March 19, 2015, Trial News | The American Association For Justice Archive

March 19, 2015, Trial News

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Report illustrates the extent of harm forced arbitration causes consumers

Cindy Gierhart

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Forced arbitration hurts consumers, and consumers rarely realize they’re being stripped of their rights, says a recent report by the Consumer Financial Protection Bureau.

A Consumer Financial Protection Bureau (CFPB) study released Mar. 10 confirms that forced arbitration hurts consumers and that consumers rarely realize they’re being stripped of their rights. 

“This new report by the CFPB calls attention to just how much harm the [forced arbitration] contracts can do to consumers,” Sen. Al Franken (D-Minn.) said at a briefing Mar. 12.

The report is a product of the Dodd-Frank Act, which instructed the CFPB to study the use of predispute arbitration agreements in consumer financial products and services and to present the findings to Congress. Forced arbitration clauses require consumers to resolve disputes through binding arbitration rather than in a court of law, depriving them of the many due process rights they would have in court. Often, arbitration clauses also prevent consumers from banding together in a class action.

The CFPB analyzed 850 consumer financial agreements, a survey of 1,007 credit card holders, 1,847 arbitration disputes filed with the American Arbitration Association (AAA), 562 state and federal class actions and 3,462 individual federal cases, and more than 42,000 small claims court filings.

“It is far more exhaustive than I think almost anybody expected it to be,” said Paul Bland, a lawyer with Public Justice in Washington, D.C.

“This study raises the level of discourse” by providing data to support what plaintiff attorneys had already been saying about the ills of forced arbitration, said Myriam Gilles, a law professor at Cardozo.

Bland said this is the first empirical study of this magnitude to look at forced arbitration in the consumer financial arena, and it’s the first report he’s seen quantify the effect arbitration clauses have in suppressing claims from ever being filed. For example, the report looked at litigation that involved multiple banks engaging in substantially similar behavior regarding the order in which they cashed checks to maximize overdraft fees. Some banks with enforceable arbitration clauses were not held responsible, while other banks that did not compel arbitration paid a total of $1 billion in settlements to 29 million class members.

The 728-page report found that “tens of millions of consumers” are subject to forced arbitration clauses, yet most consumers do not realize it. Even when they know about the clause, most wrongly believe they can still participate in class actions or sue in court.

The report confirmed that arbitration heavily favors corporations. Only 9 percent of the 341 arbitration disputes studied between 2010 and 2012 in which consumers brought claims ended in consumers obtaining relief. Yet 93 percent of the 244 arbitration disputes from the same time period in which companies brought claims ended in the company obtaining relief.

For years, companies have argued that the money they save from not having to litigate will go toward lowering the cost of their products. The report found no evidence that products or services with arbitration clauses were less expensive than those without.

The U.S. Chamber of Commerce quickly denounced the CFPB’s report, saying its “predetermined conclusions ignore key facts and are the result of an unfair and biased approach.”

The report confirms that most people do not pursue arbitration to recover small dollar amounts. Consumers filed only 25 disputes each year on average for claims under $1,000, compared with the 616 total arbitration disputes consumers filed each year on average, with an average claim of $27,000.

In contrast, many more consumers recover through class actions. Roughly 34 million class members received or will receive a payment from 236 class settlements recorded between 2008 and 2012, according to the report.

“Forced arbitration is among the most serious threats to Americans’ financial security and has denied justice to countless victims of Wall Street’s unscrupulous behavior,” said AAJ President Lisa Blue. “By hiding forced arbitration clauses in the fine print, Wall Street has been able to keep this abusive practice out of the public eye.”

The Dodd-Frank Act requires the CFPB to both conduct the study and act on its findings to protect consumers if the results show that lenders’ use of forced arbitration harms consumers. AAJ Director of Federal Programs Julia Duncan said this could include prohibiting the use of all forced arbitration clauses in consumer financial products and services. “The report shows a clear and convincing need for the CFPB to act in the public interest and stop forced arbitration for consumer financial services and products,” Duncan said.​

A petition calling on the CFPB to prohibit forced arbitration in consumer financial products and services collected more than 64,000 signatures in the week after the bureau released its report.

Blue said she is optimistic that the report will raise awareness of these clauses’ dangers among consumers and lawmakers, and pave the way for the CFPB to act in accordance with Dodd-Frank. “We applaud the Consumer Financial Protection Bureau for bringing this abusive practice to light with the release of its study, and we urge the bureau to exercise its authority to act in the public’s interest and prohibit forced arbitration in consumer financial services and products.”