Is Arbitration 'Fair'?

Stephen J. WareProfessor of Law

University of Kansasware@ku.edu

Partisan divide on adhesive arbitration evident throughout:

1.SCOTUS2.Congress3.Executive agencies

Stephen J. Ware, The Politics of Arbitration Law and Centrist Proposals for Reform, 53 HARVARD J. ON LEGISLATION 711 (2016).

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2799429

The partisan divide over adhesive arbitration is basically about the level of consent the law should require before enforcing an arbitration agreement against an individual.

Progressives generally would require higher levels of consent than arbitration law currently requires, while conservatives generally defend current arbitration law’s low standards of consent.

A. The meaning of “fairness” in dispute resolution.B. When does arbitration provide more or less fairness

than litigation?C. When is arbitration more or less costly than

litigation?D. The role of arbitration institutions and arbitrators in

promoting fairness and minimizing costs.E. To the extent that changes of some type in today’s

arbitration system are warranted, what should they be?

F. Realistically, what is the likely future direction of arbitration in light of recent case law and business trends?

A. The meaning of “fairness” in dispute resolution.

1.Process of reaching outcome; and2.Outcome (“resolution”) itself.

Both 1 and 2 can be assessed in terms of quality and cost.

Those assessments may not be the same for each party.

To what extent should those assessments be made by lawmakers (legislature, courts, agencies like the CFPB) or by parties (pre or post dispute)?

B. When does arbitration provide more or less fairness than litigation?

Fairness for whom?

Are we concerned only about fairness for adhering parties (consumers, employees, etc.),

or also for the businesses that draft adhesive arbitration agreements?

In comparing fairness of arbitration with litigation, are we comparing it to an individual action or class action?

These two types of cases ought, IMHO, to be analyzed separately.

Class claims may be more important

CFPB “preliminarily finds that the relatively small number of arbitration, small claims, and Federal court cases reflects the insufficiency of individual dispute resolution mechanisms alone to enforce effectively the law …. Some stakeholders claim that the low total volume of individual claims, in litigation or arbitration, found by the Study is attributable not to inherent deficiencies in the individual dispute resolution systems but rather to the success of informal dispute resolution mechanisms in resolving consumers’ complaints.”

CFPB-2016-0020, at 99http://files.consumerfinance.gov/f/documents/CFPB_Arbitration_Agreements_Notice_of_Proposed_Rulemaking.pdf

“Holy war” over class actions transcends battle over arbitral class waivers.

As Professor Deborah Hensler et al. explain, whether the benefits of class actions outweigh their costs “is a deeply political question, implicating fundamental beliefs about the structure of the political system, the nature of society, and the roles of courts and law in society. . . . [T]his political question is . . . unlikely to be resolved soon.”

DEBORAH HENSLER ET AL., CLASS ACTION DILEMMAS 471 (2000).

Rather than remain in the crossfire of the war over class actions and the battle over class waivers, arbitration law should leave the battlefield.

My articles argue:1.Arbitral class-waivers should be as enforceable (neither more nor less enforceable) than non-arbitrable class waivers, but 2.SCT’s (Concepcion and Amex) interpretation of the FAA is quite defensible, so 3.Congress or agencies can change the law. 4.CFPB’s rule goes too far in outright prohibiting arbitral class waivers.

Individual (non-class) claims.

Do comparisons of comparable cases show a difference in outcomes between arbitration and litigation of individual (non-class) consumer cases?

Tentative answer: probably not, but the question is difficult because no empirical study can eliminate the possibility that differences between the arbitration cases studied and the litigation cases studied might explain any differences in outcomes between the two sets of cases.

As the CFPB’s March 2015 report puts it, the disputes that are filed in arbitration differ from the disputes that are filed in litigation. ... [T]hese differences result from decisions that the parties make about arbitration and litigation, such as the company’s decision to have an arbitration clause, the consumer’s willingness to initiate either arbitration or litigation, the company’s or consumer’s decision to invoke the arbitration clause in a given litigation, and the parties’ decision to settle or litigate. Disputes, in short, are not randomly assigned to the two different fora. They exist in one forum or the other because of purposeful decisions by one or both parties. And the known outcomes—principally the cases resolved through an arbitrator’s or court’s decision—likewise reach that form of outcome, at least in part because of purposeful decisions by one or both parties. CFPB Report, Section 5, page 7. http://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf

Perhaps the most apples-to-apples study of comparable cases, Drahozal & Zyontz, Creditor Claims in Arbitration and in Court, 7 Hastings Bus. L.J. 77, 80 (2011), found: • In the court cases studied, creditors won some relief as often, or more often, than in the arbitration cases studied (i.e., consumers prevailed more often in arbitration than in court). ...• In the court cases studied, prevailing creditors were awarded as high a percentage, or a higher percentage, of what they sought than in the arbitration cases studied (i.e., consumers fared better, or at least no worse, by this measure in arbitration than in court).• The rate at which debt collection cases were disposed of other than by award or judgment (e.g., by dismissal, withdrawal, or settlement) did not appear to differ systematically between arbitration and litigation.• The rate at which consumers responded (i.e., did not default) also did not appear to differ systematically between arbitration and litigation.

C. When is arbitration more or less costly than litigation?

Less costly for whom?

Are we concerned only about costs for adhering parties (consumers, employees, etc.),

or also the businesses that draft adhesive arbitration agreements?

Again, separately analyze individual and class cases.

D. The role of arbitration institutions and arbitrators in promoting fairness and minimizing costs.

Compare actual arbitration with actual courts (not hypothetical ideal courts).

Unlike litigation, arbitration does not receive a subsidy from the taxpayer, so litigation starts not with lower costs, but with costs shifted to non-parties (taxpayers).

For arbitrators and courts (judges/juries), consider incentives and ethics.

Big picture:

Promoting fairness and minimizing costs through competition in markets (arbitration) or competition in the public sector (courts).

E. To the extent that changes of some type in today’s arbitration system are warranted, what should they be?

Some answers for law reform:

Stephen J. Ware, The Politics of Arbitration Law and Centrist Proposals for Reform, 53 HARVARD J. ON LEGISLATION 711 (2016).http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2799429

Left (Progressive) Right (Conservative)Don’t enforce consumers’ adhesive arbitration agreements.

Enforce consumers’ adhesive arbitration agreements.

But if they are enforced, courts should hear defenses to enforcement like fraud, duress & unconscionability.

Arbitrators, rather than courts, should hear defenses. (Separability doctrine.)

Don’t enforce class waivers.* Enforce class waivers.

Courts should vacate legally-erroneous arbitration awards.

Courts should confirm legally-erroneous arbitration awards.

F. Realistically, what is the likely future direction of arbitration in light of recent case law and business trends?

Partisan voting on SCT and Congress.

Rulemaking initiative by CFPB.

While statute creating the CFPB, made its director removable only for “inefficiency, neglect of duty, or malfeasance in office,” DC Circuit held that removal provision unconstitutional.

PHH Corp. v. CFPB, 839 F.3d 1 (2016)(2-1 decision).

Full D.C. Circuit?

Stephen J. Ware

Professor of LawUniversity of Kansas

ware@ku.edu

785-864-9209