The Access-to-Justice Myth

Lauren blogged about a new article by Omri Ben-Shahar, who has written a number of interesting and often (deliberately) provocative articles about consumer contracts. This new article certainly fits in that vein. Its basic point is that requiring arbitration is more favorable to weaker (read poorer) consumers than allowing in-court litigation because all litigation has a regressive distributional effect:  the well-to-do are more likely to litigate and gain the benefits of litigation, while the costs are borne more generally by all consumers. Open access to courts acts as a regressive litigation tax.

There is a clear implication to Ben-Shahar's argument, namely that binding mandatory arbitration should be the favored method for resolving consumer suits. In fairness to Ben-Shahar, however, he does not make this policy prescription, and he does note that distributional concerns are not the only factor that should be considered in policy-making. Instead, his point is simply to point out that there are distributional effects from permitting access to courts. I do, however, expect to see this paper cited in the future in support of attempts to restrict consumers' access to courts, and that's unfortunate. 

I don't have any quibbles with the basic point that it is possible that access to courts could have regressive distributional effects. It's a neat theoretical observation. Still, I don't think Ben-Shahar's observation is likely to hold up as an empirical matter in many, if not most cases, however. And even if it does, I don't think Ben-Shahar has really grappled with the logic of his argument, which proves too much: it is really an argument for banning all consumer litigation. In fact, Ben-Shahar might not disagree: he's proposed as much previously. (I think Ben-Shahar's faith in the market in that article is perhaps naive, but that's another story.) 

Recall that Ben-Shahar's argument is that open-access to courts is regressive because the well-to-do are more likely to litigate and gain litigation's benefits, while the costs are likely to fall on the least well-off or at least on all consumers.  From some brief cogitation, I see three problems with this argument:

(1) Litigation costs are not likely to be passed through to consumers if malfeasance is firm-specific in a competitive industry.

First, Ben-Shahar assumes that litigation costs get passed through to consumers. Ben-Shahar, however, admits this is "conjecture," and the section analyzing who bears the costs of access to justice is the weakest part of the paper. Ben-Shahar's analysis seems based on the assumption that litigation costs apply equally to all members of an industry, rather than varying based on firm behavior. There are certainly cases of industry-wide malfeasance, but there are also plenty of firm-specific problems. 

If we were to assume firm-specific malfeasance, then the pass-through of litigation costs to consumers disappears if there is a competitive industry. To wit, if firm A has litigation costs and firm B does not, firm A can't really pass along the litigation costs to consumers without losing market share to firm B. Instead, Firm A is likely to simply have lower profits. This may make it harder for Firm A to raise capital in the future, but that's the price of running a tortfeasor firm. It's hard to reconcile the absence of competitive markets that underlies Ben-Shahar's assumption in this paper with his faith in market solutions in other papers. 

(2) Product market segmentation reduces regressive redistribution.

Second, and related to the first point, is that to the extent there is product segmentation in the market, regressive redistribution is less likely. To wit, a suit against Verizon Wireless affects a different population than a suit against CricKet. Or a suit against Amex is affects a different population than a suit against a subprime card issuer like First Premier. Not all product markets are segmented, but segmentation reduces the potential extent of regressive redistribution. 

Thus, while even if the well-to-do have larger gains from litigation, unless there's a cost-pass-through to the entire population, I don't think there's a problem, not least because even smaller litigation gains may be more meaningful to poorer consumers due to the diminishing marginal utility of money. 

(3) If the problem is regressive cross-subsidization, get rid of all litigation, no?

Third, even if Ben-Shahar is right about the costs of litigation being passed through to consumers, the difference between arbitration and in-court litigation seems to be a matter of degree. If arbitration is cheaper (and it isn't always), then that means there is a smaller regressive redistribution. But there's still a regressive redistribution going on. The implication of Ben-Shahar's argument is that if we are concerned about preventing regressive redistribution we should ban all litigation. But that clearly proves too much. 

Don't discount deterrence too fast

I also think Ben-Shahar is too quick to discount the deterrent effect of litigation. It isn't perfect, but there is defintely som effect, particularly class action litigation. One need only look at the energy the business community has put into forcing arbitration in consumer suits (but not b2b litigation) and the speed at which class action waivers have been adopted by litigation prone businesses post-AT&T v. Concepcion. If the current system does not create a sufficient deterrence benefit the solution would seem to be making class actions easier to prosecute.

The real access-to-justice problem

There is a real access-to-justice problem for consumers, but it isn't arbitration vs. in-court litigation. It is that any type of litigation, irrespective of forum, is likely to be cost prohibitive for most consumer claims. Excluding tort claims for serious injuries, the cost of litigation makes it impossible for most consumers to pursue their legal rights as individuals. Some statutes (e.g., FDCPA) provide for attorneys' fees, which shifts the economics of litigation, but absent the class action mechanism's economies of scale, consumers are likely to just take their lumps on small tort and contract claims.

While these claims are small in absolute terms, they often really matter to households' finances, particularly poorer households. Being unable economically to prosecute small claims may also undermine confidence in the market generally. But in aggregate, they can add up to real money. Think of Office Space: steal a fraction of a penny trillions of times and you're talking real money. 

We do not currently have an adequate system for prosecuting small dollar claims, and the aggregate effect is a major wealth transfer from consumers to businesses. This is a deeply regressive wealth transfer given how ownership of businesses is concentrated and the diminishing marginal utility of money. Absent cost-shifting provisions, arbitration does not solve this problem one iota. While arbitration may be cheaper than in-court litigation in some circumstances, the relative cost savings don't matter compared with the absolute cost problem:  if you can't swim, it really doesn't matter if the water is 10 feet deep or 20.  

Still, an interesting and provactive paper.  

Comments

[Ebenezer Scrooge]

To me, this raises the basic triad of consumer law: reputation versus litigation versus regulation. All that the Ben-Shahar paper did, as far as I can see, is to recognize a new second- or third-order cost to litigation. But it really doesn't change the basic calculus:
- If reputation works, it is clearly superior to the alternatives. But reputation has many idiosyncratic failure modes. In some industries--such as financial services--it never really gets off the ground. In other industries--auto manufacturing--it works reasonably well.
- Regulation (plus social insurance) probably trumps litigation, as an abstract matter. But this is America, baby.
- The chief advantage of litigation in principle is that it is nimbler: more able to discover and publicize new modes of social harm. The chief practical advantages of litigation derive from the failures of reputation and regulation.

[Martskers]

Arbitration is almost never cheaper than litigation. The costs and fees associated with a FINRA (securities industry) arbitration, for example, can frequently amount to thousands of dollars, which is many times what the same controversy would cost if it were in court.

[Knute Rife]

Interesting and provocative? Looks like more of the Austro-Chicago rubbish that got us into this mess.

1. You're right, a firm can't pass litigation costs through if its competitors don't have them. Given that, how can litigation costs become a tax, as opposed to an expense incurred by firms that do shoddy work? Are the shoddy firms to be shielded from these expenses to the detriment of not only consumers, but competitors? Further, if it isn't just a firm but an industry that is engaged in bad practice, regulation is warranted, but the Austro-Chicagoans CAN'T have THAT. So they come up with the oh-so-logical proposal that shoddy firms be allowed to externalize their costs on consumers and competitors, which frankly is par for their course.
2. Yes, markets are segmented, and you can't identify market forces and effects if you don't bother to properly map the market you're examining. In other words, Ben-Shahar has created a model that doesn't reflect reality terribly well but DOES deliver the results he wants. Quelle surprise.
3. Actually, arbitration routinely costs more than litigation, especially if proceeding under panel rules and a choice of forum clause. Couple such clauses with a loss of class action rights, and the average consumer has ZERO access to justice. And if you couple that with nonregulation, shoddy operators have carte blanche.

The Austro-Chicagoans love to preach about "rights," but I'm compelled to quote "The Princess Bride": You keep using that word; I do not think it means what you think it means. Were the Austro-Chicagoans to have their way, rights would be nothing more than what the holders can afford to enforce. Rights would be something only the rich could afford. To paraphrase "Lord of the Rings": The way is shut. It was made by 1%ers, and 1%ers keep it. The way is shut.

[chris m]

insulation from class action lawsuits permits the worst of the worst to rip off consumers. exposure to those few in the a very small minority who are willing to run the long gauntlet of time and expense to vindicate their claims is no more than a cost of doing wildly profitable, bad business.

[Jeff]

The Supreme Court's AT&T Mobility LLC v. Concepcion decision was another step in the wrong direction, effectively gutting class action law by allowing consumer contracts to mandate cost-prohibitive arbitration.

[Vivian R]

Thank you! I cited this paper, the precepts of which troubled me immensely, in a paper my last semester of law school, and I have been WAITING for some folks with tenure to respond.

After Concepcion and AmEx completely gutted the doctrine of unconscionability re: consumer contracts, it's particularly troubling to see an academic objectively positing that any access (for the poor or less powerful) to a forum is better than no access. Not the standard I'd prefer.

The Court just took the "effective" out of "effective vindication," so that any deterrent effect is gone, and drafters are empowered, post-AmEx, to use class action bans to keep relatively small-dollar claims from being vindicated anywhere. THIS, in the real world of consumers, is the slippery slope.

Great posts!