Business Groups Sue Today to Block CFPB Arbitration/Class-Action Rule

Business groups today sued the Consumer Finance Protection Bureau (CFPB) in federal court seeking an injunction against the CFPB’s Arbitration Rule, which would nullify arbitration agreement prohibitions of class actions.

Unless blocked, the Arbitration Rule mandates compliance for pre-dispute arbitration agreements entered into on or after March 19, 2018. 

Hat Tip to Mark Kantor and Chris Drahozal.

NY Times Criticizes Confidentiality of Employment Arbitration

Today's New York Times refers to "the murky world of corporate arbitration, in which serious charges of misconduct are often settled behind closed doors." The case accuses parent of Kay Jewelers "of discriminating against women by denying them equal pay and promotional opportunities. The accusations of sexual harassment are included in statements employees made about pay and promotion disparities, and the accusers have sought to link the accusations to their wages."

University of Kansas Law Professor and arbitration expert Chris Drahozal gave me permission to add his point that "the arbitration rules in the Kay Jewelers arbitration agreement (National Arbitration and Mediation) are unusual in the U.S. In imposing a confidentiality obligation on the parties. By comparison, the AAA and JAMS rules impose a confidentiality obligation only on the arbitrator and the administrator. Under the AAA and JAMS rules, either party remains free to release any information about the arbitration (in the absence of a confidentiality order by the arbitrators) without consent of the other party."

American Arbitration Association Consumer Arbitration

More good work by my University of Kansas School of Law faculty colleague, Christopher R. Drahozal.  Professor Drahozal is serving as a Special Advisor to the Consumer Financial Protection Bureau on its study of arbitration clauses in consumer financial services contracts.

His abstract:

This chapter has provided an overview of consumer arbitrations administered by the American Arbitration Association, the largest administrator of consumer arbitrations. It does not, of course, purport to resolve the ongoing debate over arbitration and access to justice. A consumer’s incentive to bring a claim (and an attorneys’ incentive to take a case) depend on the costs of the process and the expected outcome in the forum. With the recent amendments to its consumer arbitration rules, the AAA reduced the cost to consumers of bringing claims in arbitration, both by lowering the upfront fees and by largely precluding reallocation of fees to consumers in the award. The expected outcome in arbitration (in particular, relative to the expected outcome in court) presents a much more difficult question because limits to available data preclude comparison of similarly-situated complainants. More research remains to be done.

Part of what I like about this chapter’s review of empirical studies is that it points out when selection effects make it hard to draw conclusions from the data.

NY Times Criticizes Class Waivers in Arbitration Agreements

Class Actions v. Payday Lenders Use of Arbitration

Emily Bazelon in the New York Times writes "Getting rid of predatory lenders was a victory for the citizens of North Carolina but the larger question of the right of companies to limit customers’ ability to sue for bad practices has not been rectified" due to the Supreme Court's AT&T v. Concepcion decision.

As Bazelon explains, "Only the Supreme Court can reverse one of its rulings, but Concepcion is based on a statute, which Congress can change. Senator Al Franken, of Minnesota, introduced a bill to bar mandatory arbitration, and even if Congress stalemates, the C.F.P.B. has the power to issue its own regulations on some arbitration claims." 

The phrase "mandatory arbitration" is worth attention.  As University of Kansas Law Professor Chris Drahozal writes:

A frequent criticism of arbitration in consumer contracts is that it is “mandatory.” The criticism is rhetorically powerful because viewing arbitration as “mandatory” is contrary to the whole idea of arbitration: that it is the product of an agreement between the parties. But as Richard Speidel explained, this label is “misleading because it connotes arbitration that is compelled by law regardless of consent.” Arbitration is mandatory when required by law, such as mandatory arbitration of public-employee grievances. No law requires that parties to consumer contracts arbitrate disputes.

"Forced Arbitration"?

The New York Times this week editorializes against what it calls "forced arbitration."  What the Times means is "arbitration clauses in form contracts typically drafted by businesses and presented to consumers (along with most of the other terms on the form) on a take-it-or-leave-it basis."  The Times focuses on the recent Consumer Financial Protection Bureau study I blogged about here.

The Times says banks' widespread use of use of such arbitration clauses "results in a systematic denial of justice."  In contrast, I argue that such clauses should generally be enforceable, as they are under current law.  Further analysis, I co-authored with KU Law Professor Chris Drahozal is here.

The Times does recognize that class actions are a big part of the debate on consumer arbitration.  This is true not only at the Consumer Financial Protection Bureau, but also in Congress, and in the courts.  For recent congressional testimony, see here.

   

Why Do Businesses Use (or Not Use) Arbitration Clauses?

Why Do Businesses Use (or Not Use) Arbitration Clauses?

by Christopher R. Drahozal and Stephen J. Ware

Some recent scholarship contends that arbitration is failing in its attempts to compete with litigation. When arbitration does succeed in attracting customers, such as businesses including arbitration clauses in their consumer contracts, commentators assert that it does so illegitimately, such as by enabling businesses to evade class actions and other forms of aggregate relief.

Both of these positions have found support in a pair of recent empirical studies authored by Theodore Eisenberg and Geoffrey Miller (and, for one of the studies, by Emily Sherwin as well). The first study examined the use of arbitration clauses in a sample of material contracts (such as loan commitments and merger agreements) filed with the SEC, and found that only a small percentage of the material contracts included arbitration clauses. The second study (with Professor Sherwin) compared the use of arbitration clauses in material corporate contracts of telecommunications and financial services companies with the use of arbitration clauses (and class arbitration waivers) in consumer contracts drafted by the same companies, and found a much higher use of arbitration clauses in the consumer contracts.

In this paper, we revisit the Eisenberg and Miller (and Sherwin) studies. The studies provide a fascinating and valuable look into the use of arbitration clauses in the types of contracts they studied. But as we show in detail, the types of contracts they studied are not representative of either business or consumer contracts as a whole. Indeed, the business contracts they studied are predominantly types unlikely to include arbitration clauses, while the consumer contracts they studied are among those most likely to include arbitration clauses and class arbitration waivers. As a result, their findings need to be construed narrowly, as limited to the types of contracts studied, and not as applicable to either business or consumer contracts generally.