What is going on?
We have previously blogged about the increased use of mandatory arbitration clauses. These clauses are most often found in consumer agreements and contracts. Another name for these binding arbitration clauses is pre-dispute arbitration clauses. In 2014, Attorney Generals from 16 different states asked Consumer Financial Protection Bureau (CFPB) Director Richard Cordray to rethink the rules surrounding consumer agreements for financial products or services. California, New York, Maine, Maryland, and Massachusetts are a few of the concerned states. According to various sources, the Attorney Generals became aware of the problem after a study showed that most consumers did not understand or consent to the consequences of pre-dispute arbitration clauses. Therefore, the attorneys generals asked Cordray to issue rules on “prohibitions, conditions, or limitations on the use of pre-dispute arbitration clauses.”
Are consumers being cheated?
As the result of the Attorney General’s actions, the CFPB was required in 2014 to issue a report to Congress on the use of pre-dispute arbitration clauses. The agency was mainly looking for whether these clauses benefit or hurt the average consumer. If the findings of their report showed that the clauses hurt consumer, the CFPB can impose limitation on the use of these clauses. They conducted a similar study on 2013, in which the CFPB found that 90% of arbitration clauses prohibited class arbitration and very few companies arbitrated cases for amounts under $1,000.
Other concerns being raised about the pre-dispute arbitration clauses are very familiar if you have read the previous post about binding arbitration agreements. Not only are consumers giving up their right as Americans to have a hearing on their dispute, they are forced into arbitration where the terms are generally in favor of the corporations. Most arbitrators have a financial incentive to rule in favor of the corporation because they are or will become returning customers. The 16 Attorney Generals believe this harms customers because the arbitration process is unfair and deceptive. According to a private study done on binding arbitration clauses, corporations win the dispute 93% of the time. If a consumer is fortunate enough to win against a corporation, he or she only recovers about 12 cents of each dollar they had been cheated out of. However, a “final” study on pre-dispute arbitration clauses by the CFPB may contradict these statements.
The Real Story
In 2015, the CFPB delivered the results of its “final” study on mandatory arbitration clauses to Congress. The results of the empirical study showed that it would be wrong for Congress or the CFPB to say that binding arbitration clauses hurt consumers. The findings of the study showed that arbitration is a much easier and faster process. A consumer generally does not pay more than $200 of the arbitration fees. Arbitration was only mandated in 16.7% of cases where a class action lawsuit was filed. The average amount of relief for consumer that had gone through arbitration was $5,252, showing that consumers may get more money in arbitration than in the courts.
We may or may not have the complete story on whether pre-dispute arbitration clauses hurt or benefit consumers. Attorney Generals from 16 different states were asking the CFPB to prohibit or limit these clauses, but an empirical study from the CFPB seems to be showing that these clauses actually help consumers get more money. After publishing this “final” study, CFPB Director Richard Cordray said more debates and discussions need to take place to determine whether these clauses are beneficial to consumers. In the mean time, we advise all consumers and business clients to carefully read any contracts they sign and understand pre-dispute arbitration clauses.