Add another 377 pages to the ever-burgeoning length of the Dodd-Frank Act. Today, the Consumer Financial Protection Racket Bureau announced that it would use its authority under the act to prohibit the use of mandatory arbitration clauses in contracts, alleging that these clauses “deny customers their day in court.” You can find the proposed regulation here.
Like most of the CFPB’s rules, this may sound good at first hearing. In fact, it will be a disaster for the average consumer who enters into contracts like credit-card or mobile-phone service agreements. The reason why most companies use arbitration in their contracts is because the public trial system is incredibly inefficient at what it purports to do — redress grievances. The inefficiency of the legal system has to be budgeted for, and so without arbitration, fees will go up and some people just won’t be offered a service at all. Moreover, to correct for inefficiencies and frivolous lawsuits, contracts are going to have to get much longer. If you don’t read that credit-card agreement in full now, you probably won’t when it doubles in length either. All these inefficiencies are why economists like Bryan Caplan have celebrated the growth of private dispute-resolution procedures. They’re beneficial to everybody concerned. In fact, we probably need more of them.
Those won’t be the only ways the consumer will suffer – those who are currently “denied their day in court” will as well. Because arbitration services are much cheaper, companies that use them generally pay all the fees for the consumer as well as their own. That’s not the case in court, where the consumer bears a considerable cost. If you are lucky enough to get a contract after this rule goes into effect, you’d better budget something for your day in court, because you’re going to have to lawyer up. Of course, there’s always the chance that you’ll be asked to participate in a class action lawsuit, which this rule is primarily designed to facilitate.
And that’s the answer to the Ciceronian question here, cui bono? — class-action lawyers. As Travis Norton and Matt Webb of the Chamber of Commerce noted yesterday:
Class action litigation mostly benefits the plaintiffs’ lawyers who file the cases. In a class action, plaintiffs with nearly identical harms are grouped together to sue a company for alleged wrongdoing. These cases last for years and, in the end, consumers frequently end up with a coupon or maybe a few dollars while the trial lawyers make off with millions of dollars. According to a recent study on class action lawsuits, only 13% of them settle on a class-wide basis. And among the consumers eligible for relief in those 13% of cases, only 4% ever receive even one red cent from the settlement. Using simple math, class action lawsuits benefit a whopping one-half of one percent of the class members in this type of litigation. (That study, by the way, was the Consumer Financial Protection Bureau’s own 2015 Arbitration Study.)
One red cent is actually pretty near the mark. The Bureau trumpets its finding that class actions deliver real results to plaintiffs: “At least 160 million class members were eligible for relief in federal consumer finance class actions over the five-year period studied. The settlements totaled $2.7 billion in cash, in-kind relief, expenses, and fees.” But, again, do the math. Even if those were all cash relief, the 160 million class members received just over $16 each. Most would get “in-kind” relief — in other words, a coupon. Meanwhile law firms took about half a billion dollars from the firms they sued.
How effective are arbitration services, by contrast? Well, in the cases where the consumer was found deserving, the CFPB found that “consumers obtained relief from arbitrators on affirmative claims in 32 cases and obtained debt forbearance in 46 cases. The total amount of relief and debt forbearance consumers obtained in all of these cases combined was under $400,000.” The math is once again instructive — your relief from arbitration averages $5,000.
So the likely effects of this rule are: higher fees, longer contracts, fewer services, companies going after you in court rather than via arbitration if you break the contract, and the much increased chance of getting a coupon off the company while the lawyers who represent you make out like bandits.
If you’re going to lawyer up, put Ted Frank and CEI’s Center for Class Action Fairness on speed dial.
Originally posted at National Review.