55 posts categorized "Consumer Arbitration"

Venmo's Unfair and Abusive Arbitration Opt-Out Provision

posted by Adam Levitin

Venmo's changing the terms of its arbitration agreement, and the manner in which it is doing so is unfair and abusive to consumers. The CFPB and state attorneys general need to take action here to protect consumers.

Here's the story.  Last night I got an email from Venmo entitled "Upcoming Changes to Venmo." Nothing in the email's title (which is all I see on my devices) signals that there is a change in contractual terms, and I would have just deleted it without reading but for seeing consumer finance list-serv traffic light up about it.  So I looked at the email, and in the body it does explain that there are changes to the Venmo arbitration clause. It also tells me that I can opt-out of the Agreement to Arbitrate "by following the directions in the Venmo User Agreement by June 22, 2022".  The Venmo User Agreement is hyperlinked.  It is a 95 page document. The hyperlink takes me to the very top of the agreement, but the arbitration agreement starts on page 70.  It takes a lot of scrolling to get there, and nothing is particularly prominent about the arbitration agreement's text.

The arbitration agreement itself has a summary at the top that includes a few bullet points, one of which is "Requires you to follow the Opt-Out Procedure to opt-out of the Agreement to Arbitrate by mailing us a written notice." The term Opt-Out Procedure is a hyperlink to a form that can be printed (but not completed on-line).

What's so ridiculous about requiring a hand-written form to be sent through the mail is that Venmo will surely digitize the form. That means someone's gotta open the mail and do the data entry. Why not have the customer do that himself? Or for that matter, just have a check box on my Venmo account for opting out of the arbitration agreement? The only reason to use the paper form and posts is to make it harder for consumers to opt-out of the arbitration provision.

What Venmo's doing is unfair and abusive and therefore illegal under the Consumer Financial Protection Act. It's perfectly legal for Venmo to have an arbitration clause, and there is no requirement that consumers have a right to opt-out of arbitration, although a change in terms on an existing contract is a bit more complicated. Be that as it may, Venmo is the master of its offer, and by giving consumers a right to opt-out, but raising barriers to the exercise of that right, Venmo is engaging in an unfair or abusive act or practice. Venmo is trying to have its cake and eat it too, but pretending that consumers have a choice about arbitration, but not actually giving them one.

That's "unfair" under the Consumer Financial Protection Act because the practice makes it likely that consumers will lose their right to proceed as part of a class action. That is a substantial injury to consumers in aggregate. The ridiculous opt-out procedure makes this injury "not reasonably avoidable by consumers." The consumer would have to click on no less than two hypertext links, starting with an email the title of which gives no indication what is at stake, and then navigating through a 95 page agreement to find the second link. After that, the consumer must print, fill out, and mail a form. Whatever one thinks of the benefits of arbitration, there's no benefit to consumers or competition from making the opt-out difficult. To my mind, this is a very clearly unfair act or practice. It's also an "abusive" act or practice under the Consumer Financial Protection Act. Because the terms of the opt-out make it so difficult for a consumer to actually exercise the opt-out, the terms of the opt-out "take unreasonable advantage of —the inability of the consumer to protect the interests of the consumer in...using a consumer financial product or service."  (One might also even be able to argue that it is a deceptive practice--the opt-out right has been buried in fine print and hypertext links.) 

Both the CFPB and state attorneys general have the ability to enforce the UDAAP provisions of the CFPA against nonbanks like Venmo. I hope the CFPB and state AGs get on Venmo about this. It presents a good opportunity for the Bureau to make clear what it expects in terms of fairness for contract term modification and opt-out rights.

Commercial and Contract Law: Questions, Ideas, Jargon

posted by Melissa Jacoby

In the Spring I am teaching a research and writing seminar called Advanced Commercial Law and Contracts. Credit Slips readers have been important resources for project ideas in the past, and I'd appreciate hearing what you have seen out in the world on which you wish there was more research, and/or what you think might make a great exploration for an enterprising student. This course is not centered on bankruptcy, but things that happen in bankruptcy unearth puzzles from commercial and contract law more generally, so examples from bankruptcy cases are indeed welcome. You can share ideas through the comments below, by email to me, or direct message on Twitter.

Also, I am considering having the students build another wiki of jargon as I did a few years ago in another course. Please pass along your favorite (or least favorite) terms du jour in commercial finance and beyond.

Thank you as always for your input, especially during such chaotic times.

ALI Consumer Contracts Restatement-What's at Stake

posted by Adam Levitin

The American Law Institute's membership will vote next Tuesday (the 21st) on whether to approve the ALI's Consumer Contracts Restatement project.  Let me recap why you should care about this project:  it opens the door for businesses to use contract to abuse consumers in basically any way they want.  The Restatement would do away with the idea of a "meeting of the minds," as the touchstone of contract law for consumer contracts, and allow businesses to impose any terms they want on consumers, even if the consumers are unaware of the terms and haven't consented to them.  

Under the proposed Restatement, a consumer would be bound by any and all of a business's standard form terms if the consumer (1) assented to a transaction, (2) had notice of the terms, and (3) had a reasonable opportunity to review the terms.  In other words, the consumer would not actually have to know or agree to any of the terms to be bound by them.  The Restatement would replace meaningful assent with a legal fiction of notice.  That opens the door to consumers being deprived of all sorts of rights by contract, starting with arbitration, but then going on the privacy rights and continuing to disclaimer of warranties, etc.  If you think I'm being paranoid, go look at Walmart.com's Terms of Use. Few, if any, of those terms exist when you buy something from Walmart at a storefront, but the cost of larding on an extra term on the Internet is so low, that there's no reason for a business not to bury its whole Christmas wishlist in linked on-line terms and conditions.  

The Restatement strangely believes that courts will somehow police abuses of contract through unconscionability and deception, but this presumes (1) that consumers will litigate in the first place, and (2) that courts will stretch these constrained doctrines to prevent the enforcement of not just outrageous terms, but also quotidian unfair terms.  Do I have a nice bridge to sell you in Brooklyn if you think that's a trade-off that will help consumers....

A bipartisan group of 23 state Attorneys General has recently written publicly opposing the Restatement. That sort of opposition is unprecedented and is a sign that something is seriously amiss with the project. 

So, if you know an ALI member, urge them to attend the Annual Meeting session and vote against the Restatement!

Restatement of Consumer Contracts—On-Line Symposium

posted by Adam Levitin

The Yale Journal on Regulation is holding an on-line symposium about the draft Restatement of the Law of Consumer Contracts, which is scheduled for a vote at the American Law Institute's annual meeting this May.  The launching point for the symposium are a pair of articles in JREG that take sharp issue with the empirical studies that underlie the draft Restatement.

The American Law Institute (ALI) is a self-appointed college of cardinals of the American legal profession.  It's a limited size membership organization that puts out various publications, most notably "Restatements" of the law, which are attempts to summarize, clarify, and occasionally improve the law.  Restatements aren't actually law, but they are tremendously influential.  Litigants and courts cite them and they are used to teach law students.  In other words, this stuff matters, even if its influence is indirect. 

The draft Restatement of Consumer Contracts is founded on a set of six quantitative empirical studies about consumer contracts.  This is a major and novel move for a Restatement; traditionally Restatements engaged in a qualitative distillation of the law.  Professor Gregory Klass of Georgetown has an article that attempts to replicate the Reporters' empirical study about the treatment of privacy policies as contracts.  He finds pervasive problems in the Reporters' coding, such as the inclusion of b2b cases in a consumer contracts restatement.  

A draft version of Professor Klass's study inspired me and a number of other advisors to the Restatement project to attempt our own replication study of the empirical studies of contract modification and clickwrap enforcement.  We found the same sort of pervasive problems as Professor Klass.  While the ALI Council completely ignored our findings, we wrote them up into a companion article to Professor Klass's.  

Some of the pieces posted to the symposium so far have been focused on replication study methodology (sort of beside the point given the very basic nature of the problems we identified) or defenses of the Reporters including mixed statutory-contract decisions in their data sets (which is no defense to inclusion of b2b cases or duplicate cases or vacated cases, etc.). But Mel Eisenberg has contributed an important piece that highlights some of the substantive problems with the draft Restatement, namely that it guts consumer protections.  For example, it would require findings of both procedural and substantive unconscionability for a contract to be unconscionable, while many states only require substantive unconscionability. Not surprisingly, I am unaware of any consumer law expert (other than the Reporters) who supports the project.  

But this thing that should really be a wake up call that something is very, very off with this Restatement project is the presence of outside opposition, which is virtually unheard of in the ALI process.  Every major consumer group (also here, here, and here), weighed in in opposition as well as 13 state attorneys general (and also here), and our former co-blogger (and also former ALI Vice-Chair), Senator Elizabeth Warren.  Nor has the opposition been solely from consumer-minded groups.  The US Chamber of Commerce and the major trade associations for banking, telecom, retailers, and insurers are also opposed (albeit with very different motivations).  Simply put, it's hard to find anyone other than the Reporters (and the ALI Council, which has a strong tradition of deference to Reporters) who actually likes the draft Restatement.  

So, if you're an ALI member, get informed.  If you know an ALI member, make sure that s/he is informed.  This is coming for a vote in May and if enacted would be bad policy, based on the legal equivalent of "junk science."  This isn't what the ALI should be doing.  

Shakespeare Meets ALJs: Much Ado About Nothing

posted by Patricia A. McCoy

In a recent oral argument before the U.S. Supreme Court, conservatives urged the Court to outlaw the use of administrative law judges (ALJs) in agency enforcement actions.  The Consumer Financial Protection Bureau is paying notice. On January 31, 2018, the CFPB reprised the ALJ debate in its second Request for Information under Acting Director Mick Mulvaney. This RFI asked:  should the CFPB shift course to litigate all of its enforcement cases in federal court and none before ALJs? Suffice it to say, there is less here than meets the eye.

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Epic Systems and the Atomization of Employment Disputes

posted by Mark Weidemaier

Millions of American workers are parties to arbitration agreements that require them to bring claims against their employers in individualized arbitration proceedings (rather than as part of a class or collective action, as authorized by some federal and state laws regulating the workplace). In Epic Systems v. Lewis, a 5:4 majority of the Supreme Court held today that these agreements must be enforced even though the federal National Labor Relations Act declares it an unfair labor practice for an employer to interfere with the ability of employees to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The decision is not unexpected, but it is consequential given the number of affected employees.

The case—really, several consolidated cases—was weird for a number of reasons. The NLRB had concluded that employers who insisted on individualized arbitration were engaged in unfair labor practices. Then, in September 2017, the Board fell under Republican control, and many wondered whether it would continue to defend that position. It did, but the administration worked hard to undermine it. In fact, the Solicitor General, which had previously supported the Board in seeking Supreme Court review, later filed a brief disagreeing with it on the merits.

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Summer Associate Arbitration Clauses: Why Disclosure Isn't Enough

posted by Adam Levitin

This weekend a mini-scandal erupted over the law firm Munger, Tolles requiring its summer associates to sign pre-dispute arbitration clauses. Munger, Tolles was rightly shamed into rescinding the practice, but one suspects that Munger, Tolles isn't the only firm doing or contemplating doing this. 

I believe law schools have a particular duty to stand up here and protect their students. Law students seeking firm jobs are at an incredibly disadvantage in terms of both market power and knowledge. The students are often heavily leveraged and desperate to land a high-paying job with a large law firm in order to service their educational debt, and even when debt doesn't drive them, a summer associate position at a large firm is often seen as a stepping stone to career success. Law students really have no bargaining power in terms of their contractual relationship with summer employers.  It's take-it-or-leave-it, and leave-it isn't an option for law students.  Law students also lack knowledge about the importance of an arbitration clause in terms of the procedural and substantive rights they will surrender and knowledge about the firm culture they are stepping into and the likelihood it will result in a dispute of some sort (e.g., sexual harassment).  Whatever one thinks of the virtues of arbitration generally, this strikes me as a very clear cut case of pre-dispute arbitration agreements  being inappropriate.  I don't think it's a stretch to call such arbitration provisions unfair and unconscionable both procedurally and substantively.  (Does anyone think the firms are doing this for the summer associates' benefit?) 

I believe that the appropriate response for law schools in light of the situation is to refuse access to on-campus interviewing to any firm that requires its summer associates to sign an arbitration clause. Schools have done this when their students civil rights were being threatened both under don't-ask-don't-tell and in the era when firms would often refuse interviews to women and people of color. The right to have one's grievances heard before a court (including for race and gender discrimination!) is also a civil right.  It is a civil right that is fundamental to the whole endeavor of law schools, and schools should be just as vigilant to protecting their students civil rights in this instance as they have in the face of discrimination. 

Continue reading "Summer Associate Arbitration Clauses: Why Disclosure Isn't Enough" »

Debbie Does Damages: the Stormy Daniels Contract Clusterf*ck

posted by Adam Levitin

There's been a lot of poorly informed reporting about the Stormy Daniels contract litigation, including in some quite reputable publications, but by reporters who just aren't well versed in legal issues.  For example, I've seen repeated reference to an "arbitration judge" (no such creature exists!) or to a "restraining order" (there's no enforceable order around as far as I can tell.  So what I'm going to do in this blog post, as a public service and by virtue of some tangential connection to our blog's focus, dealing with arbitration agreement (to satisfy Sergeant-at-Blog Lawless), I want to clarify some things about the Stormy Daniels contract litigation and engage in a wee bit of informed speculation based on tantalizing clues in the contract.  As a preliminary matter, though, I apologize for the clickbait title.  

Let's start with the facts as we know them.

Continue reading "Debbie Does Damages: the Stormy Daniels Contract Clusterf*ck" »

Stormy Daniels, Donald Trump, and the Role of Arbitration in Ensuring Silence

posted by Mark Weidemaier

[Edited to correct names; too many aliases involved in this one]

For readers who haven't been following along: Stephanie Clifford, aka Stormy Daniels, is an adult film star who allegedly had a sexual relationship with Donald Trump in the mid-2000s. She recently sued Trump and other defendants, seeking to invalidate a settlement agreement in which she was paid to keep silent about the details of the alleged relationship. Here is her complaint, which includes the settlement agreement as an exhibit. And here is some coverage of background details.

The settlement agreement includes an arbitration clause, which should prompt some reflection about the use of arbitration to silence victims of sexual assault (a topic that has attracted attention in the wake of revelations about Harvey Weinstein). On the other hand, people are often too quick to blame arbitration for unrelated problems, so I hope this (long-ish) post can offer a bit of clarity. The short version: Whoever drafted the agreement between Clifford and "David Dennison" gets an A for cynicism, but would have to beg for a C in my arbitration class. (I’m guessing the draftsperson would fail professional responsibility...)

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CFPB Arbitration Rule Overturned

posted by Mark Weidemaier

By a 51-50 vote, with Vice President Pence breaking the tie, the Senate has voted to overturn the Consumer Financial Protection Bureau's rule forbidding the use of contract terms (in covered consumer loan products) barring consumers to bring or participate in class actions. The affirmative vote was supported by the usual narratives: Class actions make credit more expensive, arbitration is a better and more efficient means for resolving consumer disputes, class action lawyers are greedy parasites, etc. The truth of these narratives is irrelevant, it seems. For instance, though it is possible arbitration might be used to efficiently and effectively vindicate consumer rights, there isn't much evidence that it does so in practice, and there is evidence to the contrary. As a mechanism for collecting consumer debts, the history of arbitration is uglier still. And even if the availability of class actions increases the cost of credit--emphasis on if--it's not obvious this would be bad. If class actions deter lender misconduct--not that there's any history of bank misconduct!--, and if this increases some lenders' costs and ultimately the cost of their financial products, then... I don't know. Who cares, I guess? Why should consumers victimized by fraudulent lender conduct subsidize cheaper credit for others? The contrary narrative--that class actions are just so darn expensive to defend that banks settle even the bogus ones for large sums of money--is so implausible that it should not be taken seriously without credible supporting evidence.  

CFPB Politics Update

posted by Adam Levitin

Time for a CFPB politics update:  FSOC veto, Congressional Review Act override of the arbitration rulemaking, Director succession line, and contempt of Congress all discussed below the break.

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CFPB Arbitration Rulemaking--and Potential FSOC Veto

posted by Adam Levitin

Today the CFPB finalized the most important rulemaking it has undertaken to date.  This rulemaking substantially restricts consumer financial service providers' ability to prevent consumer class actions by forcing consumers into individual arbitrations. I believe this is by far the most important rulemaking undertaken by the CFPB because it affects practices across the consumer finance space (other than mortgages, where arbitration clauses are already prohibited by statute). 

Let's be clear--the issue has never really been about arbitration vs. judicial adjudication.  It's always been about whether consumers could bring class actions.  I don't want to rehash the merits of that here other than to say that the prevention of class actions is effectively a license for businesses with sticky consumer relationships to steal small amounts from a large number of people.   For example, am I really going to change my banking relationship (and its direct deposit and automatic bill payment arrangements and convenient branch) over an illegal $15 overcharge?  Rationally, no, I'll lump it, not least because I have no easy way of determining if another bank will do the same thing to me. In a world of profit-maximizing firms, we know what will happen next:  I'll get hit with overcharges right up to my tolerance limit.  Given that consumer finance is largely a business of lots of relatively small dollar transactions, it is tailor made for this problem. Class actions are imperfect procedurally, but they at least reduce the incentive for firms to treat their customers unfairly.  

The financial services industry seems to be circling the wagons for a last ditch defense of arbitration. There appear to be three prongs to the defense strategy.  First, there will be intense lobbying to get Congress to overturn the rulemaking under the Congressional Review Act.  There's a limited window in which that can happen, however, and it will be an uncomfortable vote for members of Congress, particularly with the 2018 election looming.  This one will be an albatross for them.  Second, there's an effort afoot to have the Financial Stability Oversight Council veto the rulemaking.  And finally, if the rule isn't quashed by Congress or the FSOC, there will assuredly be a litigation challenge to the rulemaking. 

I want to focus on the FSOC veto strategy, which has just popped up in the news.  

Continue reading "CFPB Arbitration Rulemaking--and Potential FSOC Veto" »

Wells Fargo Fake Accounts and Arbitration

posted by Adam Levitin

Jeff Sovern has an excellent new article about arbitration clauses and class action waivers that uses the Wells Fargo fake account scandal as a test case.  He also does a monster job knocking down the Johnston-Zwyicki arbitration study.  As Sovern points out, the Johnston-Zywicki study makes a big deal out of some data on a Texas bank's voluntary refunds of fees in consumer disputes.  But as Sovern observes, Johnston and Zywicki aren't able to differentiate between fees due to bank misconduct and fees due to consumer behavior (account inactivity, overlimit, etc.), much less why the bank refunded the fees in some cases.  Highly recommended and relevant in the run-up to the anticipated CFPB arbitration rulemaking.  

[Link corrected 6/15/17 at 4:04pm ET]

Taking Online Dispute Resolution To The Next Level

posted by Pamela Foohey

New HandshakeYesterday I purchased a travel alarm clock through Amazon. This morning, the manufacturer emailed me with instructions for its use, including a very important point about switching the travel lock button off to activate the clock. The clock apparently arrives in the locked condition, which has caused some customers confusion and led them to think that the clock was defective when it was not. The email made me think of a recently published book, The New Handshake: Online Dispute Resolution and the Future of Consumer Protection, by Professor (and former Slips guest blogger) Amy Schmitz and Colin Rule, who is the former Director of Online Dispute Resolution for eBay and PayPal.

The New Handshake surveys that current landscape of online dispute resolution and sets out a blueprint for how the Internet can help consumers worldwide deal with disputes arising from their e-commerce transactions. With more and more consumer transactions moving online (ten years ago, I likely would have purchased that travel alarm clock at the-somehow-still-semi-alive Radio Shack), the book's detailed ideas for how to design an effective dispute resolution system is increasingly important for businesses and for consumer advocates. As Schmitz and Rule note, largely gone are the days when transactions were sealed in person with a firm handshake, and class actions seem less and less effective overall -- which leaves both challenges and space to innovate for business and consumers. For my own interests, two parts of the books stood out.

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Kindred Nursing Centers--More on Arbitration and State Contract Law

posted by Mark Weidemaier

Today, the U.S. Supreme Court decided Kindred Nursing v Clark, an arbitration case in which the Kentucky Supreme Court declined to enforce arbitration agreements between a nursing home and two patients. The agreements had been executed by relatives holding powers of attorney granting broad authority to enter contracts, but the Kentucky Supreme Court held that a power of attorney must specifically grant the authority to agree to arbitration. It was clear--as it often is--that the U.S. Supreme Court would reverse. The Kentucky rule just can’t be squared with governing federal arbitration law. Put simply, state law can't say that a broadly-worded power of attorney grants authority to enter contracts generally, except for arbitration clauses. Not surprisingly, then, the U.S. Supreme Court reversed in a 7 to 1 opinion authored by Justice Kagan.* The dissent wasn’t on the merits, either; Justice Thomas does not believe the Federal Arbitration Act applies to proceedings in state court.

I teach contracts and arbitration law, among other classes, and I find it increasingly frustrating to teach arbitration cases. So many involve plausible applications of contract law (like Kindred) but get the arbitration law flatly wrong. Others involve questionable applications of contract law or related doctrines, seemingly to avoid the effect of arbitration law. Here’s a recent case by the Maryland Court of Appeals, Cain v Midland Funding, which falls into the latter camp.

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Uber Helps Me Revise My Contracts Syllabus

posted by Mark Weidemaier

I've been meaning to post about this recent decision, by Judge Rakoff in the Southern District of New York, denying motions by Uber and its CEO Travis Kalanick to compel arbitration of a class action lawsuit. More coverage here (Bloomberg) and here (Law360). The lawsuit alleges that Uber suppresses price competition among drivers in violation of the antitrust laws. The court's opinion covers some arcane issues of arbitration law, such as the defendants' argument that the plaintiff had to arbitrate the question whether an arbitration agreement existed. (Answer: No.*) But mostly, the opinion is about contract law--or rather, about how not to design a system for forming contracts on-line.

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Porter's Modern Consumer Law

posted by Bob Lawless

Porter Consumer LawCredit Slips blogger Katie Porter has produced a new textbook in consumer law that anyone teaching the subject should consider adopting. Indeed, law professors not teaching consumer law should to take a look at it and consider whether they should add the class to their teaching portfolio. A 2013 poll on Brian Leiter's Law School Reports named consumer law as the number one "area of law which deserves more attention in the legal academy." Next academic year I will be picking up a new course, and the emergence of Porter's new text made the decision easy for me as to which course it will be.

In the preface, Porter makes explicit her three-pronged approach to the topic of consumer law:

  1. The book situates consumer law within the business-law curriculum. "Consumer law is big business," she notes. Understanding the legal issues requires understanding the "deal," the information flow, and the market in which the transaction occurs. Porter expressly recognizes, "the world of consumer practice offers opportunities for lawyers to represent consumers (as government lawyers, policy advocates, and plaintiffs’ attorneys) and to represent businesses (as in-house counsel, defense attorneys, and
    lobbyists)."
  2. The book provides a strong theoretical frame by situating consumer law at the intersection of tort and contract. The book does not present consumer law as a hodgepodge of cases and statutes loosely organized around the term "consumer." Rather it recognizes that a lot of what travels under the law of "consumer law" responds to the gaps that traditional contract and torts doctrines have when it comes to the issues that consumer transactions create.
  3. The book explores where the social-science literature has learning for consumer law. Porter looks to see what psychology, sociology, marketing, and economics can add to our understanding of the legal issues. By doing so, the book explores the difference between law on the ground and law in the books. 

The book uses a problem-based method of instruction that will be familiar to users of Porter's co-authored bankruptcy textbook or my co-authored secured transactions textbook. The problems range from straight-forward statute readers to teach doctrine to tough client counseling problems that focus on real-world lawyering skills.

More information, including a table of contents and a sample chapter, can be found at Aspen Publishers.

The CFPB's Proposed Rules on Consumer Financial Arbitration

posted by Mark Weidemaier

As has been expected for some time, the Consumer Financial Protection Bureau has issued a proposed rule that would prohibit companies providing consumer financial services from pairing arbitration clauses with clauses that prohibit consumers from bringing or participating in class actions. The rule also imposes disclosure requirements on companies that use arbitration. The CFPB's announcement is here; the proposed rule is here. There are two main components.

First, covered providers of consumer financial products can still include pre-dispute arbitration clauses in their contracts, but those who do must explicitly state that the consumer retains the right to bring or participate in a judicial class action. The rule requires that the following language be included in the contract: "We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it." (As an aside, the CFPB rule only applies to class actions brought in court. Companies may forbid class action proceedings in arbitration, and I imagine that careful drafters will want to do so expressly.) Second, the Bureau proposes to require covered providers to submit information about claims filed by or against them in arbitration, including copies of the arbitration demand, any response, and the arbitrator's award (see p. 362-363 of the proposal). The Bureau apparently hasn't made up its mind about whether it will make this information public or will merely use it to monitor arbitration proceedings. 

 

DIRECTV v. Imburgia Decided, Surprises No One

posted by Mark Weidemaier

Earlier I posted about DIRECTV v. Imburgia. To recap the issue: DIRECTV's contract with subscribers (i) required arbitration, (ii) forbade class actions, and (iii) provided for litigation in court if "the law of [the subscriber's] state" refused to enforce the class action waiver. California law refuses to enforce class action waivers in some circumstances, but this law is preempted by the Federal Arbitration Act. State courts in California invalidated the class action waiver anyway, reasoning that the contract actually meant to incorporate (i.e., be governed by) invalid state law. The interpretation is so odd that, in my view, it is explicable only if one assumes that the judges simply wanted not to enforce the arbitration clause. But the Federal Arbitration Act also preempts modes of contract interpretation that discriminate against arbitration clauses, and that seems plainly true of this mode of interpretation.

Anyway, the opinion is here, along with a dissent by Justices Ginsburg and Sotomayor. Justice Thomas dissented because he believes the FAA does not apply to proceedings in state court.

The Weight To Be Given To Comments From Bankruptcy Judges On Proposed Bankruptcy Rules and Forms

posted by david lander

 The Advisory Committee on Bankruptcy Rules (and forms) has been quite active and successful over the past decade in improving the practice of law in the Bankruptcy Courts.  Some of their major innovations such as the overhaul of the process for appealing a decision of the bankruptcy court have engendered little comment and have been deemed important contributions to justice.  Others, such as the responses to changes in the consumer credit and consumer mortgage industries have engendered very active comment from both the creditor and debtor communities and the Committee has endeavored to evaluate carefully all such comments to make certain the proposed rules and forms are not only well written and thought through but also fair to both sides.  In the business bankruptcy  realm the proposed rules governing Informal Committees (2019) engendered significant comment from the claims buying industry and the Committee made numerous changes in response to those comments.

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Dear NY Times: Thank You For Letting Me Sue Only 500 Miles From My Home

posted by Mark Weidemaier

So the New York Times has just finished a three-part series on arbitration. For such lengthy coverage, the Times reveals almost nothing that will be new to those who have been following debates over the use of pre-dispute arbitration agreements. But if you haven't been following the issue, the Times series is a good place to start. It highlights some pressing recent issues, such as the use of arbitration to eliminate class action liability, while also touching on issues that often escape attention, such as judicial enforcement of contracts requiring religious arbitration.

Discussions about arbitration can be frustrating. For one thing, it is hard to have them without sending (often unintended) ideological signals. Those who highlight flaws in anti-arbitration arguments--even if simultaneously supporting greater regulation--are often characterized as "defenders" of "forced arbitration," as if the only valid choice is to justify or oppose (rather than investigate) the practice. Meanwhile, lawyers for large business interests have the irritating habit of presenting themselves as defenders of the common good, rather than as zealous advocates for corporate clients. 

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DIRECTV v. Imburgia

posted by Mark Weidemaier

Shutterstock_322927829Yesterday, the Supreme Court heard arguments in yet another arbitration case, DIRECTV v. Imburgia. Here's the transcript. The issue is esoteric even by the standards of the Supreme Court's arbitration docket, but it has a certain practical significance. In a series of recent cases, the Court has mandated the enforcement of arbitration clauses that require claimants to proceed on an individual basis rather than as part of a class action. Many of these cases involve small-dollar consumer claims, so the likely effect is to eliminate, or at least substantially reduce, the potential liability of the business. The opinions can be baffling to read. Even when I agree with the results, it can be hard to accept the Court's application of seemingly-settled arbitration law. The common theme, though, is fairly clear: A small majority of justices view arbitration clauses as a permissible means to avoid class action liability.

Below the jump, more discussion of the specific issue in Imburgia.

Continue reading "DIRECTV v. Imburgia" »

Are Some Banks Using Credit Reports to Help Collect Discharged Debts?

posted by Dalié Jiménez

Last week, Adam pointed us to a NYT's story on "zombie debt" after bankruptcy. I did a bit more research into the story because I had a hard time understanding the problem from the article.

There are a few lawsuits that have been filed about this (I found ones against GE Capital/Synchrony, Bank of America/FIA Card Svcs, Citigroup, and Chase). The GE complaint alleges that the banks have a systematic practice of "selling and attempting to collect discharged debts and ... failing to update and correct credit information to credit reporting agencies to show that such debts are no longer due and owing because they have been discharged in bankruptcy." You can download the complaint in the GE case here.

More specifically, the allegations are that after a discharge, some creditors do not update their tradelines to a status of "in bankruptcy" and instead leave them as "charged-off." The credit report of a person in this situation would then say they have filed bankruptcy and obtained a discharge but you could not tell whether any individual debt has been discharged in that bankruptcy. The (non-binding) credit bureau reporting guidelines (METRO 2) specify that creditors should report accounts as "included in bankruptcy" once they receive a notice of discharge.

The complaint characterizes GE's argument as being that the FCRA does not require it to make this change, perhaps especially in particular after a debt has been sold and they no longer have an interest in it. (GE has not filed an answer yet, but it seems like this is one argument they might make from reading their other filings). That seems to me to be a wrong interpretation of the FCRA and the FTC's Furnisher Rule. It should also be a violation of the discharge injunction. As Judge Drain put it in an opinion denying a motion to compel arbitration:

One could argue that the reporting of a discharged debt as still outstanding when the credit report also shows that the debtor has been in bankruptcy is even a worse result, indicating to those who are considering providing credit in the future that the debtor has fallen into the category of the dishonest debtor who did not receive a discharge.

I am told that NPR's On Point will be doing a segment on this on Thursday at 10AM EST with one of the attorneys filing these cases. You can listen to the podcast here.

Note: post has been edited to correct the timing of the NPR program and to add the link to the podcast.

Consumer Arbitration: Taking Stock

posted by Adam Levitin

I have an op-ed in today's American Banker on the supposed efficiency and fairness of binding mandatory arbitration.  We've given arbitration occasional coverage on the Slips over the years, but it's never been a major focus of our posting, in part because it isn't inherently a credit issue. Instead, the fight over arbitration is another chapter in the fight over whether public services should be privatized.  It's worth noting, however, in the time since our coverage began (not to take any credit for it), the needle has moved a bit on binding mandatory arbitration in consumer contracts--both ways.  

Continue reading "Consumer Arbitration: Taking Stock" »

Legal Notice. Read Carefully: Your Rights May Be Affected

posted by Adam Levitin

In light of General Mills policy of claiming that its binding mandatory arbitration requirement (with class action waiver) applies to anyone who purchases its products, including via third-party vendors, I have decided, to post the following legal notice, applicable to all persons, everywhere:     

By permitting, allowing, or suffering me to purchase any of your products or services, whether directly from you or indirectly through dealers, vendors, agents, or other third-parties, you agree to irrevocably surrender all rights to compel me to arbitration or to waive my rights to proceed against you as a member of a class action.  In order to make this provision effective and allow effective vindication of my rights, you also agree to irrevocably surrender all rights to compel arbitration and to prevent class actions against all other purchasers of your products and services.  You also agree to cover all of my costs associated with bringing an action, including attorneys' fees and any damages awarded against me, irrespective of the outcome of the action. 

Is General Mills notice any more effective than mine?  I don't see why it would be.  Let's get this long-range battle of the forms on! 

An Amicable Separation for Arbitration and the Class Action Waiver

posted by Mark Weidemaier

Shutterstock_124671304To follow up on Adam's post about the Dropbox arbitration clause and its class action waiver, I want to highlight two aspects of the clause that may not be apparent on first glance. First, Dropbox's procedures for individual arbitration are actually quite fair. That's worth emphasizing, but so is the likely explanation: that Dropbox views a fair individual process as the cost of getting insulation from class actions. Second, Dropbox's clause suggests that the long-standing link between arbitration and class action avoidance may be breaking down. (This isn't necessarily good news if you value the deterrent effect of class actions.)

Continue reading "An Amicable Separation for Arbitration and the Class Action Waiver" »

Arbitration Agreements and Class Action Waivers: Dropbox

posted by Adam Levitin

It's hardly news that arbitration agreements are used to effectuate class action waivers.  The Supreme Court has blessed the comandeering of a federal policy favoring enforcement of forum selection clauses to limit types of proceedings, including those that have nothing to do with forum and are necessary for effective vindication of small value claims.  

While arbitration ageements have been a particular problem in consumer finance, they also appear in things like telecom agreements, and now, to my chagrin, for Dropbox, a popular free cloud storage service. Dropbox announced a change in its terms of service that includes an arbitration clause.

Continue reading "Arbitration Agreements and Class Action Waivers: Dropbox" »

The Access-to-Justice Myth

posted by Adam Levitin

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.) 

Continue reading "The Access-to-Justice Myth" »

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.

Continue reading "Another Myth of Consumer Law?" »

Creeping Privatization of Justice

posted by Jason Kilborn

Shutterstock_99036074Lauren's and Bob's recent posts brought to mind a theme that keeps cropping up in my teaching and research: public authorities increasingly offloading responsibility for important justice-related issues, especially consumer justice, to the private sector.

On the teaching side, I teach Civil Procedure, and that world is all abuzz with talk of a slew of recent Supreme Court and Court of Appeals opinions that have prioritized private arbitration over public adjudication of disputes (see, e.g., here and here). And this movement is afoot not only in the classic context of complex business disputes, where arbitration makes some sense; rather, it has taken hold in David-and-Goliath situations involving important rights like employment contracts and consumer sales and service contracts of a variety of kinds. In the big case that started the latest round of hoopla, AT&T Mobility v. Concepción, Justice Scalia acknowledges that "the times in which consumer contracts were anything other than adhesive are long past," yet he and the majority proceed to bend over backwards to ensure that clever company counsel can relegate disputes over such contracts to arbitration, effectively ensuring no suits will be brought in many cases, where the stakes are too low without aggregate (class) litigation, as in Concepción.  

On the research side, virtually every discussion around the world of consumer insolvency reform begins from the premise that out-of-court workouts are to be preferred, and court-sanctioned payment plans and coercive discharge should be a last resort. Many world consumer insolvency regimes require consumers to engage in an informal workout negotiation as a mandatory prerequisite to seeking formal relief. The notion of private workouts in this context is like Communism: it sounds great in theory, but it just doesn't work out in practice. In the highly morally charged context of consumer workouts, creditors consistently refuse to offer any kind of relief from the inflated principal debt, and only limited relief from spiraling interest (sound familiar?).

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Arbitration versus sovereign debt: Where will YOU be on February 27?

posted by Mark Weidemaier
February 27 is a big day for people interested in financial markets, consumer credit, and... well, many things of interest to Credit Slips readers. I'll be in New York, attending round two of the Second Circuit oral arguments in NML v. Argentina. Meanwhile, the Supreme Court will be hearing argument in In re American Express Merchants Litigation - the latest big arbitration case. Much of my academic writing deals with arbitration, so I want to take a minute to highlight the significance of the AmEx case.

Like many credit providers, American Express tries to escape class action liability by pairing an arbitration clause with a class action waiver, thus requiring customers to bring claims in arbitration, as individuals. In AT&T v. Concepcion, the Court rejected an attempt to use state law unconscionability doctrine to invalidate a clause like this. In the AmEx case, the Court must resolve an arguable conflict between two federal laws. Plaintiffs are merchants who accuse American Express of violating the Sherman Antitrust Act and want to bring a class action in federal court. (Actually, they waffle a bit on this (pp. 35-36), but let's just say they wouldn't turn up their nose at a federal class action...) Relying on the Federal Arbitration Act, American Express argues that the plaintiffs must honor their agreement to pursue these claims individually in arbitration. In its prior cases, the Court has resolved such disputes in favor of arbitration so long as that forum allows claimants to "effectively vindicate" their statutory rights.

Continue reading "Arbitration versus sovereign debt: Where will YOU be on February 27?" »

Protecting Public Rights

posted by Amy Schmitz

Contracts professors, policymakers, consumer groups and others have become particularly interested in another post-AT&T Mobility LLC v. Concepcion case.  The United States Court of Appeals for the Ninth Circuit recently agreed to an en banc rehearing of Kilgore v. Keybank, 673 F.3d 947 (9th Cir. 2012).  The issue in this case is whether Concepcion precludes courts from preserving judicial access for public injunctions under state consumer protection statutes by invoking the public policy exemption from the Federal Arbitration Act's ("FAA") mandate that courts enforce arbitration agreements according to their terms.  The en banc hearing is set for some time in December of this year.

The case is important on many levels.  It raises fundamental questions about the reach of FAA preemption in the wake of Concepcion, in which the United States Supreme Court held that the FAA preempted courts from using California unconscionability law to strike a class relief waiver and order class arbitration.  Moreover, the case implicates states' power to protect individuals' access to meaningful injunctive relief in order to enforce and protect public rights under state statutes, such as consumer protection statutes.  

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Needle in a Haystack?

posted by Amy Schmitz

Following my post regarding PayPal's new opt-out arbitration provision, I talked to many individuals who could not find the directions for how they can opt out (hence "needle in a haystack").  Here they are:

"Opt-Out Procedure.

You can choose to reject this Agreement to Arbitrate ("opt out") by mailing us a written opt-out notice ("Opt-Out Notice"). For new PayPal users, the Opt-Out Notice must be postmarked no later than 30 Days after the date you accept the User Agreement for the first time. If you are already a current PayPal user and previously accepted the User Agreement prior to the introduction of this Agreement to Arbitrate, the Opt-Out Notice must be postmarked no later than December 1, 2012. You must mail the Opt-Out Notice to PayPal, Inc., Attn: Litigation Department, 2211 North First Street, San Jose, CA 95131.

The Opt-Out Notice must state that you do not agree to this Agreement to Arbitrate and must include your name, address, phone number, and the email address(es) used to log in to the PayPal account(s) to which the opt-out applies. You must sign the Opt-Out Notice for it to be effective. This procedure is the only way you can opt out of the Agreement to Arbitrate."

It seems PayPal is banking on our inertia.  How likely are we to send a letter in the mail to opt-out when PayPal is used for e-contracts?  Why not simply have an online opt-out procedure, as companies do for unsubscribing to online newsletters?  

That said, PayPal's arbitration procedure is arguably reasonable on its face.  

Continue reading "Needle in a Haystack?" »

PayPal Joined the Party

posted by Amy Schmitz

Adam Levitin commented on the eBay's opt-out arbitration program on CreditSlips.org a few weeks ago, and there have been campaigns calling for consumers to opt out of eBay's program.  Public Citizen has provided instructions on its website for consumers "to protect their constitutional rights by opting out of a forced arbitration clause and ban on consumers joining together in class actions."  eBay is not alone in using this sort of opt-out arbitration program.  Many tech companies have joined, or plan to join, the "party" in requiring consumers to opt out or be subject to binding arbitration.

Opt-out programs also may be layered now that PayPal is joining the party.  It recently sent notices to its users of policy updates, effective November 1, 2012, stating:

"You will, with limited exception, be required to submit claims you have against PayPal to binding and final arbitration, unless you opt out of the Agreement to Arbitrate (Section 14.3) by December 1, 2012. Unless you opt out: (1) you will only be permitted to pursue claims against PayPal on an individual basis, not as a plaintiff or class member in any class or representative action or proceeding and (2) you will only be permitted to seek relief (including monetary, injunctive, and declaratory relief) on an individual basis."

Query whether campiagns will begin for consumers to opt out of this program?  It also will be interesting to see how these opt-outs work in tandem due to PayPal's prominence as the purchasing mechanism for sites like eBay?  

When Squeaky Wheels Get Rusty

posted by Amy Schmitz

Yesterday, I wrote about the "squeaky wheel system," or "SWS" for ease of reference, which I explored in my article, Access to Consumer Remedies in the Squeaky Wheel System.  The research shows that consumers who have and take the time and resources to complain (or “squeak”) often get what they want. For example, consumers with the time and patience to endure the labrynth of their phone company's customer assistance line and actually speak with a representative regarding an increase in their bill are much more likely to get "loyalty" and other such discounts.  

That said, I have noticed that companies are even becoming more stingy in providing assistance to proactive consumers. For example, a manufacturer recently insisted on charging me for shipping to send me a replacement for a blender that was under warranty.  Sure, the warranty covered replacement . . . but  not shipping (a la "fine print").  The warranty was therefore meaningless since the blender was worth about the same as the shipping cost, and it would be silly to expend resources to sue using UCC Article 2 or other warranty arguments.  Furthermore, I have been unable lately to catch many breaks on increased fees for phone and internet service, and had difficulty in obtaining any assistance from some credit card companies when trying to rectify the issues I faced when my purse and all my credit cards recently were stolen.

Continue reading "When Squeaky Wheels Get Rusty" »

Arbitration Agreements

posted by Adam Levitin

Brian Wolfman has an interesting post about e-Bay's new arbitration agreement with a class action opt-out.  Curiously, e-Bay's arbitration agreement isn't mandatory, but it is opt-out with a limited opt-out period.  Brian's take is that this opt-out is consumer choice window-dressing:  while there is formally a consumer choice involved, functionally it is meaningless. I agree. 

First, consumers aren't likely to pay attention to the opt-out notice in the first place in this age of information overload.  (That's one reason why I don't like the mandatory annual Gramm-Leach-Bliley Act privacy notice--it contributes to information overload by telling me nothing--basically there are no privacy rights--and lulling me into thinking that all fine-print disclosures by my bank don't matter.)  Second, even if they do pay attention, consumers are unlikely to place much value ex-ante on the right to sue in court or to proceed as part of a class; certainly not enough to bother opting out.  

The problem, it seems to me, with arbitration or class action waiver or forum selection clauses in contracts, even if explicit opt-out provisions are available, is that there's an inherent imbalance between businesses and consumers in the way valuations of the provision are going to work: businesses value arbitration clauses in the aggregate, while consumers value them based on individual transactions. For contract provisions with small value this means that businesses are more likely to value them than consumers, which therefore warps the nature of any sort of bargain. The business is bargaining in aggregate;the consumer is bargaining based on an individal valuation.

Continue reading "Arbitration Agreements" »

Arbitration Unconscionability Post-Concepcion

posted by Adam Levitin

My Georgetown colleague Rebecca Tushnet has a great post about a recent Missouri Supreme Court ruling, Brewer v. Missouri Title Loans, holding that an arbitration agreement in an auto title loan was unconscionable.  The case is important because it says that post-AT&T v. Concepcion arbitration agreements are still vulnerable to attack on generally applicable contract law grounds. Perhaps contract law isn't as dead as Justice Scalia claimed in Concepcion

It's a procedural unconscionability case; the court does mentions, but does not comment on, how payments of $1000 on a $2200 loan only reduced the loan balance by 6 cents. Even Walker-Thomas Furniture would be blushing.

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Reputational Sanctions in an Age of Internet Manipulation?

posted by Adam Levitin

A major argument against substantive regulation of industries (including consumer finance) is that the market self-regulates. Bad actors get bad reputations and lose business.  Therefore, there's no need for government to intervene.  

This type of argument involves a significant set of assumptions about how reputational sanctions work for any particular product and about the inability of bad actors to simply rename themselves. Often, these assumptions are unexamined or unwarranted--ideology trumps all--but the development of the Internet as a reputational reference complicates things. 

The Internet provides a tremendous aggregation of reputational feedback, with everything from formal reviews to "XYZsucks.com" sites, etc. But the typical Internet reputational search involves a google search or the like, and the search results are manipulable. Not only can they be manipulated, but there are whole businesses set up to do just that.

Continue reading "Reputational Sanctions in an Age of Internet Manipulation?" »

Arbitration Double Standards

posted by Bob Lawless

A case out of the Third Circuit demonstrates the frustration that many of us have with the current state of consumer arbitration law. The consumer had purchased a Dell computer that he alleged had design flaws leading to repeated failure of his motherboard. After Dell refused to fix the computer a third time, he brought a class action against Dell for the alleged design defects.

Dell invoked an arbitration clause which read that any dispute "SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF)." This clause was found in "clickware," that is an agreement to which the consumer agreed by checking a box on Dell's web site when he purchased the computer. The capital letters were in the original agreement, presumably to make this language stand out due to its importance. As many readers of this blog will quickly pick up, there is a problem with this language -- because of abuses the National Arbitration Forum agreed to a consent judgment where it would no longer administer consumer arbitrations.

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The Anti-Consumer Agenda

posted by Adam Levitin

I often find myself annoyed by left-wing (and occassionally right-wing) anti-business screeds that decry corporations, big business, etc.  I don't find anything inherently troubling about corporate form or business size, and I have no problem with profit-motivated actors (individual or corporate), so long as they play fair. Mindless attacks on the business community have the unfortunate effect of undermining perceived validity of more targeted, thoughtful concerns through a guilt-by-association phenomenon. 

But business and consumer interests often diverge. Now, it should hardly be controversial that there is an unequal playing field between businesses and consumers. Generally, businesses know more about their products than consumers and have more bargaining power than consumers. (Yes, there are information assymetries running the opposite way, which is a particularly salient problem for credit and insurance products.) For many businesses, it is important to maintain this assymetry of information and bargaining power, as there's profit in it.

In theory, and I emphasize in theory, competition should eliminate many of the problems these assymetries create for consumers, but there's no such thing as a perfect, complete market, just varying degrees of market imperfection, so competition alone cannot be relied upon to solve everything. What, if anything else, should be done is an open question, but when one looks at a range of seemingly unconnected recent public policy issues, a troubling common theme emerges.

Instead of a laboratory of experiements to help level the b2c playing field, we see a different trend emerging:  a distinct anti-consumer agenda that aims to reduce consumer bargaining power and information.  Consider the common theme that runs through the following issues: 

  • AT&T v. Concepcion (waiver of class actions in arbitrations)
  • Attempts to bust up public employee unions (and attacks on unions in general, such as the failure of Card Check legislation)
  • Citizens United (corporate speech rights)
  • Attempts to retain the current corrupt swipe fee system (failure of antitrust)
  • Attacks on public health insurance (prohibition on Medicare bargaining over prescription drug prices and the death of the public option)
  • Attempts to first kill off and now to maim the Consumer Financial Protection Bureau

Continue reading "The Anti-Consumer Agenda" »

A Big Win for Consumers: NAF Leaves Arbitration Business

posted by Bob Lawless

Credit Slips bloggers have written a number of posts about the National Arbitration Forum (NAF) (here, here, here, here, here and here). NAF was a business friendly--and especially a credit card company friendly--arbitration forum, but that looks to be a thing of the past. Last week, after a lawsuit was filed by the Minnesota attorney general NAF agreed in a consent decree to stop taking any consumer arbitrations. Deepak Gupta over at the always insightful Consumer Law & Public Policy Blog has has an informative summary on the story. NAF exiting consumer arbitration is great news.

Earlier this week, the not-for-profit American Arbitration Association (AAA) also announced it would stop accepting arbitrations in consumer debt-collection cases until standards or safeguards are established. Big changes appear to be afoot.

In Favor of the Consumer Financial Protection Agency (CFPA)

posted by John Pottow

Adam's earlier post started the ball rolling on the CFPA discussion, and I wanted to weigh in (favorably) having now waded through the 153 pages of proposed legislation.  I take the case to be made for sheer regulatory consolidation as surely correct: the crazy quilt of overlapping agencies would make even Sir Humphrey cringe.  But the case in favor rests on much more than that, and of shrewd appeal to both typical bailywicks of the left and right.

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Alternatives to Arbitration: Government ADR

posted by Adam Levitin

The serious problems with binding mandatory arbitration (BMA) as a consumer dispute mechanism for financial services raises the question of "how can we do this better?" Any solution to financial services consumer dispute resolution must take into account four salient factors--(1) the disparity of sophistication between parties, (2) the disparity of resources between parties, (3) the repeat player interest of financial institutions, and (4) the frequently small amounts in controversy. Thus, litigation in court might do better at accounting for factor (3) than BMA, it does not deal will with factors (1), (2), and (4)--it is simply not practical for many consumers to litigate--court procedures make effective pro se representation difficult, time-consuming, and expensive, and the amounts in controversy are too small. Class actions can overcome these problems, but many disputes are not class action issues, and class actions have their own problematic dynamics. The fairness vs. practical trade-off between court and BMA isn't very satisfactory. Fortunately, we do not live in a binary world of public litigation vs. private ADR.

A very interesting new paper by Professor Daniel Schwarcz at the University of Minnesota School of Law raises another possibility: a public ADR system. Schwarcz's suggestion comes from his study of the United Kingdom's consumer dispute resolution system for insurance. In the UK the Financial Ombudsman Service (FOS) provides a dispute resolution mechanism for the entire insurance industry--it combines mediation, arbitration, and negotiation in a single scheme. The FOS (originally created by industry), is staffed primarily by non-attorneys and is separate from the insurance safety & soundness regulator, which helps guarantee its independence. And by being a public, rather than a private system, there are political checks and balances on its operations. Most important to note about the FOS, though, is that both consumers and industry are very happy with its operation.

Continue reading "Alternatives to Arbitration: Government ADR" »

Public Citizen Responds to Their Critics on Arbitration

posted by Bob Lawless

In September 2007, Public Citizen released a report entitled The Arbitration Trap: How Credit Card Companies Ensnare Consumers. Using data from California arbitrations, the Public Citizen report shows how consumers are forced into a mandatory arbitration where they will be systematically disadvantage. Credit Slips blogger Elizabeth Warren wrote a post about the report, including this:

Public Citizen has picked a good target, and they have written a superb report.  There is solid research to back up the claim that arbitration is systematically biased. Senator Russ Feingold has introduced legislation to ban mandatory arbitration clauses imposed on consumers. Will this be the first serious consumer reform initiative in more than two decades?

That's exactly right, but the U.S. Chamber of Commerce did not like it. Through its Institute for Legal Reform, the Chamber had Navigant Consulting write a response to the Public Citizen report. Public Citizen has now released their own response to the Chamber of Commerce/Navigant report. The Public Citizen response, The Arbitration Debate Trap: How Opponents of Corporate Accountability Distort the Debate on Arbitration, which also takes on a law review article and a different Chamber of Commerce report by law professor Peter Rutledge.

Continue reading "Public Citizen Responds to Their Critics on Arbitration" »

Senate Hearings: Bartholet on NAF

posted by Bob Lawless

Today, the Senate Judiciary Committee again held hearings on how recent Supreme Court decisions affect the everyday lives of Americans. Professor Elizabeth Bartholet of Harvard Law School testified about mandatory binding arbitration in both the employment and consumer context. As part of her testimony, she recites her own experience as an arbitrator for the National Arbitration Forum or "NAF" (for information on NAF, see previous Credit Slips posts here, here, here, here and here). Professor Bartholet summarizes this portion of her testimony thusly:

All this, together with my other experience as an arbitrator, and my reading of the literature, is what has led me to conclude that the Supreme Court's approval of pre-dispute arbitration has led to a private justice system in which banks and credit card companies are able to purchase the results they want, at the expense of the debtors forced into the system.

Professor Bartholet's full statement is available here so that you can read for yourself what caused her to come to this conclusion.

NAF, Just NAF

posted by Bob Lawless

"NAF" sounds like maybe something you should say when you're frustrated. "NAF!, I stubbed my toe." In some circles, NAF may already be turning into an expletive. NAF stands for the National Arbitration Forum, a for-profit business that has twisted the tools of arbitration into a debt collection tool. The discussion about NAF should not be confused with the larger discussion about consumer arbitration generally. NAF is a problem unto itself. This organization's aggressive tactics have been featured several times by different bloggers here at Credit Slips (here, here, here, here) and are the subject of a lawsuit by the San Francisco city attorney.

Paul Bland, over at the Consumer Law & Policy blog, has a must-read post up about NAF's newest tactic: a push in the law reviews and bar journals to argue that courts should not look behind the debt collector's arbitration award to see if it is supported by any evidence. Paul explains why NAF would especially agitate for acceptance of this rule.

Continue reading "NAF, Just NAF" »

San Francisco City Attorney Sues NAF

posted by Bob Lawless

My semi-favorite debt collector, er, I mean arbitration service, the National Arbitration Forum (NAF), has been sued by the San Francisco city attorney. The San Francisco Chronicle reports the story here. Different contributors have discussed the NAF here on Credit Slips (see here, here, here, and here), noting the high win rate for creditors and describing how the NAF acts almost as if they are a disguised debt collection agency. According to the article, the lawsuit makes very similar allegations against the NAF.

The lawsuit also names Bank of America as a defendant, which makes me wonder if that part of the lawsuit (not the part against the NAF) will be preempted under the Supreme Court's Watters decision from last spring (see here).

What a Law Professor Does on a Saturday Afternoon

posted by Bob Lawless

It's Saturday afternoon, and as a law professor I'm spending it in my usual way--reading and rereading the various form contracts to which our household is subject. I was all involved with an engrossing new form describing my rights under section 631 of the Cable Communications Policy Act of 1984, when this caught my attention. The contract directed me to a web page that allows you to opt out of arbitration with Comcast. The hitch is that you have to opt out within 30 days of receiving your contract. You also have to know your Comcast account number.

Continue reading "What a Law Professor Does on a Saturday Afternoon" »

Bankrupt Consumer Arbitration

posted by Bob Lawless

A couple of years ago, I got all exorcised about MBNA v. Hill, 436 F.3d 104 (2d Cir. 2006). The case involved a consumer bankruptcy where MBNA had offset $159 from the consumer's account despite MBNA's admission that it had notice of the bankruptcy case. The consumer brought an action for damages because of MBNA's violation of bankruptcy's automatic stay and styled it as a class action. MBNA invoked the arbitration clause in its account agreement, and the Second Circuit agreed the case had to go to an arbitrator. Because the automatic stay is central to the U.S. bankruptcy court's power to protect the bankruptcy estate and because Hill had the potential to be an important precedent that undermined the bankruptcy court's authority, a few of us signed an amicus brief urging the court to reconsider its decision. The Second Circuit disagreed, and the case still stands.

I have been wondering where things stand with consumer arbitration in U.S. bankruptcy courts. I did a little poking around this morning and found a few reported cases where MBNA had been cited. Most of these are cases where a bankrupt consumer has asserted rights under a consumer protection statute as a counterclaim to the creditor's claim in the bankruptcy case. These are just the reported cases, and my curiosity is not about the law in the books but the the law on the ground. Are institutional creditors aggressively asserting arbitration clauses to avoid the jurisdiction of the U.S. bankruptcy courts? It's not really the assertion of arbitration against consumer protection claims in which I am interested. Rather, I am really curious to know whether institutional creditors are using arbitration in an attempt to avoid core bankruptcy procedures like the automatic stay or the claims resolution process. Comments are open.

Deathstar Arbitration

posted by Elizabeth Warren

Arbitration may seem like the Andy of Mayberry form of dispute resolution--folksy, cheap and fair.  The data suggest, however, that it is Darth Vader's Death Star--the Empire always wins.  A new report from Public Citizen shows that the consumer loses in 95% of arbitration cases--dominance that would have made the Emperor proud.

The Public Citizen report follows an earlier jaw-dropping report this summer from the Christian Science Monitor showing that the most frequently chosen arbitrators ruled against consumers and for the companies 98.4% of the time.  After serving as an arbitrator, former judge Richard Neely described arbitration as full of "Godless bloodsuckers."  (Gee, Judge Neely, tell us what you really think.)  Several academic pieces of condemned the current use of arbitration clauses as well. 

Continue reading "Deathstar Arbitration" »

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Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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