According to a forthcoming article by Professors Andrea Chandrasekher and David Horton in the California Law Review, more consumers and their lawyers would take advantage of individual arbitration if states enacted non-waivable statutes allowing an arbitrator who awards a prevailing consumer fees and expenses under a fee-shifting statute to augment the award with an extra “bounty” for winning the arbitration. Such laws, the authors argue, would create an incentive for consumers with small dollar claims to arbitrate rather than litigate, just as “bump-up” clauses used in some companies’ arbitration agreements guarantee the prevailing plaintiff a specific recovery even if the arbitrator’s award is less. That would help produce more “repeat playing” plaintiff’s law firms to help level the playing field between individuals and “repeat playing” corporate law firms. The authors assert that these state laws would not be subject to Federal Arbitration Act (FAA) preemption because they encourage arbitration rather than discriminate against it.
At first blush, this might look like a creative way to incentivize plaintiffs’ lawyers to abandon litigation and embrace arbitration, which the authors (correctly) applaud for its “speed and relative affordability.” The authors, however, are not exactly pro-arbitration advocates. They denigrate arbitration as a “pale substitute for class actions” and call their own bounty proposal “a second-best solution.” Their preferred solution is that “Congress should ban class arbitration waivers.” A skeptic might ask whether the article’s bounty proposal is an attempt to achieve payback for AT&T Mobility LLC v. Concepcion, which upheld the use of class action waivers in consumer arbitration agreements, and Congress’ repeal of the Consumer Financial Protection Bureau’s (CFPB’s) final arbitration rule last October, which would have prohibited the use of such waivers. In fact, the article does refer to “arbitration entrepreneurs” who inundate the same company with hundreds or even thousands of individual arbitration demands, and it recognizes the potential for a “tsunami of frivolous arbitrations” if the proposed state legislation is enacted.
Although the article is replete with statistics and regression analyses, there is other data supporting the view that an extra bounty is not necessary to incentivize the increased use of consumer arbitration. For example, the CFPB’s 735-page empirical study of consumer arbitration demonstrated that individual arbitration is far more beneficial to consumers than class action litigation. Individuals in arbitration received an average recovery of nearly $5,400 (166 times the average putative class member’s recovery of $32.35). That should be incentive enough. The real problem, as we have argued, is that the prior CFPB director refused to use any of the CFPB’s substantial funds to educate consumers on the benefits afforded by arbitration.
Moreover, the CFPB study dispelled the misconception that companies have an unfair advantage over consumers in arbitration. The study concluded that while most of the arbitration proceedings it studied involved companies with repeat experience in the forum, that was counter-balanced by the fact that counsel for the consumers were also usually repeat players in arbitration. Indeed, in 81% of the arbitrations in which consumers were awarded affirmative relief, the company was a “repeat player,” but the consumer prevailed anyway.
Finally, there is a strong argument that the FAA would preempt state laws requiring a bounty to be awarded to prevailing plaintiffs. First, a central premise of the FAA is that arbitration agreements must be enforced as written, and state laws that interfere with those agreements should be preempted. It is one thing if parties agree to an enhanced recovery under certain conditions. It is quite another thing if state laws mandate additional payments to prevailing plaintiffs as a condition for enforcing the arbitration agreement. Second, under the FAA arbitration agreements are to be treated the same as any other contract. The imposition of an “arbitrator multiplier” would only affect arbitration agreements and, therefore, the proposed state laws would treat arbitration agreements differently from other contracts. Third, to the extent that imposition of the bounty would result in abuses of the arbitral system by “arbitration entrepreneurs,” it would be hostile to arbitration and therefore preempted.
In sum, this proposal is too clever by half to garner industry support or pass muster under the FAA.
