New: ECLECTIC RANT: Eliminating Pre-Dispute Arbitration Clauses in Consumer Contracts

By Ralph E. Stone
Saturday February 22, 2014 - 10:55:00 AM

According to The Free Dictionary, "arbitration is the submission of a dispute to an unbiased third person designated by the parties to the controversy, who agree in advance to comply with the award—a decision to be issued after a hearing at which both parties have an opportunity to be heard." Over the years, arbitration has become a take-it-or-leave contract provision in many consumer contracts. And available evidence suggests that the arbitration playing field has tilted against consumers.  

The pending Arbitration Fairness Act (AFA), if passed, will eliminate pre-dispute arbitration clauses. And Congress has given the Consumer Finance Protection Board (CFPB) power to eliminate such clauses. 

Forced arbitration clauses are found regularly in consumer contracts for credit cards, cell phones, car loans, and health insurance policies. Those subject to such clauses are forced to resolve their disputes through arbitration rather than through federal or state courts. And arbitration proceedings are conducted in private thus eliminating transparency found in court proceedings. 

Arbitration providers select the arbitrators, make the rules, set fees, and administer consumer arbitrations. There is no requirement that arbitrators be lawyers or retired judges, or have legal training, to follow legal precedents, consider evidence, or even issue written legal opinions. But these providers’ existence depends on receipt of fees after they are chosen to arbitrate a dispute. 

The American Arbitration Association (AAA), JAMS, Inc., and the National Arbitration Forum (NAF) are the predominant administrators of consumer financial arbitrations. Because of the complexity of arbitration clauses, few consumers file for arbitration, especially when the amount in dispute is small. 

While arbitration may be a faster, cheaper way to resolve a dispute, they are generally unfair to consumers because it eliminates the right to appeal and access to discovery, and arbitration clauses often prohibit class actions. 

The AFA, an amendment to the 1925 Federal Arbitration Act (FAA), was introduced in U.S. Senate last year. It provides, in pertinent part, that "no predispute arbitration [forced] agreement shall be valid or enforceable if it requires arbitration of an employment dispute, consumer dispute, antitrust dispute, or civil rights dispute."  

The AFA was prompted by recent Supreme Court decisions interpreting the FAA., which have regularly enforced pre-dispute arbitration clauses in consumer, employment, and other contexts where the contract was not subject to negotiation between the contracting parties. For example, in 2011, the Supreme Court in AT&T Mobility LLC v. Concepcion held that the FAA preempted state law that prohibited the enforcement of a consumer arbitration clause with a “no-class action” provision. 

And in 2013, the Supreme Court went further in American Express Co. v. Italian Colors Restaurant holding that a contractual waiver of class arbitration is enforceable under the FAA even if the cost of proving an individual claim in arbitration exceeds the potential recovery. 

On another front, Section 1028(a) of the Dodd-Frank Act requires the Consumer Finance Protection Bureau (CFPB) to “conduct a study of, and to provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.” Section 1028 goes on to provide that the CFPB “by regulation, may prohibit or impose conditions or limitations on the use of [such] an agreement” if the CFPB “finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.” The CFPB can restrict or ban the usage of arbitration clauses in consumer financial services contracts based on the results of the study. 

On December 12, 2013, the CFPB published "Arbitration Study Preliminary Results" (Study). The Study found in the credit card market, larger bank issuers are more likely to include arbitration clauses than smaller bank issuers and credit unions. As a result, while most issuers do not include such clauses in their consumer credit card contracts, just over 50 percent of credit card loans outstanding are subject to such clauses. 

In the checking account market, which is less concentrated than the credit card market, around 8 percent of banks, covering 44 percent of insured deposits, include arbitration clauses in their checking account contracts. 

In the reloadable limited prepaid card sample, arbitration clauses are included across the board. Some 81 percent of the cards studied, and all of the cards for which market share data were available, have arbitration clauses in their cardholder contracts. 

Nearly all the arbitration clauses studied include provisions stating that arbitration may not proceed on a class action basis. 

Are pre-dispute arbitration clauses biased against consumers? Data is sketchy. For example, California requires private arbitration companies to collect and publish data. A U.C. Hastings analysis found that some companies do not comply and among the published reports important information is missing. But, a Christian Science Monitor analysis of data from the NAF found that creditors and debt-buyers won more than 96 percent of the cases they brought against consumers. The top 10 most frequently used arbitrators, who decided the vast majority of all cases, decided in favor of consumers only 1.6 percent of the time, while arbitrators who decided three or fewer cases decided for the consumer 38 percent of the time. 

In conclusion, arbitration can be an effective, less costly method of resolving consumer disputes, that is if the playing field is level and, if the consumer has a choice to accept or reject arbitration after, not before, the dispute arises. Hopefully, either the AFA or the CFPB or both will eliminate pre-dispute arbitration clauses and consumers, if they choose arbitration, will get a fair disposition of their dispute.