Industry's Preference for Arbitration Is a Reality

In a recent blog post on BankThink, Jeff Sovern calls into question my prediction that the Consumer Financial Protection Bureau's proposed plan on class action waivers in consumer arbitration agreements will cause companies to abandon arbitration completely.

The fact remains that arbitration is superior to class action litigation for consumers and companies alike. In my opinion, the CFPB's proposal, which would disallow companies from requiring arbitration in group claims, would dramatically change firms' cost-benefit analysis enough to convince them to stop using arbitration for individual claims as well.

Yet Sovern speculated that banks may only want to block class-action lawsuits more than sing the praises of arbitration. He suggested that a total abandonment of arbitration by financial services companies would be a nonevent because, he said, the evidence points to few individual arbitrations occurring in the first place.

But in fact, there have been thousands of individual arbitrations in recent years. The CFPB's own study on arbitration clauses examined 1,750 of them alone from just one administrator, the American Arbitration Association.

Moreover, there likely would have been even more individual arbitrations but for the steady stream of negative publicity about arbitration generated by plaintiffs' class action lawyers and consumer advocates, like Sovern, over the past 15 years. In any event, the CFPB study demonstrates that arbitration works for consumers.

I would like to see the number of individual arbitrations grow substantially as an alternative to litigation, and have urged the CFPB to direct its consumer education and engagement division to educate consumers about the benefits that arbitration can provide, although it has declined to do so.

If companies abandon arbitration altogether, consumer arbitration will never realize its full potential, and consumers will be deprived of an alternative method for resolving disputes with companies that is faster, cheaper and more beneficial than class action litigation. That would be a significant and regrettable event.

The advantage of arbitration is a matter of common sense, as well as dollars and cents. Under the consumer arbitration rules of the two leading administrators, the American Arbitration Association and JAMS (formerly known as Judicial Arbitration and Mediation Services), the cost to the consumer for small-dollar claims in arbitration is capped at $200 and $250, respectively. The company is required to pay the remainder of the administrative and arbitrator fees, which typically amounts to several thousand dollars.

Companies are willing to bear that extra expense to resolve individual consumer disputes if they are not also required, at the same time, to incur the extraordinary cost and burden of defending class actions.

The CFPB proposal, meanwhile, disregards the evidence that consumers fare much better in arbitration than in class action litigation. The bureau's own study of arbitration clauses said that in class action settlements reviewed by the agency, the average payout was a meager $32.25 per member of the class. By comparison, consumers who prevailed in an individual arbitration recovered an average of $5,389.

In short, there is no reason to criticize companies that may decide to abandon arbitration altogether if they are prohibited from using class action waivers. Unfortunately, it is consumers who will pay the price.

Alan Kaplinsky leads the consumer financial services group at Ballard Spahr. His clients include financial institutions.