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Another Myth of Consumer Law?

posted by Lauren Willis

As the CFPB gears up to regulate arbitration clauses, a timely article by Omri Ben-Shahar has been posted on ssrn. Part of Ben-Shahar’s “Myths of Consumer Law” project (see here, here, and here ), The Myth of Access-to-Justice in Consumer Law  contains some provocative insights, but key blind spots lead the piece to unwarranted conclusions.

The conclusions are that pre-dispute arbitration and class action waiver clauses in consumer contracts benefit weak consumers. To get there, Ben-Shahar first notes that consumers are not a homogeneous group and access to justice in the courts is far from evenly distributed. Because elites are more likely to sue and are likely to collect higher damages (one of the many reasons they are more likely to sue), giving all consumers the right to sue is, in effect, a regressive cross-subsidy from poorer consumers to those elites.

That is, everyone pays the same litigation tax on a toaster or a cellphone, but only elite consumers will sue and receive compensation for their injuries if the toaster blows up or the cellphone carrier adds bogus charges to the bill (and even if poorer consumers sue in the toaster case, their damages will be lower). [The toaster and cellphone examples are my own, but they help illustrate Ben-Shahar’s argument.] Arbitration and class action clauses eliminate this cross-subsidy, the tax on products that all consumers would otherwise pay to subsidize the cost to firms of litigation by, and damages awarded to, elite consumers, because the clauses effectively prevent many claims from being brought at all.

Ben-Shahar recognizes that some class action litigation brought by elite consumers can have trickle down deterrent effects that help weak consumers, but he argues that most class actions are frivolous and do not deter firms from producing exploding toasters or from adding bogus charges to bills. For the exploding toasters, Ben-Shahar argues here (and elsewhere) that for the most part, reputation is what makes products safe, not litigation or the threat of litigation. As for the bogus cellphone charges, he argues that the effect of litigation or the threat thereof is that firms add more fine print disclosures to their contracts that allow them to charge these hidden fees. The benefits of these fine print disclosures, as Ben-Shahar and Carl Schneider have argued more fully elsewhere, are reaped by elites who can understand them, not the poor or even the average consumer.

The article is still a draft, and so I will not nitpick here about errors that will of course be fixed before publication. Ben-Shahar has also told me he plans substantial revisions, and is now more convinced that class actions might provide sufficient value to poor consumers to undo the otherwise regressive effects of litigation. But the current draft has already been downloaded over 400 times, and thus warrants public discussion.

The article makes some good points. Court enforcement of fine print disclosures does favor elites. Charges disclosed in fine print therefore ought to be unenforceable; every price component ought to be disclosed in such a manner as to facilitate price-shopping. Damages calculations in litigation do favor elites. Perhaps damages ought to be class-blind -- every arm lost to an exploding toaster compensated at the same rate rather than according to the income that arm would have otherwise generated, and every countertop destroyed by that toaster compensated using a formula indifferent to whether the countertop is made of marble or cheap laminate. (Better yet, if the wealth gap between rich and poor were narrowed, the courtroom values of lost arms or lost countertops would no longer be so disparate). Certainly access to attorneys ought to be more broadly available so that the merit of the claim rather than the wealth of the plaintiff would determine who gets a lawyer.

But the article’s suggested remedy for these ailments -- to send all disputes between consumers and firms to arbitration and to eliminate class actions -- would make matters worse, not better, for poor and, in some cases, rich consumers as well.

Moving claims to arbitration and eliminating class actions will only make the access disparity issue worse. To the extent that arbitration is more expensive than litigation for consumers, weak consumers have less ability to vindicate their claims. The elites can continue to bring their high value claims for themselves, but without the class device they cannot obtain any recovery for others. Further, the greater secrecy firms often enjoy in consumer arbitration rather than litigation means that news of the claims of these elites will also not reach: (a) policymakers or regulators who might otherwise be able to force improvements in the toaster’s safety or the cellphone carrier’s billing practices, (b) weak consumers who might pursue copycat litigation once the rich consumer’s suit paves the way, even if they could not or would not have pursued a groundbreaking claim, and (c) all consumers who might benefit if they knew to avoid the toaster or cellphone contract at issue in the future.

It is true that it took Edith Windsor, a woman who stood to inherit so much money from her deceased wife’s estate that the tax treatment of that money made a lawsuit financially viable, to take down the Defense of Marriage Act. But if she had pursued the claim in arbitration (impossible given the parties but for the sake of argument assume she had), then she may well have had her tax burden reduced, but DOMA would still be enforced against all the poorer gays and lesbians who lack the resources to challenge the law.

So too for consumer cases against firms. It is both the class action device and the public nature of litigation that makes firms change practices; individual arbitration in secrecy does not. Sometimes only the rich victim of the exploding toaster collects his damages in litigation, and even in class litigation, sometimes weaker consumers have smaller recoveries. But, at least where rich and poor buy the same toasters and cellphones, the reason the toaster does not explode and the firm does not attempt to charge bogus fees in the first place is, in part, due to the prospect of that rich victim’s litigation and/or the prospect of class litigation.

To the extent that an arbitral forum is so controlled by firms that even rich consumers cannot win, moving all claims to arbitration places the relationship between firms and consumers in a state of lawlessness (outside the space of what government enforcement, which can also be more responsive to elites than the poor, can do). Without tort law or consumer protection law, elites and weaker consumers both suffer, but again the elites are relatively better off. Without litigation to deter firms from making exploding toasters and charging bogus cellphone fees, consumers must each protect themselves. Elites have more resources with which to do this in the marketplace, just as they have more resources to pursue litigation. In some cases even elites are worse off as compared to a marketplace disciplined by tort and consumer protection laws. It is cheaper for firms to make toasters safer than for each consumer to identify which toasters are safe. It saves even the elites substantial effort when firms make price components easy to locate, understand, and compare rather than hidden in the fine print.

When rich and poor consumers are not buying the same toasters and cellphones, moving claims to arbitration and eliminating class actions might harm weak consumers even more. It is not only Ben-Shahar who has noticed that consumers are not a homogeneous group; firms know it well. I know little about toasters and perhaps even less about cellphones, but my guess is that firms sell high and low end toasters and high and low end cellphone contracts. Eliminating the claims of weak consumers through arbitration and class action clauses prevents them -- those few weak consumers who might bring suit -- from using litigation to try to discipline the low end of the product and service markets. The low end markets are thus left in a state of lawlessness. Eliminating the claims of elite consumers may not benefit weak consumers. If firms specialize, then weak consumers do not pay a litigation tax that benefits elites in the first place; if a single firm offers both high and low end products and services, who pays the litigation tax (or any other firm costs) will depend on whether the high or low end market is more price competitive.

In sum, eliminating a regressive litigation tax sounds appealing in theory, but in practice the cure proposed here is likely to be worse than the disease. Eliminating all access to justice is not a good way to solve the problem of unequal access to justice.


With the major caveat that I have not yet read the article, the description above does not sound like any consumer litigation world I know. Individual consumer suits certainly exist, but the real issue with BMA is about preventing class actions. Consumer class action litigation is driven by attorneys, not consumers. As the attorneys work on contingency and recover from settlements and judgments, they don't particularly care about how well off their clients are. The attorneys finance the litigation, not the clients. It's pretty much irrelevant whether the plaintiffs are elite or less-well-off (other than for how sympathetic they are). So I just don't see a distributional problem in the class action space. It might exist for individual litigation, but that's not really what the binding mandatory arbitration problem is about.

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