Bench Memos

Public Citizen’s Unfair Attack on Arbitration

Earlier this month, Public Citizen released a report that praised the work of private consumer lawsuits to make parallel state enforcement efforts possible. The report cites the tobacco litigation and various insurance abuse cases, and calls for strictly limiting arbitration by, among other things, banning forced arbitration clauses in consumer and employment cases, the subject of the Arbitration Fairness Act. Not surprisingly, this report distorts the truth, which is that trial lawyers, not consumers, would benefit from such a radical campaign against arbitration.

The report takes aim at two recent Supreme Court arbitration cases. The first, AT&T Mobility v. Concepcion, interpreted the Federal Arbitration Act to prohibit states from banning certain arbitration clauses. The second, American Express Co. v. Italian Colors Restaurant, upheld a contract that required small federal antitrust claims against American Express to go through arbitration individually, not as a class-action lawsuit, even if it was difficult to vindicate each particular claim. Somehow these decisions have undermined consumer rights in favor of big businesses, by making arbitration more widespread.

In reality, as Ted Frank of the Center for Class Action Fairness points out, both AT&T and American Express Co. had exceedingly narrow outcomes — these cases weren’t an instance of the mythical “pro-business court” that liberals like to hyperventilate about. In AT&T, the Supreme Court upheld an arbitration clause that was especially generous toward consumers, so much so that “the District Court concluded that the Concepcions [plaintiffs] were better off under their arbitration agreement with AT&T than they would have been as participants in a class action.” Certainly that couldn’t be the fulfillment of a radical business agenda — arbitration contracts that are less consumer friendly may still be invalidated. And in American Express, despite the dissent’s hand-waving that vindicating small claims are now more difficult, the American Express majority relies upon AmEx’s concession that plaintiffs had cost-effective ways to vindicate their rights, besides class action lawsuits. This could hardly be a devastating blow to consumer rights — consumers could still pursue their claims against AmEx through other means.

So who would be most helped by significantly limiting arbitration, and the increased prevalence of class action suits? Trial lawyers, who can leverage frivolous lawsuits — with enough plaintiffs strung together — to threaten companies into settlement talks, while cashing in on the high attorney fees associated with class action lawsuits. The state tobacco litigation for example, which the report cites as a model of consumer protection, saw astronomical attorney fees, sometimes in upwards of $1 billion dollars.

While class action suits are a cash cow for trial lawyers, they don’t usually help consumers, who are systemically under-compensated in such cases. The incentives involved in class-action lawsuits make this under-compensation almost inevitable, as attorneys take their fees from the same pool of money that should compensate plaintiffs, and trial attorneys “have incentives to engage in self-dealing during the negotiation of class settlements, which often occur simultaneously with the negotiation of attorneys’ fee payments.” With small claims cases, trial attorneys are “often able to obtain high fees without obtaining meaningful compensation for class members.”

While trial lawyers would benefit from strictly limiting arbitration, consumers would suffer. As Ted Frank explains, class action lawsuits last an average of 3 years from start to completion, while arbitrations last slightly under 7 months. What’s more, while consumer claims go on the backburner to trial attorney fees in class action litigation, consumers can actually be successful in arbitration, and prefer arbitration to the alternatives.  “[T]he Searle Civil Justice Institute found that ‘consumer claimants won some relief in 53.3 percent’ of arbitrations and ‘were awarded 52.1 percent of the amount they sought.’” In fact, one survey found that “most measures—raw win rates, comparative win rates, comparative recoveries, and comparative recoveries relative to amounts claimed—do not support the claim that consumers and employees achieve inferior results in arbitration compared to litigation.” Even consumers, when polled, prefer arbitration, as a survey found that two-thirds of previous arbitration participants “reported themselves likely to arbitrate again, including one-third of those who had lost their claims.”

This is not the first time that Public Citizen has waded into the arbitration debate. Their 2007 report on arbitration was widely misleading – enough that no-one should be surprised that this report follows the same path. And, no-one should be shocked to find that Public Citizen is again using “consumer protection” to justify radical policy changes to a practice that has been of great service to consumers. The only shocking thing – or at least I wish it were shocking – is that some policymakers seem to have bought this charade, advancing policies that are effectively handouts to the quintessential top 1%: well-paid trial lawyers. 

 

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