Class actions deliver more money to more people than arbitration: CFPB

December 12, 2013

What a difference a day – and a data source – makes.

Yesterday I told you about a new study of class action outcomes that Mayer Brown conducted at the urging of clients like the U.S. Chamber of Commerce. The law firm looked at 148 consumer and employment class actions filed in federal court in 2009, and found evidence that a grand total of one case – a $1.2 billion settlement of ERISA claims rooted in Bernard Madoff’s Ponzi scheme – delivered meaningful recoveries to class members. Of the five other cases in which claims data was publicly disclosed, Mayer Brown found distressingly minimal participation in settlement funds by class members: 0.000006 percent, 0.33 percent, 1.5 percent, 9.66 percent and 12 percent.

Mayer Brown released its study in anticipation of a report by the Consumer Financial Protection Bureau, which Congress assigned in the Dodd-Frank Act to analyze the impact of mandatory arbitration clauses in consumer contracts for financial products and services like credit cards and checking accounts. Sure enough, CFPB disclosed preliminary findings from its year-long study on Thursday – and they indicate that the U.S. Chamber was right to worry. According to CFPB, exceedingly few consumers actually bring arbitration claims when they have a dispute with their credit card company, bank or payday lender. Tens of millions of consumers are subject to mandatory arbitration for disputes involving financial products and services, CFPB estimated, yet only 1,241 cases involving these products were filed with the American Arbitration Association between 2010 and 2012. Of those, according to CFPB chairman Richard Cordray, about 900 were filed by consumers. (The rest were initiated by banks and lenders.) CFPB offered some caveats, including the lack of data from JAMS Inc, which also hears consumer arbitrations, albeit far fewer than AAA. But the bureau isn’t exactly going out on a limb when it concludes that the evidence shows arbitration doesn’t provide any recovery to the overwhelming majority of consumers of financial products, especially those with small dollar claims. “Plainly, the number of arbitrations was low relative to the total populations using these products,” the report said, in a notable understatement.

So, a vanishingly small percentage of consumers who are bound by mandatory arbitration provisions win recovery from their banks and credit card companies, since hardly any of them arbitrate their claims. Would consumers obtain better results via classwide proceedings (which are explicitly barred in more than 90 percent of the arbitration agreements reviewed by CFPB)? If we were to rely exclusively on Mayer Brown’s report, we’d conclude that they would not. Mayer Brown found that consumer class actions filed in 2009 were either so flimsy that they were dismissed or that they resulted in settlements offering recoveries too small for most class members to even bother claiming.

That’s not at all what CFPB found, however. The bureau set out specifically to compare consumer recoveries in arbitration to those in class actions. Using case databases and other anecdotal reports, CFPB identified eight class action settlements to serve as a basis of comparison. (The criteria: Settlements had to have been approved in the second half of 2009 or later; the contract at issue in the class action must have contained an arbitration clause; and the case must have involved credit cards, checking accounts or payday loans.) CFPB found that more than 13 million class members made claims or received payments through these eight settlements – which delivered more than $350 million in payments and debt relief to consumers.

Those aren’t results to scoff at, especially considering that only 900 consumers attempted to arbitrate similar claims. Thirteen million people received payments through class actions, which is an awful lot more than the 900 who filed for arbitration with AAA, suggesting that consumers are vastly more likely to recover for their grievances through a class action than through litigation. And no matter what you think of class action lawyers, $350 million in payouts is real money.

To be fair, there are some anomalies in CFPB’s data set. One settlement, of consolidated antitrust litigation over foreign transaction fees charged by Visa, MasterCard and other credit card companies, accounts for a disproportionate share of claimants and payouts. That settlement, which received final approval in 2009, distributed about $263 million to some 10 million claimants, most of whom took a flat-rate recovery of $18. Three other sizable settlements came in the consolidated checking account overdraft litigation, and most of the several million class members in those cases received payments without having to file claims. (As a rule, automatic distribution settlements, in which the identity of class members can be ascertained without a claims notice process, result in recoveries to a dramatically higher percentage of the class.)

In the eight settled cases CFPB analyzed, only a tiny percentage of class members opted not to accept a payout through the class settlement. There were a total of 3,605 opt-outs, compared to more than 13 million participating class members. And only a handful of those opt-outs, according to CFPB, ended up bringing their own arbitration claims. Those statistics led CFPB chairman Cordray to conclude, “Few consumers use arbitration at all, at least when compared to the number of consumers involved in lawsuits and class actions.”

The consumer bureau has a long way to go before it issues a final report to Congress on the use of mandatory arbitration clauses and adopts regulations on the use of such provisions for financial products and services. I’ve touched upon only one aspect of CFPB’s 168-page preliminary analysis, which also talks about the difficulties consumers face in understanding densely written arbitration clauses and the risks to consumers in fee allocation provisions in the clauses. The bureau has a lot to consider as it formulates regulations.

Nevertheless, CFPB’s report noted that commenters across the spectrum urged the bureau to investigate the relative benefits to consumers in class actions and arbitration. And from what CFPB presented in this initial report, it’s quite clear that the bureau believes class actions deliver better results.

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