By Jenna Greene, From The National Law Journal

For years, businesses have argued that mandatory arbitration is good for consumers, that it’s faster and cheaper and the outcome is as good or better than going to court.

A new study by the Consumer Financial Protection Bureau contradicts many of those claims, potentially laying the groundwork for the agency to restrict or abolish consumer arbitration agreements in the financial-services sector.

Such agreements, typically found in the small print of credit card and checking-account agreements, cover tens of millions of consumers, who are compelled to resolve disputes through arbitration and are barred from joining class actions.

“It’s been incredibly depressing to be a consumer protection lawyer for years. This study changes everything,” said Paul Bland, executive director of Public Justice, speaking at a CFPB field hearing in New Jersey on Tuesday. “It’s an exciting, incredibly cool day.”

As part of the Dodd-Frank Act that created the agency, Congress directed the CFPB to conduct a study on the use of predispute arbitration clauses in consumer financial contracts. Congress further said the CFPB “by regulation, may prohibit or impose conditions or limitations on the use of” such arbitration clauses in consumer financial contracts if the bureau finds that doing so “is in the public interest and for the protection of consumers,” and is “consistent with the study.”

Despite a carefully neutral, just-the-facts tone, the 728-page study paints a damning picture of arbitration for consumers.

Among the findings: Over a two-year period, American Arbitration Association neutrals issued 341 decisions in disputes that involved credit cards, checking accounts, prepaid cards, payday loans, private student loans and mobile wireless contracts.

Consumers won awards in 32 cases—less than 10 percent—and obtained debt forbearance in 46 cases. The total combined relief in all cases: under $400,000.

Companies also filed 244 claims or counterclaims against consumers, winning award totaling $2.8 million in 227 disputes, or 93 percent of the time.

During the same time period—2010 to 2012—individual consumers filed an average of 1,200 lawsuits in court per year. Only two cases went to trial, and the consumers won just under $1 million.

The real difference is in class actions. According to the CFPB, about 32 million consumers were eligible for relief through class action settlements in federal court each year. Over the past five years, courts approved 422 settlements, yielding more than $2.7 billion in cash, in-kind relief, expenses and fees—with about 18 percent going to lawyers.

Arbitration is “a get-out-of-jail-free card” for companies said Myriam Gilles, a professor of law at Yeshiva University Benjamin N. Cardozo School of Law, speaking at the field hearing. “It has nothing to do with effective dispute resolution. What’s going on is liability avoidance.”

Ballard Spahr partner Alan Kaplinsky defended arbitration, which he called “a great solution for both consumers and companies because everyone benefits from a process is that is faster, cheaper and more congenial than litigation.”

Kaplinsky, who also spoke at the field hearing, criticized the study for not surveying consumers who have been through arbitration about whether they were satisfied with the experience.

“Many plaintiffs lawyers don’t like arbitration because it goes against their economic self-interest,” he said. “We believe the legal system is broken in a lot of places, and that includes class action litigation. …The majority of class actions are frivolous or filed for the purpose of extracting individual settlements.”

Still, the CFPB found no evidence that arbitration clauses led to lower prices for consumers. The agency “looked at whether companies that include arbitration clauses in their contracts offer lower prices because they are not subject to class action lawsuits. … The CFPB found no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses.”

CFPB Director Richard Cordray said the agency will begin meeting with stakeholders to discuss the report.

“In our governing statute, Congress specified that the results of this arbitration study are to provide the basis for important policy decisions that the Consumer Bureau will have to make in this area,” he said. “So people are right to be interested in digesting these results and considering how we intend to fulfill the objectives.”

IMAGE: Richard Cordray. Photo: Diego M. Radzinschi/NLJ

For more on this story go to: http://www.nationallawjournal.com/id=1202720179509/Consumer-Agency-Confronts-Mandatory-Arbitration-Agreements#ixzz3UB3SHksm