Ballard Spahr LLP

In a recent guest post, Professor Mark Budnitz voiced support for Professor Jeff Sovern’s recent proposal that the CFPB issue a rule barring the use of pre-dispute arbitration agreements unless consumers opt in to them.  He claims it is the “only fair method” for contracting with consumers because “consumers cannot know, pre-dispute, which forum is better.”  In paragraph after paragraph, Professor Budnitz recites a litany of considerations that consumers should consider in choosing a forum to resolve disputes.  For example: will discovery be needed, and what types? will the consumer be the plaintiff or the defendant?  can the dispute be resolved in small claims court?  which route will be more or less expensive?  will the arbitration forum be fair?  will confidentiality be required?  Without knowing the answers to such questions, he concludes, “there’s no way for consumers to intelligently and knowledgeably decide, pre-dispute, if they should agree to arbitration.”

Professor Budnitz ignores, however, that companies also cannot know, pre-dispute, the answers to these questions because the disputes have not yet occurred.  But that is the beauty of the pre-dispute arbitration system: the playing field is leveled, and the potential pro’s and con’s of arbitration versus litigation are the same for each side.  By contrast, after a dispute has erupted, one party or the other, or both, will act based upon perceived advantages or disadvantages of a particular forum, and the dispute will expand to envelop the dispute resolution process itself.  Pre-dispute arbitration agreements are the great equalizer!

According to Professor Budnitz, pre-dispute arbitration really does not level the playing field because the company always knows in advance that it will have the use of a lawyer, whereas most consumers won’t be able to retain a lawyer unless “the dispute involves a substantial amount of money” or the lawyer “can get into court and file a class action.”  That argument is fundamentally flawed for three reasons.  First, most consumer protection statutes permit a successful plaintiff to recover his or her attorneys’ fees and costs, which can be substantial even if the actual recovery is small.  Therefore, there is an incentive for an attorney to represent a consumer even in small dollar cases.  Second, the reality is that consumers with small claims receive little if any benefit from class actions.  The CFPB’s 728-page empirical study of consumer arbitration showed that in 87% of the 562 class actions the CFPB studied, the putative class members received no benefits whatsoever.  In the remaining 13%, the average class member’s recovery was a mere $32.35 (while class counsel recovered $424 million).  By contrast, in arbitrations where consumers obtained relief on affirmative claims, the consumer’s average recovery was $5,389.  Presumably, most of those arbitrations were held pursuant to pre-dispute arbitration agreements of the type that Professor Budnitz criticizes.  Third, if, as Professor Budnitz argues, plaintiffs’ lawyers won’t handle small-dollar non-classable claims (i.e., claims that are not amenable to class action disposition because they do not implicate systemic conduct), arbitration is one of the only remaining dispute resolution options left to the consumer if informal negotiations have failed and a lawyer can’t be found.  If a pre-dispute arbitration agreement with procedures spelled out is already in place, that makes it all the easier for the consumer to resolve the dispute rather than giving up on it.

Professor Budnitz asks, “if [arbitration] is so wonderful, companies could easily convince consumers, post-dispute, to agree to arbitration.”  Well, arbitration is wonderful, and even the CFPB has recommended it to its employees as a means of resolving workplace disputes.  Nevertheless, trying to get consumers to agree to arbitration post-dispute is not so “easy”—not just because positions have hardened or because of any inherent flaws in the arbitral process—but because class action lawyers and consumer advocates such as Professors Budnitz and Sovern have for years poisoned the well by denigrating consumer arbitration in order to promote class action litigation, and because the CFPB has failed to set the record straight by educating consumers on the numerous benefits of arbitration that its own research has confirmed.

In any event, as a practical matter, the CFPB is likely to shy away from promulgating another arbitration rule—one that would have to be substantially different than its prior rule which was overridden by Congress.  The earlier arbitration rulemaking took about five years, including a three-year empirical study as well as numerous hearings and regulatory proceedings, and it generated vast industry opposition.   Starting again from square one would require another multi-year commitment of time and an enormous expenditure of valuable resources at a time when the CFPB already has a full plate of near- and long-term rulemaking activities, judging by the semi-annual regulatory agenda it released last week.

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