When drafting legislation, nearly every interest tries to provide language that will allow for disputes to be settled outside of court. Though our system of laws — and courts to interpret those laws — works well for both for businesses and consumers, it is expensive to appear before a court. There are multiple moving parts in a courtroom … all of whom need to be paid.
An alternative to the court system to settle disputes is arbitration. Many contracts require arbitration, or at least provide for it as an alternative. Financial service providers, including banks, often include such clauses in their contracts. This week the Consumer Financial Protection Bureau (CFPB) released the results of a three-year study, mandated by the Dodd-Frank Act, that is critical of arbitration clauses. CFPB Director Richard Cordray stated: “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. We found that it is rare for a company to try to force an individual lawsuit into arbitration, but it is quite common for arbitration clauses to be invoked to block class actions.”
The CFPB study found that, of the more than 1,000 cases filed through the American Arbitration Association in 2010 and 2011, consumers obtained debt relief or forbearance of about $400,000 total, while companies had rulings awarding $2.8 million. On class action suits, however, CFPB estimates that 32 million consumers were eligible to share $2.7 billion, after attorneys took 18 percent.
Yet according to research conducted by Christopher R. Drahozal and Samantha Zyontz, “Creditor Claims in Arbitration and in Court,” arbitration provides similar or better monetary rewards to court trials. Furthermore, studies have found that consumers prevailed more often in arbitration than in court.
Another study, “Survey of Arbitration Participants,” conducted by Harris Interactive, concluded that the majority of consumers who had engaged in arbitration found it to be faster (74 percent), simpler (63 percent) and less expensive (51 percent) than legal proceedings. In fact 66 percent of consumers said they would likely use arbitration again.
According to the American Bankers Association, arbitration is a streamlined legal procedure that has been in use for hundreds of years to resolve legal disputes in a manner that is fair and less expensive than litigation. An arbitration hearing is administered and managed by an independent third party for two or more parties with a legal dispute. The parties present their arguments and evidence to an arbitrator, who then decides the case.
Arbitration is regulated by the Federal Arbitration Act and a variety of state laws. In 1995 the U.S. Supreme Court recognized arbitration’s benefits: It is less expensive than litigation; the rules are simpler; the process invokes less hostility; it does not disrupt dealings among the parties; and it is more flexible in scheduling. In 2011 the Supreme Court ruled that the Federal Arbitration Act preempts state laws that prohibit contracts from disallowing class-wide arbitration.
Director Cordray may have his work cut out for him if he tries to ban banks from using arbitration clauses, since the U.S. Supreme Court has already ruled on the issue. Case closed.
– S. Joe DeHaven