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1.4.3 Limitations on Class Actions

The vast majority of arbitration clauses in use in consumer contracts explicitly prohibit consumers from bringing or participating in class actions either in court or in arbitration.23 According to the CFPB’s study, across all of the products studied, between 85 and 100% of arbitration clauses included such class waivers.24

In 2011 and 2013, the United States Supreme Court affirmed that these clauses are enforceable,25 even though the class action offers individuals with small claims their only realistic opportunity to receive justice or to vindicate their rights under state and federal law.26 There are indications that many lenders have adopted arbitration clauses precisely for the purpose of avoiding all class actions.27 The general counsel of Automotive Compliance Consultants recently asserted that in car dealership contracts “the purpose of an arbitration agreement is to keep a customer’s suit against a dealership from becoming the basis for a class action.”28

When a business victimizes a large number of consumers, but individual injuries are relatively small, class actions in court or arbitration often provide the only effective way for consumers to vindicate their rights. The Supreme Court has held that class plaintiffs cannot avoid enforcement of an arbitration clause and accompanying class action waiver by arguing that the costs of individual litigation exceed the value of an individual claim.29 Furthermore, commentators have pointed to other structural problems with the individual arbitration of legal claims common to a class of consumers that prevent consumers from bringing claims at all.30

Because of the profound effects class action waivers have on potential consumer claims, businesses sometimes—along with class action waivers—add provisions to their arbitration clauses that make them appear more consumer friendly, such as provisions that allocate costs to the merchant or that provide increased payments to claimants who receive more in arbitration than the company offered before the arbitration began. These provisions may appear to make individual arbitrations more consumer friendly, but their goal is to decrease the likelihood that the arbitration clause and concomitant class action waiver will be struck down by a court.31

The proliferation of class action bans has had dire effects. A report from Public Citizen and the National Association of Consumer Advocates identifies hundreds of potential class actions that have been squelched by such contractual provisions.32 Thus the result of the pervasiveness of class action bans in many industries is that arbitration has been transformed from an alternative dispute resolution mechanism to a means of squelching consumer claims altogether.33

After reviewing the use of forced arbitration over a three-year period, the Consumer Financial Protection Bureau concluded in its March 2015 study that the consequences of “class waiver” provisions are particularly dire. By contrast to consumer arbitration—which rarely occurs and, when it does occur, generally proceeds on an individual basis—consumers fare relatively well in class litigation.

Consumers recover significant amounts in affirmative relief in class litigation. The CFPB study found that in 419 federal consumer class action settlements “the annual average of the aggregate . . . [financial recovery for consumers] was $540 million per year. This estimate covers, for settlements approved between 2008 and 2012, more than $2 billion in cash relief including fees and expenses and more than $600 million in in-kind relief.”34

Footnotes

  • 23 {23} According to the Consumer Financial Protection Bureau’s 2013 report, around 90% of the arbitration clauses studied in credit card agreements, consumer banking agreements, payday loans, and prepaid card agreements included class action waivers. Consumer Fin. Prot. Bureau, Arbitration Study Preliminary Results: Section 1028(a) Study Results to Date (Dec. 12, 2013), available at http://files.consumerfinance.gov.

  • 24 {24} Consumer Fin. Prot. Bureau, Arbitration Study, Report to Congress Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a), at § 1.4.1 (Mar. 2015), available at http://files.consumerfinance.gov.

  • 25 {25} Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 133 S. Ct. 2304, 186 L. Ed. 2d 417 (2013); AT&T Mobility, L.L.C. v. Concepcion, 563 U.S. 333, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011).

  • 26 {26} See, e.g., Amchem Products Inc. v. Windsor, 521 U.S. 591, 117 S. Ct. 2231, 2246, 138 L. Ed. 2d 689 (1997); Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 809, 105 S. Ct. 2965, 86 L. Ed. 2d 628 (1985). See also Ting v. AT&T, 182 F. Supp. 2d 902 (N.D. Cal. 2002), aff’d in part and rev’d in part, 319 F.3d 1126 (9th Cir. 2003); Arenson v. Whitehall Convalescent & Nursing Home, 164. F.R.D. 659, 666 (N.D. Ill. 1996); Fogie v. Rent-A-Center, 867 F. Supp. 1398, 1404 (D. Minn. 1993); Leonard v. Terminix Int’l Co., 854 So. 2d 529 (Ala. 2002); Fletcher v. Sec. Pac. Nat’l Bank, 591 P.2d 51, 57 (Cal. 1979); Mandel v. Household Bank, 129 Cal. Rptr. 2d 380 (Cal. Ct. App. 2003); Eshaghi v. Hanley Dawson Cadillac Co., 574 N.E.2d 760, 766 (Ill. App. Ct. 1991); Streich v. Am. Family Mut. Ins. Co., 399 N.W.2d 210, 218 (Minn. Ct. App. 1987); King v. Club Med, Inc., 430 N.Y.S.2d 65, 68 (N.Y. App. Div. 1980); 4 Herbert Newberg, Newberg on Class Actions § 21.01, at 21–23 (3d ed. 1992).

  • 27 {27} See Brief of Amicus Curiae Trial Lawyers for Public Justice, the American Association of Retired Persons, the Association of Trial Lawyers of America, and the National Association of Consumer Advocates in Support of Appellees, Baron v. Best Buy Co., 260 F.3d 625 (11th Cir. 2001) (includes as an attachment such a letter from an arbitration service provider) (available online as companion material to this treatise). See also Alan S. Kaplinsky & Mark J. Levin, Excuse Me, But Who’s the Predator?, Bus. L. Today 24 (May/June 1998) (encouraging banks to use arbitration as a “defense” against class actions and class action lawyers).

  • 28 {28} Five Recommendations When Reviewing Arbitration Clauses, SubPrime Auto Fin. News (Aug. 6, 2014), available at www.autoremarketing.com.

  • 29 {29} Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 133 S. Ct. 2304, 186 L. Ed. 2d 417 (2013).

  • 30 {30} See David Korn & David Rosenberg, Concepcion’s Pro-Defendant Biasing of the Arbitration Process: The Class Counsel Solution, 46 U. Mich. J.L. Reform 1151 (2013) (describing defendants’ incentive to spend large amounts on individual arbitrations of claims common to a class of plaintiffs).

  • 31 {31} Myriam Gilles, Killing Them with Kindness: Examining “Consumer-Friendly” Arbitration Clauses after AT&T v. Concepcion, 88 Notre Dame L. Rev. 825 (2012). See also Roger B. Jacobs, Fits and Starts for Mandatory Arbitration, 67 Disp. Resol. J. 39 (2013).

  • 32 {32} Nat’l Ass’n of Consumer Advocates & Pub. Citizen, Cases That Would Have Been: Three Years After AT&T v. Concepcion, Cases of Corporate Wrongdoing Continue to Pile Up (May 1, 2014), available at www.citizen.org.

  • 33 {33} See, e.g., Judith Resnick, Diffusing Disputes: The Public in the Private of Arbitration, the Public in Courts, and the Erasure of Rights, 124 Yale L.J. 2804 (2015).

  • 34 {34} Consumer Fin. Prot. Bureau, Arbitration Study, Report to Congress Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a), at 15 (Mar. 2015), available at http://files.consumerfinance.gov.