Professor Jeff Sovern recently proposed that the CFPB issue a so-called “new” arbitration rule “that prevents companies from preventing consumers from suing unless consumers specifically opt in to the arbitration clause” after receiving a CFPB-mandated disclosure that if they don’t sign and their rights are violated, they “can still sue us or agree to arbitration later.” In truth, there is nothing “new” in this proposal. This is just the latest version of the decades-old argument from consumer advocates that arbitration agreements should only be made after a dispute has arisen, not before, because consumers are not fully aware of their rights until then.
Proponents of post-litigation arbitration agreements have never made a convincing case, nor has Professor Sovern. Limiting consumer arbitration to post-dispute controversies would significantly reduce consumer arbitration, because once a dispute has arisen, one or the other party, or both, inevitably use the “threat” in terrorem of costly and protracted litigation as a bargaining tool. This tactic is eliminated if the parties have agreed to arbitrate the dispute before it arises. So while post-litigation arbitration is a theory that may seem appealing on the surface, it fails in real life. An empirical study by researchers at the University of California, Berkeley concluded that the “overriding problem” with post-litigation arbitration is that “it is extremely rare for plaintiff and defense attorneys in a case choose arbitration after the dispute has arisen”. and, therefore, businesses and individuals “are harmed by a post-litigation system”. David Sherwyn, “Because It Takes Two: Why Post-Dispute Voluntary Arbitration Programs Will Fail to Address the Problems Associated with Employment Discrimination Arbitration”, 24 Berkeley Journal of Employment and Labor Law 1, 7, 68 (2003). On the other hand, “[p]new dispute arbitration agreements ensure that both parties are on the “same page” regardless of the details of any subsequent dispute. Victor E. Schwartz and Christopher E. Appel, “Setting the Records Straight on the Benefits of Pre-Litigation Arbitration,” 34 Legal Briefing Paper No. 7, Washington Legal Foundation (June 7, 2019).
Moreover, Professor Sovern’s proposal rests on three fundamental errors. First, Professor Sovern argues that giving consumers the right to “opt out” of arbitration is ineffective because consumers do not understand arbitration clauses and do not understand that they are waiving their constitutional right to a trial. before a jury. This simply ignores the fact that most arbitration clauses contain clear and visible information about the arbitration process and its legal consequences, including the fact that if a claim is arbitrated, there will be no no right to a jury trial. Additionally, as the United States Supreme Court has held, under federal arbitration law, if the commercial terms of a consumer contract are enforceable, the arbitration clause must also be enforced and cannot not be given special treatment. Allied-Bruce Terminix Cos. vs. dobsonian, 513 U.S. 265, 281 (1995) (“[w]what states cannot do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause”). Professor Sovern makes no effort to explain how his suggestion that the arbitration clause “be read aloud to the consumer” would work when millions of consumers typically receive their account agreements with arbitration clauses in the mail.
Second, Professor Sovern incorrectly assumes that the CFPB would agree to recommend that consumers ‘DO NOT’ choose arbitration, as it is an ‘abusive practice’. This contradicts both the CFPB’s 2015 empirical study on consumer arbitration and its 2017 final arbitration rules, which did not conclude that the arbitration process was in itself detrimental to consumers or to society as a whole. Indeed, contrary to Professor Sovern’s assertion that “class actions…make economic sense”, data from the CFPB study demonstrated not only that arbitration is faster and less costly than litigation, but that consumers who arbitrate fare much better, recovering an average of $5,389 in individual arbitration compared to $32.35 recovered by the average class member. Class action lawsuits only make economic sense for class attorneys, who, according to the CFPB study, recouped a colossal $425 million in fees compared to the paltry sum their clients received. Notably, the CFPB has encouraged its own employees to use alternative dispute resolution to resolve workplace disputes, as it provides “faster and less contentious results” as well as “confidentiality.” United States Government Accountability Office, Report to Congressional Applicants, Consumer Financial Protection Bureau Additional Measures Needed to Support a Fair and Inclusive Workplace, p. 48-49 (May 2016). At its core, Professor Sovern’s proposal embodies an ill-disguised political preference for class actions over individual arbitration. So, despite his protests to the contrary, it would be banned by the Congressional Overhaul Act because it is “substantially the same” as the CFPB’s earlier rule barring the use of class action waivers that Congress vetoed. . Allowing the consumer to participate in an arbitration program, particularly one that the CFPB cautions consumers against, amounts to a rule prohibiting the use of arbitration altogether, which is not supported by the own record. of the CFPB who demonstrated that arbitration is fair for consumers.
The third error in Professor Sovern’s proposal is its insistence that arbitration agreements in general, and exclusion clauses in particular, fail to “explain to consumers why an arbitration clause is preferable”. and encourage companies “not to say anything about it”. The reality is that most companies strive to provide informative information about arbitration to the consumer and generally give the consumer 30-60 days to decide whether or not to opt out. This leaves plenty of time for consumers to privately consult with their attorney, family or friends, or spend time on the Internet investigating the pros and cons of arbitration in order to make an informed decision. Most arbitration clauses also specify that there is no penalty for withdrawing the arbitration clause. And, asking a consumer to send a short opt-out notice to the business if they wish to reject the arbitration clause is no more binding than asking putative class members to return an opt-out notice. write if they do not wish to participate. in the certified class – a procedure that passes the constitutional muster as ruled by the United States Supreme Court. Phillips Petroleum Company vs. Shutts, 472 U.S. 797, 812 (1985) (“due process requires at a minimum that an absent plaintiff be given the opportunity to opt out of the class by executing and returning an ‘opt-out’ or ‘opt-out’ form to the to research”).
In short, the CFPB would be well advised to disregard Professor Sovern’s proposal.