02 November 2015

Consumer Arbitration Really Is Unfair

The New York Times is running a series on the problems with arbitration, particularly consumer arbitration clauses in take it or leave it contracts of adhesion.

Part I

Part II

Part III

I'll fill out this post at a later date with some of the details of why its indictment of consumer arbitration is correct.  Previous posts at this blog on the subject can be located via the Arbitration tag. The CFPB, a new federal agency, is considering regulations banning or restricting the practice.  A number of major providers of consumer arbitration ceased to provide the service within the past few years.

The stories are effective because mandatory pre-dispute arbitration fundamentally conflicts with a variety of widespread norms held by participants in the community subject to arbitration over their rights in the transactions they enter into and their reasonable expectations of fairness.

There are isolated contexts where it can make sense, such as in business to business transactions where privacy and a swift resolution are imperative, and in business to business transactions in which large numbers of cases, none precedent setting, between entities are likely (e.g. resolution of fee disputes between realtors who are part of the National Association of Realtors over who gets what share of a real estate commission).

But, routine disputes between credit card companies, cable companies, cell phone companies, and the like, over systemic mistreatment of large numbers of similarly situated consumers are not benign and encourage dishonest business practices by large companies.

UPDATE November 5, 2015: Law professor Stephen Carter writing an opinion piece for Bloomberg offers a rather unpersuasive rebuttal to the New York Times account of consumer arbitration clauses discussed above.

As someone who actually represents parties on a fairly regular basis in cases that involve, or could involve, commercial arbitration, and who drafts contracts and evaluates contracts for clients, I should also put on my "to do" list comparison of most material differences between a court forum and an arbitration forum.

For example, privacy, rules of evidence, discovery, speed of litigation, limitations on injunctive relief, and the availability of appeals.  The particulars of these differences are often different for major arbitration forums, for example, the American Arbitration Association and the Judicial Arbiter Group, and a significant minority of arbitration clauses call for arbitration of very narrow issues without specifying any widely adopted set of arbitration rules.  Also, even within AAA arbitration rules, for example, there are actually several different sets of rules for different kinds of disputes.

There are some respects in which arbitration can be a superior forum for certain kinds of disputes, and in other respects arbitration can be profoundly inferior for many kinds of disputes.

In general, for example, the looser rules of evidence that apply in arbitration causes under AAA commercial arbitration rules, tend to be a positive difference between an arbitration forum for commercial cases, and a court forum for commercial cases using evidence rules largely designed in the first instance for criminal cases and applied more generally to all civil cases even though the justifications for them in commercial cases tried to a judge are far less compelling.

On the other hand, it is rare indeed that the near universal absence of appellate relief for a bad decision made in an arbitration forum is a good one, except in very simple, small stakes cases between repeat players with comparable power in the institutions that conduct the arbitrations. In those cases, the law of averages mitigates the harm caused by individual erroneous decisions on any given litigant over time, and the benefits of rapid dispute resolution and reduced costs that flow from a lack of appellate review outweigh the harms caused by a lack of appellate review in any individual wrongfully decided cases within a pool of cases. There may be a place for a lack of meaningful appellate review, for example, in fee disputes between Realtors involved in the same real estate transaction, or between banks resolving disputes over check payment snafus.

But, a lack of meaningful appellate relief is almost never fair to a litigant in a high stakes dispute who is a one time player or will only litigate in that forum a very small number of times.  The lack of meaningful appellate review of arbitration awards in these circumstances fundamentally undermines the rule of law.

In a significant class of disputes for which arbitration is often appropriate, privacy and freedom from government involvement in dispute resolution, are important motives for choosing this forum.  For example, arbitration is frequently a desirable forum for trade secret disputes.  But, bifurcation that allows some relief to be sought in the courts while limiting other relief to arbitration forums can undermine the argument for arbitration in these cases, as can the important harm caused by removing precedents that would have been valuable to litigants in future disputes from the public domain.

Filing fees in arbitration cases are universally much higher than the filing fees in comparable cases in the Court system.  These fees buy, in part, a significantly faster time from filing to resolution in most arbitration cases.  This is partially a procedural issue, and partially a product of an intense scarcity of judges in the vast majority of U.S. courts with jurisdiction over civil actions. But, generally speaking, the amount of attorneys' fees involved in litigating a dispute through arbitration is not materially lower than the attorneys' fees that would have been incurred litigating the same case in the ordinary court system.

Empirical evidence also tends to show rather powerfully, that arbitration forums in which a repeat player (typically a big business) imposes an arbitration forum on an infrequently litigant such as a consumer or employee, show a pronounced bias, relative to the Court system, in favor of the repeat litigant who had the economic power to chose the arbitration forum.

As another example, the arbitration forum is often chosen primarily to defeat the possibility of obtaining vindication through class action litigation, or to deny a litigant substantive remedies (e.g., exemplary damages may not be awarded in arbitration forums in Colorado).  In these circumstances, the appropriateness of using an arbitration clause to secure these benefits is almost always deeply problematic.

Ultimately, however, the ninety year old Federal Arbitration Act tips the balance far too strongly in favor of arbitration and does the nation a deep disservice in the process.  The scope of circumstances in which arbitration is appropriate (and a respectable share of cases that I handle in arbitration are of that type), is, however, far greater than the scope of circumstances where the FAA mandates an extremely strong policy in favor of binding pre-dispute arbitration clauses,

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