital component of running any business. This is why companies have robust complaint management procedures to ensure they are resolving disputes as quickly as possible. Moreover, the CFPB, Department of Justice, prudential regulators, and state Attorneys General have enforcement and supervisory authority over financial institutions to identify and discipline bad actors and practices. Finally, courts still maintain the authority to invalidate arbitration terms or agreements they deem unfair or unreasonable.

 

 

Myth: The CFPB’s rule is based on a comprehensive analysis of the consumer benefits of class actions versus arbitration.

 

 

Fact: Although the Bureau’s study on arbitration is the most extensive one conducted to date, it is incomplete and should not be used as a basis for restricting arbitration. The study did not consider the vast majority of disputes settled through internal company processes. Moreover, it unfairly compared arbitration awards to class action settlements, which biases results in favor of class actions. Further, the rule promotes the use of class actions, despite the Bureau’s study showing 60 percent of class action suits produced no benefits for those qualifying as class members.

 

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