Yesterday the federal Consumer Financial Protection Bureau (CFPB) announced a new rule that will prevent consumers from resolving disputes with companies through quick and efficient arbitration. Plaintiffs’ lawyers and their allies predictably crowed that the agency’s decision would help ordinary Americans. Instead, customers of a sweeping array of products, from credit cards to cell phones, will be able to seek redress only through class-action lawsuits. Such mega-suits make big bucks for attorneys, but consumers — who get no individual attention in such cases — are usually left waiting years for minuscule awards, even when they have serious claims.
A typical “consumer-fraud” class-action suit filed last week in Illinois alleged that Starbucks has been cheating consumers by filling their iced coffees with too much ice. Of course, nothing is stopping a Starbucks customer from asking for less ice in his iced coffee — or, if still unsatisfied, from taking his business elsewhere. But that hasn’t stopped the lawsuit from asking for $5 million; and the cost of defending against this suit, even if Starbucks is ultimately successful, will be passed on to the company’s customers.
The Starbucks case is hardly anomalous. All 50 states, plus the District of Columbia, allow for filing private suits over alleged consumer frauds, and 38 state consumer-protection acts allow for class-action litigation. According to a 2015 survey, three in ten class-action lawsuits involve alleged consumer fraud.
Many states allow consumer-fraud class-action lawsuits to recover damages even without a showing of actual injury. In a new study published earlier this year, Emory University law professor Joanna Shepherd reports that, in the 432 such lawsuits she studied, consumers as a group received on average less than 9 percent of the total dollars awarded.
Before the CFPB could release its new rule, it had to do its own study — which, though flawed, shows that class-action lawsuits typically reward plaintiffs’ lawyers handsomely, give consumers little compensation, and take years to pay out. Of the 251 class-action lawsuits the CFPB reviewed, the average payment to a class member was just $32.35 per individual, while the average payment to the plaintiffs’ lawyers was more than $1 million per case. Eighty-seven percent of the class-action lawsuits filed didn’t get approved for settlement and provided no benefits at all to consumers — though significant costs to business defendants.
Class-action lawsuits typically reward plaintiffs’ lawyers handsomely, give consumers little compensation, and take years to pay out.
Without written customer contracts, Starbucks and similar vendors have little recourse against dubious class-action consumer-fraud claims, but companies that have ongoing contractual relationships with their customers have increasingly been turning to outside-the-court arbitration processes as an alternative to the class-action game. In a 2011 decision, the Supreme Court ruled that private arbitration clauses that precluded class litigation were enforceable under the Federal Arbitration Act.
Arbitration typically benefits consumers because it is significantly cheaper and faster than filing a lawsuit. Evidence shows that consumers are more likely to prevail in arbitration than in individual cases in court (they usually lose in both) and that there is no statistical difference in amounts awarded. Almost all of the eight million members of the Kaiser health plan in California are covered by an arbitration agreement, and a survey shows that 90 percent of these claimants and their attorneys found it as good as, if not better than, going to court in individual cases.
Such results are unsurprising: To be enforceable, arbitration clauses must provide terms of meaningful redress, and courts review them for “fundamental fairness.” Typical arbitration agreements require the business to pay the costs of arbitrating claims under $75,000 and permit consumers to make their cases online or in a telephone hearing. AT&T’s arbitration agreement gives successful consumers a minimum recovery of $10,000 and double attorneys’ fees – more than they could ever obtain in court — giving the company a strong incentive to settle meritorious claims at the outset.
Unfortunately for consumers, arbitration clauses like AT&T’s will soon be largely extinct. The exceptionally pro-consumer terms that companies offer under arbitration clauses demonstrate powerfully just how much they want to escape class-action shakedown lawsuits. But by preventing arbitration clauses from foreclosing class-action claims, the CFPB’s new rule will make it unaffordable for companies to offer consumer arbitration in the future. So lawyers win, but consumers lose.
Why would the CFPB make such a foolish decision? Simply put, the plaintiffs’ bar is a very powerful political force. For example, in 2008, out-of-state plaintiffs’ firms funneled more than $800,000 to the Ohio Democratic party, which in turn heavily funded the campaign of Richard Cordray, who was running for attorney general. Cordray won his race and subsequently hired several of those firms to represent the state in class-action lawsuits.
Today, Cordray is the director of President Obama’s CFPB. And his agency, intended to help consumers, is hurting them — much to the benefit of Mr. Cordray’s trial-lawyer friends.
— James R. Copland is a senior fellow and director of legal policy for the Manhattan Institute and author of the report Trial Lawyers, Inc.: Class Actions and Mass Torts (2016).