Comment on a Comment: The Consumer Financial Protection Bureau Arbitration Study Preliminary Results
Is consumer arbitration fair and efficient?
On May 6, 2014, Steven I. Zeisel of the Consumer Bankers Association, “The Voice of the Retail Banking Industry,” posted a comment about the Consumer Financial Protection Bureau Arbitration Study Preliminary Results, under the heading: “Arbitration Is Fair and Efficient for Consumers.”
Pointing to conclusions of the preliminary report that “larger institutions are more likely to use arbitration clauses, arbitration clauses in account agreements can often be complex, and the agreements often contain class-action waivers,” Mr. Zeisel comments that the CFPB’s preliminary report may leave a misleading impression that arbitration clauses disadvantage consumers.
He concludes, “we are pleased the CFPB now says it will compare the costs and benefits to consumers from arbitration with those derived from individual and class action litigation.” Indeed, such a result would be an excellent outcome, because it is devilishly difficult to compare litigation and arbitration costs and benefits, and such a comparison would be of great benefit to consumers, corporations, and legislators.
However, some of Mr. Zeisel’s comments deserve scrutiny:
- He says that for nearly 90 years, arbitration has been a valuable means for consumers to quickly and easily resolve disputes in an efficient and affordable manner. Ninety years – that’s almost the exact age of the Federal Arbitration Act of 1925. But as Prof. Imre Szalai convincingly shows in his historical study of arbitration in the United States, the Federal Arbitration Act was created with an intent to provide an efficient and affordable dispute mechanism for merchants of equal bargaining power. See my February 19, 2014 review of Outsourcing Justice. Whether consumer arbitration is cost efficient is precisely the subject that deserves further study by the CFPB.
- Mr. Zeisel comments, “Congress recognized the importance of arbitration as a means of resolving consumer disputes when it enacted the Federal Arbitration Act in 1925.” But “resolving consumer disputes” played a very minor part, if any, in the enactment of the Federal Arbitration Act. And that is precisely why the fairness and efficiency of consumer arbitration deserve further attention by Congress.
- In support of the argument that consumer arbitration is cost efficient, Mr. Zeisel states that studies show: “the upfront cost to the consumer was far less than the fee required to file a complaint in the federal courts.” But that’s not a simple comparison. The fee for filing a complaint in federal court is $350. Given the restrictive requirements of federal jurisdiction, the cases filed in federal court are not going to be small claims cases. If the matter is a consumer class action, a $350 filing fee is not an excessive entry cost. Consumer advocates argue that class actions provide economies of scale. On the other hand, most consumer disputes are much smaller than class action disputes, and the litigation alternative is not federal court, but small claims court, where filing fees will be less than $350. (And in fact, many consumer arbitration clauses have a “carve-out” provision allowing for the filing of small claims.).
Now if the CFPB is able to methodically compare costs and benefits to consumers of arbitration versus litigation, that may help to answer the question we started with: whether consumer arbitration is really fair and efficient.