New York Times article omits critical pro-arbitration facts

An article on consumer arbitration in this week’s Sunday New York Times concludes that “[b]y inserting individual arbitration clauses into a soaring number of consumer and employment contracts, companies… devised a way to circumvent the courts and bar people from joining together in class-action.” Unfortunately, the Times article (in which I’m quoted extensively and in which my photo appears) fails to acknowledge many critical facts concerning consumer arbitration and class actions that are inconsistent with that conclusion. The March 2015 empirical study of consumer arbitration issued by the CFPB is bursting with data showing that consumer arbitration is faster, less expensive and far more beneficial for consumers than class action litigation.

Among the important points that I conveyed to the Times when it interviewed me at length for the article, but which were omitted in the article, are the following:

• The CFPB studied 562 class actions. It found that in 60% of those class actions, the putative class members received no benefits whatsoever, because the named plaintiffs settled 25% of the class actions on an individual basis and voluntarily withdrew 35% of the cases.
• Only 15% of the class actions studied by the CFPB resulted in settlements that provided monetary benefits to class members. Consumers who received settlement cash payments got $32.35 on average after waiting for up to two years, while class counsel class recovered $424,495,451 in attorneys’ fees. By contrast, consumers who prevailed in an individual arbitration recovered an average of $5,389. Thus, consumers who prevailed in individual arbitration received 166 times as much as the average putative class member.
• According to the CFPB, in class settlements that required putative class members to submit a claim form, the weighted average claims rate was only 4%, meaning that 96% of the putative class members covered by settlement agreements requiring claim forms to be submitted failed to obtain any benefits because they did not submit claims.
• The study found that the average arbitration lasted 2-7 months, while class action litigation takes two or more years. The average arbitration costs the consumer a total of $200, but a federal court complaint costs $400 to file and that’s only the beginning of thousands or tens of thousands or even more in fees and expenses.
• Disputes actually get resolved on the merits in arbitration, but not in class action litigation. None of the 562 class actions studied by the CFPB went to trial. By contrast, in arbitrations studied by the CFPB, of 341 cases resolved by arbitrator, in-person hearings were held in 34% of the cases, and the arbitrators reached the merits of the claims in 146 cases.
• The CFPB study noted that consumers have brought relatively few arbitrations against companies, but the study disregarded that the vast majority of consumers resolve their disputes with businesses informally without the need for arbitration or litigation. Companies provide toll-free numbers for customers to contact them if there is a problem and they have extensive service departments to make sure customers are satisfied. In addition, the CFPB and a vast number of other federal agencies as well as state agencies such as state attorneys’ general offices provide complaint portals, as do private entities such as the Better Business Bureau. The CFPB itself has established a portal through which financial services companies resolve consumer disputes informally. According to the CFPB’s website, from July 2011 through March 1, 2015 more than 558,800 alleged consumer complaints have been resolved in this manner.
• The CFPB study also disregarded that its own enforcement and supervisory actions have eliminated much of the need for consumers to bring private arbitration actions. The study actually excluded the bulk of the CFPB’s own enforcement and supervisory actions from January 1, 2013 to date. The study only examined federal and state enforcement actions from January 1, 2008 through December 31, 2012. But the CFPB did not report its first enforcement action until July 2012, and it has reported about 100 enforcement actions in 2013, 2014 and thus far in 2015. As of July 15, 2015, CFPB enforcement activity has resulted in over $10.8 billion in relief for more than 25 million consumers. None of this was taken into account in the CFPB study.
• Another major omission in the study was the CFPB’s decision to exclude consumers’ actual experience with arbitration and class actions. In ascertaining whether consumer arbitration is in the public interest, which is the CFPB’s charge, one would assume that consumers’ actual experiences with arbitration and class action proceedings would be a core area of inquiry. But the CFPB deliberately avoided studying the issue, claiming that it is difficult to find consumers who have personal experience with both arbitration and litigation. But others, such as Harris Interactive, have conducted such surveys in the past, and the results showed that people who experienced arbitration liked it; even if they lost, they thought it was a good process.
• The CFPB study complains that consumers are generally not aware of the arbitration clauses in their contracts and do not understand them. But the CFPB’s own Consumer Education and Engagement division could play a big role here in educating consumers on the pro’s and con’s of arbitration and litigation, particularly class action litigation. It has not devoted any resources to educating consumers on this important issue.

The Times article further disregards that arbitration helps companies save substantial legal fees and costs in resolving disputes. As a matter of basic economics, consumers ultimately pay for the increased litigation costs of litigation. Even marginal or frivolous court cases require the company to incur substantial defense costs up to the point of settlement, withdrawal, or dismissal. All customers pay for the cost of defending and managing such suits in the form of higher prices or impact on services as such expenses have to be funded. By contrast, arbitration helps reduce a company’s litigation costs and those savings are passed along in the form of lower costs or increased services to consumers.

I am not alone in pointing out the shortcomings of the Times article. Daniel Fisher of Forbes concurs that “[a]bitration clauses prohibiting class actions provide a less costly alternative” to class action litigation, and criticizes the Times article for disregarding the many negative aspects of class action litigation. Mr. Fisher notes that the Federal Arbitration Act serves an “important purpose” by allowing consumers to opt out of a costly class action litigation system “that is lucrative for lawyers but does little for them other than raise the price of the goods they buy.”