Our nation was founded with three separate branches of government, each designed to serve as a check on the other two. The Judicial Branch plays the pivotal role of ensuring our laws are applied equally and fairly. While our court system is often considered the gold standard for fairness, it is not immune from people attempting to use it as a tool to turn a profit.
The Consumer Financial Protection Bureau did a study in 2015 that then-Director Richard Cordray called “the most comprehensive empirical study” examining arbitration and class action lawsuits. The results showed attorneys handling the 562 class action cases included in the study (none of which went to trial, mind you) received nearly $425 million – while the average consumer involved in a claim received about $32.
So, when you hear people feigning outrage about arbitration clauses in financial contracts, as some have done recently, look at the facts and ask, “Who are these groups really looking out for? Trial lawyers or consumers?”
Going back to the CFPB study, consumers using arbitration recover an average of $5,389 compared to just $32.35 through class action suits. Yes, apparently some in Washington would have you believe it is better for consumers to have $32 instead of more than 168 times that, though the trial lawyers certainly make out better when consumers take the former.
The CFPB also found arbitration is faster than a lawsuit, which can drag on nearly two years compared to an average of two to seven months for an arbitration case.
Consumers not only receive on average greater compensation from arbitration, the process is also cheaper. Consumer fees for arbitration are limited to $200 by the American Arbitration Association and companies often end up footing the total bill.
In contrast to an arbitration case, litigation can be complicated, time-consuming and require a lawyer to navigate the process. Plus, many consumer claims may be too small to attract contingency fee lawyers.
Since the Federal Arbitration Act passed in 1925, federal law has protected the benefits of arbitration to consumers. This is why arbitration provisions are found in a wide variety of everyday consumer agreements, including those for credit cards, checking accounts, cell phones, cable television, internet access and even gym memberships.
The Supreme Court agrees, noting in 1995 that arbitration avoids “the delay and expense of litigation.” A decade prior, Chief Justice Warren Burger encouraged the use of arbitration as a way to help reduce “the backlog of cases” in state and federal courts. The CFPB’s study estimated arbitration clauses saved the courts from having to process an additional 6,000 class action cases every five years for just the financial services sector alone.
And, as Supreme Court Justice Stephen Breyer once said, without arbitration, “the typical consumer who has only a small damage claim (who seeks, say, the value of only a defective refrigerator or television set) [would be left] without any remedy but a court remedy, the costs and delays of which could eat up the value of an eventual small recovery.”
So why do so many people continue to insist that arbitration clauses are bad for consumers? We have already established based on the CFPB’s own study that monetarily – both in cost and reward – arbitration is a win for consumers. The same for the speed of resolution.
Some might claim arbitration favors companies, but as Alan Kaplinsky with Ballard Spahr testified to the Senate Judiciary Committee earlier this year, “the courts have rigorously struck down arbitration agreements that they have found to be overreaching, unfair or abusive to consumers.” What about a public answer on the merits of a consumer’s grievance? Well, none of the cases in the CFPB’s study went to trial while a little more than a third of arbitration cases in the study received in-person hearings.
Advocates for class action cases claim they are about more than monetary rewards and necessary to publicly shame companies, but enforcement actions from government regulators and the resulting media (both traditional and social) coverage of such events accomplishes this goal far better than a monetary penalty.
The final argument you hear against arbitration deals with a consumer’s loss of due process.
Again, that just does not hold water. Consumers often have the right to reject arbitration clauses and the courts have supported these opt-out clauses. Further, there is little evidence arbitration is a significant roadblock to legal claims. Of the 562 cases studied by the CFPB, “claims against a company party were stayed or dismissed for arbitration in eight percent of the cases.” And, the American Arbitration Association states consumers should have the option to bring a suit to small claims court, if disputes are within jurisdiction.
It is clear – and banks agree – strong and effective consumer protection coupled with fair and responsible banking is profoundly important. Arbitration is just one tool consumers can use to ensure they receive faster, more cost-effective and higher recovery resolutions than offered by class action litigation favored by trial attorneys and the benefactors of their donations.
Richard Hunt is President and CEO of the Consumer Bankers Association.
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