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«Via Federal Express July13, 2015 The Honorable Richard Cordray Bureau of Consumer Financial Protection 1275 First Street, NE Washington, DC 20002 Re: Comments on the Bureau’s Consumer Arbitration ...»

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B. Analysis of the Study Underscores the Need for Additional Research to Inform Future Policy Decisions Regarding Arbitration Before the Bureau decides whether or not to issue a regulation, it should research a number of important issues that either were omitted from or were not fully or properly analyzed in the Study. We believe that these issues, discussed in Section II. B below, are essential to a fair The Bureau itself has provided a portal through which financial services companies informally resolved more than 558,000 alleged customer complaints in the past three years. Each alleged complaint resolved obviated the need for the customer to commence an arbitration proceeding.

For example, in comments submitted to the Bureau when it initially proposed the Study, Modria, one of the leading companies offering online arbitration and dispute resolution services, stated that it handles more than 60 million disputes a year. See http://www.regulations.gov/#! documentDetail;D=CFPB-2012-0017-0019. Even if only a fraction of the disputes handled by Modria involve consumer financial services companies, it is obvious that the universe of customer disputes being addressed outside the courtroom is much larger and diverse than just the AAA database examined in the Study. Modria is only one of many online dispute resolution services. In their own initial comments on the Study, the Associations asked the Bureau to study the extent to which customers resolve their disputes with businesses through online dispute resolution in order to place more traditional customer arbitration services (such as the AAA) in the proper context. See http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0017However, the Bureau did not do so. Before enacting any regulation affecting customer arbitration, the Bureau should study whether and how such a regulation would impact this ever-burgeoning national and international market for resolving customer disputes online.

DMEAST #22199841 v1 and balanced understanding of whether any regulation of consumer arbitration “is in the public interest and for the protection of consumers.” They include–

1. Customer satisfaction with the arbitration process;

2. The cash awards, if any, that individual class members receive in class action settlements;

3. The economic consequences to customers and companies of regulation that would prohibit the use of arbitration provisions or class action waivers;

4. The impact of any regulation regarding customer arbitration on the provision of national and international online dispute resolution services (see note 9 supra);

5. Whether recent United States Supreme Court decisions, which make it more difficult to obtain class certification, weigh in favor of supporting arbitration as a method for customers to resolve their disputes with companies;

6. The impact of the Bureau’s enforcement and supervisory actions from January 1, 2013, to date;

7. Whether the class actions analyzed in the Study or the complaints in the Bureau’s Consumer Complaint Database can be qualitatively evaluated to determine how many involved systemic issues that would have been amenable to class action treatment and certification; and

8. Customer experience with analogous areas in which the use of arbitration has a lengthier and more developed history, such as employment arbitration.

–  –  –

Section 1028 of the Dodd-Frank Act requires the Bureau to “conduct a study of, and to 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.” Section 1028 further provides that the Bureau, “by regulation, may prohibit or impose conditions and limitations for the use of [such] an agreement” if it “finds that such a prohibition or imposition of conditions and limitations is in the public interest and for the protection of consumers.” The findings in such a regulation must be “consistent with the study.” Notably, the Study—consistent with prior empirical studies of consumer arbitration conducted by the Bureau’s own consultant 10—includes a significant quantity of data See, e.g., Christopher R. Drahozal, et al., “An Empirical Study of AAA Consumer Arbitration,” 25 Ohio St. J. on Disp. Resol. 843 (2010). This article discusses the results of the March 2009 study of AAA consumer arbitrations undertaken by the Searle Civil Justice Institute, Northwestern University School of Law. The study was based on a DMEAST #22199841 v1 demonstrating that arbitration is more beneficial to consumers than class action or even individual litigation and dispels key misconceptions about arbitration. These data weigh heavily against any regulation that would prohibit the use of arbitration provisions in consumer financial services contracts altogether, or materially condition or limit their use (for example, by banning the use of class action waivers). We discuss these data in Section A below.

–  –  –

1. Arbitration Is Faster for Customers than Litigation The Study demonstrates that customer arbitration is up to twelve times faster than customer litigation. The data show that (i) the median desk arbitration 11 was resolved in 4 months; (ii) the median telephone arbitration was resolved in 5 months; (iii) the median inperson hearing was resolved in 7 months; and (iv) when the arbitration settled, the median arbitration proceeding lasted 2-5 months. 12 By contrast, the average class action settlement received final court approval in 1.89 years, and federal court multi-district litigation (MDL) class actions filed in 2010 closed in a median of 2.07 years. 13





2. Arbitration Is Less Expensive for Customers than Litigation

The Study shows that customers pay far less to arbitrate than to sue in court. Prior to September 14, 2014, the customer’s portion of the administrative and arbitrator fees charged by the American Arbitration Association (AAA) under its rules was capped at $125. The company paid all of the remaining fees. Under the AAA’s revised rules, the customer’s share of those fees is capped at $200, with the company paying the remainder. 14 That is only one-half of the $400 it review of 301 AAA consumer arbitrations (240 brought by consumers, 61 brought by businesses) that were closed by award between April and December 2007. It reached the following conclusions: (a) the upfront cost of arbitration for consumer claimants was quite low; (b) AAA consumer arbitration is expeditious (an average of 6.9 months); (c) consumers won some relief in 53.3% of the cases filed and recovered an average of $19,255 (52.1% of the amount claimed); (d) no statistically significant repeat-player effect was identified; and (e) arbitrators awarded attorneys’ fees to prevailing consumers in 63.1% of cases in which the consumer sought such an award and the average attorneys’ fee award was $14,574.

Desk arbitration involves dispute resolution based on paper submission rather than a hearing.

Study, § 1, p. 13.

Id. § 6, pp. 9, 43.

Id. § 1, p. 13; § 4, pp. 10-11. Moreover, customers are permitted to apply for a hardship waiver if they cannot pay these modest amounts, and many arbitration provisions offer to pay them for the customer if requested or unconditionally. Id. § 2, pp. 58-59; § 5, pp. 12, 76-77.

DMEAST #22199841 v1 costs to file a new complaint in federal court. 15

3. Customers Recover More in Arbitration than in Litigation According to the Study, in arbitrations where customers obtained relief on affirmative claims and the Bureau could determine the amount of the award, the customer’s average recovery was $5,389 (an average of 57 cents for every dollar claimed). 16 By contrast, based on 73 of 74 individual federal court claims in which a judgment was entered for the customer, the average amount awarded to the customer was $5,245. 17 At the other end of the spectrum are class members in consumer class action settlements. The Study states that cash payments to “at least 34 million consumers” during the period studied were “at least $1.1 billion.” This means that the average class member’s recovery was a mere $32.35. 18 The Study further concluded that in 60% of the 562 putative class actions studied, the putative class members got nothing at all, because 25% of the class actions were settled individually, while 35% were withdrawn by plaintiffs. 19 These statistics create a strong inference that many class actions are marginal at best and are filed not to benefit putative class members, but with the intention of driving an individual settlement. (Of course, even marginal or frivolous class actions require the defendant company to incur substantial defense costs up to the point of settlement, withdrawal, or dismissal. Therefore, all customers pay for the cost of defending and managing such suits in the form of higher prices or impact on services as such expenses have to be funded.) Moreover, according to the Study, only 15% of the class actions studied obtained final class settlement approval. 20 In the class settlements that required the putative class members to submit a claim form, the weighted average claims rate was only 4%, because 96% of the potentially eligible putative class members failed to submit claims and therefore did not receive a settlement award. 21 In addition, even those minuscule claims rates fell by 90% if documentary proof was required to be submitted along with the claim. 22 Id. § 4, p. 10.

Id. § 5, pp. 13, 41. Customers were also awarded attorneys’ fees in 14.4% of the disputes resolved by arbitrators; the largest award of customer attorneys’ fees was $37,275. Id.

§ 5, p. 79.

Id. § 6, p. 49 n. 85.

$1.1 billion divided by 34 million equals $32.35 per class member.

Study, § 1, pp. 13-14; § 6, p. 37.

Id. § 1, p. 14.

Id. § 1, p. 17, § 8, p. 30.

Id. § 8, p. 31.

DMEAST #22199841 v1 The Study also shows that customers are more likely to obtain decisions on the merits in arbitration than they are in class action litigation. None of the 562 class actions studied by the Bureau went to trial. 23 By contrast, the Study found that of 341 cases resolved by an arbitrator, in-person hearings were held in 34% of the cases, and an arbitrator issued an award on the merits in about one-third of the cases. 24 Finally, the statistic that dwarfs all others is the amount paid to class action attorneys.

The Study found that attorneys’ fees awarded to class counsel in settlements during the period studied amounted to a staggering $424,495,451—almost half a billion dollars—in that relatively short period. 25 The Bureau’s findings confirm the conclusions reached by the U.S. Chamber of Commerce, Institute for Legal Reform in a December 2013 empirical study of class actions titled, “Do Class Actions Benefit Class Members?” 26 The Chamber analyzed 148 putative consumer and employee class action lawsuits filed in or removed to federal court in 2009.

Consistent with the Bureau’s Study, the Chamber’s report found, inter alia, that—

• Not one of the class actions studied ended in a final judgment on the merits for the plaintiffs. And none of the class actions went to trial, either before a judge or a jury.

• The vast majority of cases produced no benefits to most members of the putative class—even though in a number of those cases the lawyers who sought to represent the class enriched themselves in the process.

• Over one-third (35%) of the class actions that were resolved were dismissed voluntarily by the plaintiff. Many of those cases settled on an individual basis, resulting in an award only to the individual named plaintiff and the lawyers who brought the suit, with the class members receiving nothing.

• Just under one-third (31%) of the class actions that were resolved were dismissed by a court on the merits, and the class members received nothing.

• For those cases that settled, there was often little or no benefit for class members.

Moreover, few class members ever received those benefits, particularly in consumer class actions.



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