Arbitration Study

728 Pages·2015·8.27 MB·English

by  Natalia Fitzgerald

Arbitration Study

Report to Congress, pursuant to Dodd–Frank Wall Street
Reform and Consumer Protection Act § 1028(a)
Consumer Financial
March 2015
Protection Bureau
Section 1 Introduction and Executive Summary
Section 2 How prevalent are pre-dispute arbitration clauses
and what are their main features?
Section 3 What do consumers understand about dispute
resolution systems?
Section 4 How do arbitration procedures currently differ
from procedures in court?
Section 5 What types of claims are brought in arbitration
and how are they resolved?
Section 6 What types of claims are brought in litigation and
how are they resolved?
Section 7 Do consumers sue companies in small claims
courts?
Section 8 What is the value of class action settlements?
Section 9 What is the relationship between public
enforcement and consumer financial class actions?
Section 10 D o arbitration clauses lead to lower prices for
consumers?
Appendix A 2013 Preliminary Results
Other Appendices
Section 1
Introduction and Executive Summary
Table of contents
Introduction ............................................................................................................. 2
1.1 What is a pre-dispute arbitration clause? ....................................................... 3
1.2 The Bureau’s mandate to study consumer arbitration
and our process in undertaking this study...................................................... 5
1.3 The scope of this report and its relationship
to the 2013 Preliminary Results ..................................................................... 7
1.4 Executive Summary ......................................................................................... 9
1.4.1 Clause incidence and features .................................................................................... 9
1.4.2 Consumer understanding and awareness ................................................................. 11
1.4.3 Arbitration incidence and outcomes ......................................................................... 11
1.4.4 Class litigation incidence and outcomes ................................................................... 13
1.4.5 Individual litigation incidence and outcomes ........................................................... 15
1.4.6 Small claims court ..................................................................................................... 15
1.4.7 Class settlements ....................................................................................................... 16
1.4.8 Public and private enforcement ................................................................................ 17
1.4.9 Price and output effects of arbitration provisions ..................................................... 18

1 SECTION 1: INTRODUCTION AND EXECUTIVE SUMMARY
Introduction
In Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,
Congress instructs the Consumer Financial Protection Bureau (the “Bureau”) to study “the use
of agreements providing for arbitration of any future dispute . . . in connection with the offering
or providing of consumer financial products or services,” and to provide a report to Congress on
the same topic. This document presents the results of that study.
The advantages and disadvantages of pre-dispute arbitration provisions in connection with
consumer financial products or services — whether to consumers or to companies — are fiercely
contested. Consumer advocates generally see pre-dispute arbitration as unfairly restricting
consumer rights and remedies. Industry representatives, by contrast, generally argue that pre-
dispute arbitration represents a better, more cost-effective means of resolving disputes that
serves consumers well.1 With limited exceptions, however, this debate has not been informed by
empirical analysis. Much of the empirical work on arbitration that has been carried out has not
had a consumer financial focus.
The present study is empirical, not evaluative. Although the report covers a wide range of topics,
its uniform and consistent focus is on understanding the facts surrounding the resolution of
consumer financial disputes — both in arbitration and in the courts — through a careful analysis
of empirical evidence. Our results reflect what we believe is the most comprehensive empirical
study of consumer financial arbitration carried out to date.
The remainder of this Section 1 describes:
 What pre-dispute arbitration is;
 The Bureau’s mandate to address pre-dispute arbitration and the process the Bureau has
followed in undertaking this study; and
 What we cover in the present report and the relationship of this report to the 2013
Preliminary Results.

1 See Arbitration Study Preliminary Results: Section 1028(a) Study Results to Date at 4–8 (Dec. 12, 2013),
http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf (hereinafter “2013
Preliminary Results”).
2 SECTION 1: INTRODUCTION AND EXECUTIVE SUMMARY
1.1 What is a pre-dispute arbitration
clause?
Companies provide almost all consumer financial products and services subject to the terms of a
written contract. Whenever a consumer obtains a consumer financial product such as a credit
card, a checking account, or a payday loan, he or she typically receives the company’s standard-
form, written legal contract.
In addition to being governed by such contracts, the relationship between a consumer and a
financial service provider will generally be governed by one or more federal consumer protection
laws and often by state consumer protection laws. These laws create legal rights for consumers
and impose duties on financial service providers. Absent an agreement to the contrary, if a
dispute arises between a consumer and a company as to whether one side or the other is
adhering to its contractual or statutory duties, the aggrieved party generally has the right to seek
resolution of the dispute in a court of law (although some state and federal laws provide only for
public, and not private enforcement).
Furthermore, the federal court system and most state court systems provide for a class action
process in which, in defined circumstances, one or more plaintiffs may file suit on behalf of
similarly situated individuals. If such an action is certified by the court as meeting the criteria
for a class action and plaintiffs prevail or secure a settlement, members of a class — for example,
customers of a company who have been affected by a particular practice — may be eligible to
obtain relief without initiating their own lawsuits. Conversely, if the defendant prevails in a
certified class action, members of the class may be bound by the decision and thereby precluded
from initiating their own lawsuits with respect to the claims at issue in the class case.
As a general rule, the parties to a dispute can agree, after the dispute arises, to submit the
dispute for resolution to a forum other than a court — for example, to submit a particular
dispute that has arisen to resolution by an arbitrator.
In addition, as a general rule the parties to a contract can agree at the time of entering the
contract to an alternative means of resolving disputes that arise in the future between the
parties. The most common form of alternative dispute resolution provided for in contracts is
3 SECTION 1: INTRODUCTION AND EXECUTIVE SUMMARY
final and binding arbitration in which a privately-appointed individual — an arbitrator2 — is
empowered to resolve claims that arise between the parties, including both contractual disputes
and disputes under state or federal law.3 As discussed in detail in Section 2, contract clauses that
provide for pre-dispute arbitration appear to be a common, but not a universal, feature of
consumer financial contracts. These arbitration clauses are sometimes “mandatory”: Under the
terms of such agreements, either side can mandate that a dispute that arises between the parties
be resolved in binding arbitration.4 The clauses are described as “pre-dispute” because they
commit the parties to this arrangement before there is a dispute between them.
These arbitration clauses generally give each party to the contract two distinct contractual
rights. First, either side can file claims against the other in arbitration and obtain a binding
decision from the arbitrator. Second, if one side sues the other in court, the party that has been
sued in court can invoke the arbitration clause to require that the dispute proceed, if at all, in
arbitration instead.
As noted, use of pre-dispute arbitration provisions in agreements governing consumer financial
products and services has become a contentious legal and policy issue. An important
development in this controversy occurred in 2011, when in AT&T Mobility LLC v. Concepcion,5 a

2 In some cases, more than one arbitrator may be involved in resolving a dispute.
3 Binding arbitration is similar to litigation, in that a decision by the adjudicator is final. In contrast, other forms of
dispute resolution such as mediation may not involve a final, binding decision by a third party.
4 Alternatively, the term “mandatory,” when used to describe arbitration clauses in the consumer context, may derive
from the nature of consumer contracts. When a consumer uses a consumer financial product, he or she is usually
bound by the terms of a consumer contract. The terms of that contract are not generally open to negotiation by the
consumer, but are instead offered on a take-it-or-leave-it basis, meaning that the consumer either accepts those
terms or instead shops for another product with different standard-form terms. In legal terms, the contract is one of
adhesion, making the clause “mandatory” in contrast to the voluntary clauses that may be reached by negotiation
between commercial parties. See, e.g., Jean R. Sternlight, Creeping Mandatory Arbitration: Is It Just?, 57 Stan.
L.Rev. 1631, 1632 n.1 (2005). Other scholars argue that the term “mandatory arbitration” may be better reserved for
arbitration that is mandated by statute or regulation. See, e.g., Ian R. Macneil et al., Federal Arbitration Law §
17.1.2.2, at 17:8–17:9 (Supp. 1999).
5 AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).
4 SECTION 1: INTRODUCTION AND EXECUTIVE SUMMARY
divided Supreme Court held that the Federal Arbitration Act of 1925 (“FAA”)6 preempted state
law that would have prohibited the enforcement of a consumer arbitration clause with a “no-
class” provision. Prior to that decision, courts were divided on state law challenges to the
enforceability of no-class provisions in arbitration clauses.
1.2 The Bureau’s mandate to study
consumer arbitration and our process in
undertaking this study
As noted at the outset, Section 1028(a) of the Dodd-Frank Act requires the Bureau to conduct a
study of the use of pre-dispute arbitration agreements “in connection with the offering or
providing of consumer financial products or services.”7
As a preliminary step in undertaking the study, the Bureau published a Request for Information
(the “RFI”) in 2012 that sought comments on the appropriate scope, methods, and data sources

6 Chapter 1 of the FAA is codified at 9 U.S.C. §§ 1-16. It provides that an arbitration award is final and binding, with
limited grounds available for judicial review. See 9 U.S.C. §§ 9-10. There has been an active scholarly and judicial
debate over the meaning of the FAA, particularly as it applies to consumer contracts and state court proceedings.
7 Section 1028, titled “Authority to Restrict Mandatory Pre-Dispute Arbitration,” reads:
(a) STUDY AND REPORT. The Bureau shall conduct a study of, and shall provide a report to Congress
concerning, the use of agreements providing for arbitration of any future dispute between covered persons
and consumers in connection with the offering or providing of consumer financial products or services.
(b) FURTHER AUTHORITY. The Bureau, by regulation, may prohibit or impose conditions or limitations on the
use of an agreement between a covered person and a consumer for a consumer financial product or service
providing for arbitration of any future dispute between the parties, if the Bureau finds that such a
prohibition or imposition of conditions or limitations is in the public interest and for the protection of
consumers. The findings in such rule shall be consistent with the study conducted under subsection (a).
(c) LIMITATION. The authority described in subsection (b) may not be construed to prohibit or restrict a
consumer from entering into a voluntary arbitration agreement with a covered person after a dispute has
arisen.
5 SECTION 1: INTRODUCTION AND EXECUTIVE SUMMARY
for the required study.8 We received 60 comments in response to the RFI and we met with
numerous commenters and other stakeholders to discuss their concerns. We refer to a number
of those comments in this report.9
We published preliminary results from the study in December 2013.10 In the final section of that
report, we identified nine additional work streams that were underway or under consideration
for inclusion in this report. Following the publication of the report, we again met with numerous
stakeholders, this time to discuss their feedback regarding the 2013 Preliminary Results.
One of the areas of investigation identified in the 2013 Preliminary Results was a planned survey
of consumers to address consumer awareness of arbitration clauses and consumer perceptions
of and expectations about dispute resolution. Towards that end, in June 2013 we published a
Federal Register notice addressing this proposed survey. We received 17 comments with respect
to that survey, many of which also discussed the study as a whole. After considering the
comments and conducting two focus groups to help us refine the survey instrument, we
published a second Federal Register notice in May 2014, which generated an additional seven
comments. We received approval from the Office of Management and Budget to proceed with
the survey in September 2014. It was completed on December 31, 2014.

8 See Consumer Financial Protection Bureau, Request for Information Regarding Scope, Methods, and Data Sources
for Conducting Study of Pre-Dispute Arbitration Agreements 4 (Apr. 2012) (Docket No. CFPB-2012-0017).
9 We cite to these using the name of the commenter and the title “RFI Comment.” All such RFI Comments are
available on www.regulations.gov, accessible from the Bureau’s website, www.consumerfinance.gov.
10 The 2013 Preliminary Results appear in full as Appendix A of the present report. Except when specifically noted,
those results are a part of the present report.
6 SECTION 1: INTRODUCTION AND EXECUTIVE SUMMARY
1.3 The scope of this report and its
relationship to the 2013 Preliminary
Results
The remainder of the report has nine core sections. Most of these sections have corresponding
appendices presenting additional background, data and further descriptions of methodologies
used.
The remaining sections are as follows:
 Section 2 presents data on the prevalence of arbitration clauses in different consumer
financial product markets, including credit cards, checking accounts, general purpose
reloadable prepaid accounts (“GPR prepaid cards”), private student loans, storefront
payday loans, and mobile wireless third-party billing. It also reviews the features of these
clauses. The analysis in this section is based upon a number of data sets we assembled
consisting of a total of approximately 850 consumer financial agreements, of which
slightly under half are credit card agreements. We explain in Section 2 how these data
sets were constructed. This section recaps some material presented in Section 3 of the
2013 Preliminary Results and should be read in conjunction with that material;
 Section 3 reports on the results of a national survey of 1,007 credit card holders
concerning their knowledge and understanding of arbitration and other dispute
resolution mechanisms;
 Section 4 recaps the different procedural rules applicable in consumer arbitration and
select courts;
 Section 5 reviews consumer disputes filed with the American Arbitration Association
(“AAA”) by consumers and/or companies from January 1, 2010, through the end of 2012
for six consumer financial product markets: credit cards, checking accounts/debit cards,
payday loans, prepaid cards, private student loans, and auto loans. It covers several data
points such as the number of filings, the results reached in these disputes, and the time
to resolution. The analysis in this section is based upon a data set consisting of 1,847
arbitration cases filed with the AAA, the organization that administers the vast majority
of consumer financial arbitration cases. The AAA shared with the Bureau, pursuant to a
non-disclosure agreement, its electronic case records for consumer disputes filed from
2010–2012, and we manually identified those cases pertaining to these six consumer
7 SECTION 1: INTRODUCTION AND EXECUTIVE SUMMARY