Why More Consumers Are Shut Out of Court

Why More Consumers Are Shut Out of Court

Photo by Sam Hodgson

Hal Rosner is an attorney with the Auto Fraud Legal Center. Rosner wants to limit the scope of mandatory arbitration clauses.

A study released Thursday by the federal Consumer Financial Protection Bureau found that about half of the debt owed by consumers of financial products studied is subject to private arbitration, rather than the courts.

So-called “mandatory arbitration clauses,” which stipulate that consumers must take any complaints before a private arbitrator instead of a judge and jury, have become increasingly common in contracts for products like credit card loans, prepaid credit cards and even checking accounts, the study found.

And the report has some startling statistics for supporters of class action lawsuits. In the wake of a big 2011 Supreme Court decision that began in San Diego, AT&T v. Concepcion, “nearly all” the arbitration clauses studied by the agency bar consumers from bringing class action lawsuits against their lenders.

“Around 90 percent of the contracts with arbitration clauses — covering close to 100 percent of credit card loans outstanding, insured deposits, or prepaid card loads subject to arbitration — include such no-class arbitration provisions,” it found.

We drilled into the issue of consumer arbitration in this three-part series earlier this year.

We took a look at a local consumer, John Perz, who has spent years in what he calls “arbitration purgatory,” waiting for a fair hearing in his dispute with a local car dealership.

In California, arbitration firms are blatantly flouting a legal requirement to tell the public how many times their private judges find in favor of consumers and against corporations.

The Concepcion case is at the heart of a war on class actions by the Supreme Court.

The CFPB report doesn’t shed a whole lot of light on the fairness of consumer arbitration. Anti-arbitration campaigners argue that arbitration can often be biased against consumers and lacks the transparency of the courts.

Despite being hailed by anti-arbitration activists as a damning report, the study is really a cold, analytical look at how common mandatory arbitration clauses are, and what sort of language they typically contain.

There are a few interesting snippets, however:

• Larger, more sophisticated banks are more likely to include longer, more complicated arbitration clauses in their contracts with customers.

• While a majority of credit card companies and banks don’t use mandatory arbitration clauses, because the big ones do, the clauses actually affect about 50 percent of all credit card debt the CFPB studied and about 50 percent of all the money held in bank accounts studied by the agency.

• A far larger proportion, more than 80 percent, of prepaid credit cards are subject to mandatory arbitration clauses.

• The median length of the arbitration clauses studied by the CFPB was 1,074 words – about twice as long as this article.

• The clauses are also complicated and hard to read. Apparently, there’s a measure for “readability” of written material called the Flesch readability score. Here’s a snippet from the report:

Credit card arbitration clauses almost always were more complex and written at a higher grade level than the rest of the credit card contract. The mean Flesch readability score for credit card arbitration clauses — with a higher score indicating greater readability — was 34.5 and the median was 33.766. By comparison, the mean Flesch readability score for the remainder of the contract (i.e., excluding the arbitration clause) was 52.2 and the median was 51.6.

This is a really important consumer issue that’s only going to get bigger.

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Will Carless

Will Carless

Will Carless is the former head of investigations at Voice of San Diego. He currently lives in Montevideo, Uruguay, where he is a freelance foreign correspondent and occasional contributor to VOSD. You can reach him at will.carless.work@gmail.com.

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14 comments
Sal D'Anna
Sal D'Anna

Either that report is flawed or being misread because credit card companies no longer want to enforce their arbitration clauses and are filing thousands of cases in courts throughout the country. The courts are being overwhelmed by these cases because previously these cases were all rubber stamped by the arbitration company owned by the credit card debt collectors that went by the name of National Arbitration Forum.

You can read all about it in this Businessweek story.
http://www.businessweek.com/bwdaily/dnflash/content/jul2009/db20090714_952766.htm
or read the complaint filed by the Minnesota Attorney General in the attached link..Minnesota Sues a Credit Arbitrator, Citing Biashttp://www.businessweek.com/bwdaily/dnflash/content/jul2009/db20090714_952766.htmConsumer Credit The Minnesota Attorney General on July 14 sued the nation's largest arbitration firm involved in adjudicating delinquent credit-card debt, charging that it runs a biased process that favors major credit-card companies.

Sal D'Anna
Sal D'Anna subscribermember

Either that report is flawed or being misread because credit card companies no longer want to enforce their arbitration clauses and are filing thousands of cases in courts throughout the country. The courts are being overwhelmed by these cases because previously these cases were all rubber stamped by the arbitration company owned by the credit card debt collectors that went by the name of National Arbitration Forum.

You can read all about it in this Businessweek story.
http://www.businessweek.com/bwdaily/dnflash/content/jul2009/db20090714_952766.htm
or read the complaint filed by the Minnesota Attorney General in the attached link..Minnesota Sues a Credit Arbitrator, Citing Biashttp://www.businessweek.com/bwdaily/dnflash/content/jul2009/db20090714_952766.htmConsumer Credit The Minnesota Attorney General on July 14 sued the nation's largest arbitration firm involved in adjudicating delinquent credit-card debt, charging that it runs a biased process that favors major credit-card companies.

Stephen Goldfarb
Stephen Goldfarb

Mandatory arbitration also is present in health care. Kaiser, for example, requires mandatory arbitration to resolve health care disputes, including medical mal-practice. The individual need not individually approve the arbitration clause. One's employer can do it. The requirements for arbitration are lax, leaving much room for conduct that would likely not occur in a court of law. And overturning a bad decision is unlikely. The courts grant wide latitude to the conduct of arbitration. Also, Kaiser assembles a list of "neutral" arbitrators. A problem is that to be called from the list, the arbitrator is under economic pressure to not rule against the health care agency. The issue of mandatory arbitration for health care warrants attention.

Stephen Goldfarb
Stephen Goldfarb subscribermember

Mandatory arbitration also is present in health care. Kaiser, for example, requires mandatory arbitration to resolve health care disputes, including medical mal-practice. The individual need not individually approve the arbitration clause. One's employer can do it. The requirements for arbitration are lax, leaving much room for conduct that would likely not occur in a court of law. And overturning a bad decision is unlikely. The courts grant wide latitude to the conduct of arbitration. Also, Kaiser assembles a list of "neutral" arbitrators. A problem is that to be called from the list, the arbitrator is under economic pressure to not rule against the health care agency. The issue of mandatory arbitration for health care warrants attention.

Jim Jones
Jim Jones

Corruption, greed and bureaucracy destroy the legal system, so the private sector has stepped in with a remedy. The thrust of this article, that the remedy is worse than the horrendous civil system, has not been shown to be fact. I rather suspect the individual is overall better off, but the lawyers and judges are panicking.

Jim Jones
Jim Jones subscriber

Corruption, greed and bureaucracy destroy the legal system, so the private sector has stepped in with a remedy. The thrust of this article, that the remedy is worse than the horrendous civil system, has not been shown to be fact. I rather suspect the individual is overall better off, but the lawyers and judges are panicking.

Omar Passons
Omar Passons

You need to separate the issues. Your quite natural suspicion of any entity actively attempting not to disclose information required by law is wholly separate and distinct from whether consumers get more equitable treatment or are more inclined to get a just result from an arbitrator than a judge (or judge and jury). It would serve you well, if you have not already done so, to spend some time in small claims court (where the vast majority of consumer actions would end up if not privately resolved) and a similar amount of effort understanding the constraints facing civil court calendars.

When dealing with the practical realities that limited budgets and complicated legal systems present, one's eye may be a little less jaundiced when considering alternative dispute resolution. And although I think it's a mistake to be overly focused on the class-action waiver, since it is such a large part of your efforts I think it's worth discussing. How much time have you spent getting to understand how class actions work? How much do you know about the class certification process, what the requirements are, what connection they have to liability (hint: zero), and what impacts there are on the employees of companies subjected to this remedy?

Class action litigation is extremely expensive well before you even have to consider the question of whether anyone actually did anything wrong. In fact, companies can be put out of business merely on the grant of a class certification because the risk of loss - regardless of actual liability - can be too significant to ignore. A better system would be exactly like what AT&T designed: give consumers a very big INDIVIDUAL stick and significant reward when companies are wrong and let them handle those typically small cases in that format. Class action litigation can occasionally serve very good purposes. Some of the mass environmental and health issues that have been rectified needed that mechanism. But in the world of cell phones and toy robots I think this hyper-focus on class action waivers misses the mark.

Omar Passons
Omar Passons subscribermember

You need to separate the issues. Your quite natural suspicion of any entity actively attempting not to disclose information required by law is wholly separate and distinct from whether consumers get more equitable treatment or are more inclined to get a just result from an arbitrator than a judge (or judge and jury). It would serve you well, if you have not already done so, to spend some time in small claims court (where the vast majority of consumer actions would end up if not privately resolved) and a similar amount of effort understanding the constraints facing civil court calendars.

When dealing with the practical realities that limited budgets and complicated legal systems present, one's eye may be a little less jaundiced when considering alternative dispute resolution. And although I think it's a mistake to be overly focused on the class-action waiver, since it is such a large part of your efforts I think it's worth discussing. How much time have you spent getting to understand how class actions work? How much do you know about the class certification process, what the requirements are, what connection they have to liability (hint: zero), and what impacts there are on the employees of companies subjected to this remedy?

Class action litigation is extremely expensive well before you even have to consider the question of whether anyone actually did anything wrong. In fact, companies can be put out of business merely on the grant of a class certification because the risk of loss - regardless of actual liability - can be too significant to ignore. A better system would be exactly like what AT&T designed: give consumers a very big INDIVIDUAL stick and significant reward when companies are wrong and let them handle those typically small cases in that format. Class action litigation can occasionally serve very good purposes. Some of the mass environmental and health issues that have been rectified needed that mechanism. But in the world of cell phones and toy robots I think this hyper-focus on class action waivers misses the mark.

Will Carless
Will Carless

Or, you could read all about it in my story from earlier this year :) http://voiceofsandiego.org/2013/05/23/justice-for-sale-part-two-ignoring-the-law/
Justice for Sale, Part Two: Ignoring the Lawhttp://voiceofsandiego.org/2013/05/23/justice-for-sale-part-two-ignoring-the-law/A decade ago, California lawmakers decided to act in response to a startling trend in consumer law. Corporations across the country had increasingly been inserting clauses into their contracts that barred consumers from taking them to court.

Will Carless
Will Carless author

Or, you could read all about it in my story from earlier this year :) http://voiceofsandiego.org/2013/05/23/justice-for-sale-part-two-ignoring-the-law/
Justice for Sale, Part Two: Ignoring the Lawhttp://voiceofsandiego.org/2013/05/23/justice-for-sale-part-two-ignoring-the-law/A decade ago, California lawmakers decided to act in response to a startling trend in consumer law. Corporations across the country had increasingly been inserting clauses into their contracts that barred consumers from taking them to court.

Omar Passons
Omar Passons

Thanks for the well thought out replies to the various questions I posed. Of the issues I feel personally invested in, this is not as high as permanent supportive housing for homeless, better education options for kids or even neighborhood growth. But it is an interesting topic worthy of the dialogue.

Will Carless
Will Carless

@Omar

Glad to take our Twitter discussion public here. My responses below:

OP: You need to separate the issues. Your quite natural suspicion of any entity actively attempting not to disclose information required by law is wholly separate and distinct from whether consumers get more equitable treatment or are more inclined to get a just result from an arbitrator than a judge (or judge and jury).

WC: Why is it wholly separate and distinct? If fairness is the issue here, I'd like to make a judgment on that fairness based on empirical data. That data exists, but arb companies refuse to let the public see it, despite being required to by law. Why? If the system is fair, the numbers should back that up. The obfuscation of the data is absolutely relevant to the equity or otherwise of the process.

OP: It would serve you well, if you have not already done so, to spend some time in small claims court (where the vast majority of consumer actions would end up if not privately resolved) and a similar amount of effort understanding the constraints facing civil court calendars.

WC: I have actually sued somebody in small claims court. It was a few years ago. I found the process to be very simple, almost free, and the judge found in my favor. Not only that, but in court I was offered the option of mediation right before the hearing. I declined and the hearing went very well.

I'm well aware of the stresses facing the court system. But is the answer to better fund the court system and eliminate waste, rather than instead heading off in a direction that has been shown again and again to be grossly unfair to consumers?

OP: When dealing with the practical realities that limited budgets and complicated legal systems present, one's eye may be a little less jaundiced when considering alternative dispute resolution.

WC: The legal justice system has served democracies pretty well for thousands of years. Because the system is being short-changed at this moment in time, are we to abandon it in favor of what seems to be a flawed alternative system skewed in favor of business and against consumers? As an idealist, I should think the better answer is to fix the holes in the legal system. Fund it properly and get it working again.

OP: And although I think it's a mistake to be overly focused on the class-action waiver, since it is such a large part of your efforts I think it's worth discussing. How much time have you spent getting to understand how class actions work? How much do you know about the class certification process, what the requirements are, what connection they have to liability (hint: zero), and what impacts there are on the employees of companies subjected to this remedy?"

WC: I'm well aware of the arguments against class actions. You may remember my coverage of the Chula Vista tax issue that ended up in a class-action. But for all the arguments against class actions, their role as a deterrent has, again, served the world pretty well for a long, long time. Granted, often the only people who truly win in the short-term from such cases are the attorneys, but I think there's massive value in having class-actions around to deter companies from essentially stealing small amounts of money from people.

If society truly thinks class actions are a bad thing, let's legislate them out of the legal system, or let's legislate a way that we can have a deterrent, along with a system that minimizes the less tasteful aspects of class-actions. Either way, I'd rather have the issue solved via some form of democratic dialogue, rather than by large corporations essentially killing class actions via a complicated loophole that few in society understand.

OP: Class action litigation is extremely expensive well before you even have to consider the question of whether anyone actually did anything wrong. In fact, companies can be put out of business merely on the grant of a class certification because the risk of loss - regardless of actual liability - can be too significant to ignore.

WC: I agree. As stated above, the system needs work.

A better system would be exactly like what AT&T designed: give consumers a very big INDIVIDUAL stick and significant reward when companies are wrong and let them handle those typically small cases in that format.

WC: Here, I totally disagree. AT&T knew full-well that the number of customers with the hutzpah, time, patience, resources and energy to fight the company would be few and far between. Do you honestly believe the pros and cons of this weren't discussed in a boardroom at AT&T? The company made a conscious decision: Fight the fight on behalf of businesses everywhere for mandatory arb clauses barring class actions. They won.

Besides, AT&T's arb. clause was, as you point out, a big individual stick. Where's the mandate to require companies to hand out such sticks? Has AT&T quietly taken back its stick since the decision, or whittled it down?

OP: Class action litigation can occasionally serve very good purposes. Some of the mass environmental and health issues that have been rectified needed that mechanism. But in the world of cell phones and toy robots I think this hyper-focus on class action waivers misses the mark.

WC: The fact that the world is full of cellphones and toy robots is exactly why class actions are such an important aspect of this. These clauses are so prevalent now, in contracts for anything from computer software to buying a car, that they can't be avoided. I don't see why protecting consumers' rights is so much less noble than protecting the environment. They're both important, and if they're under attack, people should know about it.

Omar Passons
Omar Passons subscribermember

Thanks for the well thought out replies to the various questions I posed. Of the issues I feel personally invested in, this is not as high as permanent supportive housing for homeless, better education options for kids or even neighborhood growth. But it is an interesting topic worthy of the dialogue.

Will Carless
Will Carless author

@Omar

Glad to take our Twitter discussion public here. My responses below:

OP: You need to separate the issues. Your quite natural suspicion of any entity actively attempting not to disclose information required by law is wholly separate and distinct from whether consumers get more equitable treatment or are more inclined to get a just result from an arbitrator than a judge (or judge and jury).

WC: Why is it wholly separate and distinct? If fairness is the issue here, I'd like to make a judgment on that fairness based on empirical data. That data exists, but arb companies refuse to let the public see it, despite being required to by law. Why? If the system is fair, the numbers should back that up. The obfuscation of the data is absolutely relevant to the equity or otherwise of the process.

OP: It would serve you well, if you have not already done so, to spend some time in small claims court (where the vast majority of consumer actions would end up if not privately resolved) and a similar amount of effort understanding the constraints facing civil court calendars.

WC: I have actually sued somebody in small claims court. It was a few years ago. I found the process to be very simple, almost free, and the judge found in my favor. Not only that, but in court I was offered the option of mediation right before the hearing. I declined and the hearing went very well.

I'm well aware of the stresses facing the court system. But is the answer to better fund the court system and eliminate waste, rather than instead heading off in a direction that has been shown again and again to be grossly unfair to consumers?

OP: When dealing with the practical realities that limited budgets and complicated legal systems present, one's eye may be a little less jaundiced when considering alternative dispute resolution.

WC: The legal justice system has served democracies pretty well for thousands of years. Because the system is being short-changed at this moment in time, are we to abandon it in favor of what seems to be a flawed alternative system skewed in favor of business and against consumers? As an idealist, I should think the better answer is to fix the holes in the legal system. Fund it properly and get it working again.

OP: And although I think it's a mistake to be overly focused on the class-action waiver, since it is such a large part of your efforts I think it's worth discussing. How much time have you spent getting to understand how class actions work? How much do you know about the class certification process, what the requirements are, what connection they have to liability (hint: zero), and what impacts there are on the employees of companies subjected to this remedy?"

WC: I'm well aware of the arguments against class actions. You may remember my coverage of the Chula Vista tax issue that ended up in a class-action. But for all the arguments against class actions, their role as a deterrent has, again, served the world pretty well for a long, long time. Granted, often the only people who truly win in the short-term from such cases are the attorneys, but I think there's massive value in having class-actions around to deter companies from essentially stealing small amounts of money from people.

If society truly thinks class actions are a bad thing, let's legislate them out of the legal system, or let's legislate a way that we can have a deterrent, along with a system that minimizes the less tasteful aspects of class-actions. Either way, I'd rather have the issue solved via some form of democratic dialogue, rather than by large corporations essentially killing class actions via a complicated loophole that few in society understand.

OP: Class action litigation is extremely expensive well before you even have to consider the question of whether anyone actually did anything wrong. In fact, companies can be put out of business merely on the grant of a class certification because the risk of loss - regardless of actual liability - can be too significant to ignore.

WC: I agree. As stated above, the system needs work.

A better system would be exactly like what AT&T designed: give consumers a very big INDIVIDUAL stick and significant reward when companies are wrong and let them handle those typically small cases in that format.

WC: Here, I totally disagree. AT&T knew full-well that the number of customers with the hutzpah, time, patience, resources and energy to fight the company would be few and far between. Do you honestly believe the pros and cons of this weren't discussed in a boardroom at AT&T? The company made a conscious decision: Fight the fight on behalf of businesses everywhere for mandatory arb clauses barring class actions. They won.

Besides, AT&T's arb. clause was, as you point out, a big individual stick. Where's the mandate to require companies to hand out such sticks? Has AT&T quietly taken back its stick since the decision, or whittled it down?

OP: Class action litigation can occasionally serve very good purposes. Some of the mass environmental and health issues that have been rectified needed that mechanism. But in the world of cell phones and toy robots I think this hyper-focus on class action waivers misses the mark.

WC: The fact that the world is full of cellphones and toy robots is exactly why class actions are such an important aspect of this. These clauses are so prevalent now, in contracts for anything from computer software to buying a car, that they can't be avoided. I don't see why protecting consumers' rights is so much less noble than protecting the environment. They're both important, and if they're under attack, people should know about it.