DECEMBER 12, 2013 Arbitration Study Preliminary Results Section 1028(a) Study Results To Date Table of contents 1. Introduction .......................................................................................................... 4 1.1 What is a pre-dispute arbitration clause? ................................................ 4 1.2 The Bureau’s mandate to study consumer arbitration ............................ 8 1.3 What does this presentation cover? ......................................................... 9 2. Summary of results to date ............................................................................... 12 3. Clause incidence and features ......................................................................... 16 3.1 Prior studies ............................................................................................ 17 3.2 Clause incidence ...................................................................................... 19 3.3 Clause length and complexity ................................................................ 28 3.4 Clause features ....................................................................................... 30 3.5 Clause changes ........................................................................................53 4. Incidence and typology of consumer arbitration filings ................................. 58 4.1 Data sources ........................................................................................... 58 4.2 Case incidence ........................................................................................ 62 4.3 Representation ....................................................................................... 70 4.4 Amounts at issue ..................................................................................... 76 4.5 Non-collection arbitrations .................................................................... 82 4.6 Debt collection arbitrations ................................................................... 92 4.7 Which consumers bring arbitrations? ................................................... 96 2 CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY PRELIMINARY RESULTS 4.8 Prior litigation ....................................................................................... 101 4.9 Initial fee allocation ............................................................................... 110 5. Small claims court data ................................................................................... 118 5.1 Previous studies .................................................................................... 120 5.2 Data sources .......................................................................................... 121 5.3 Incidence ............................................................................................... 124 6. Future work ...................................................................................................... 129 Appendix A .............................................................................................................. 132 Clause incidence methodology ...................................................................... 132 Appendix B .............................................................................................................. 136 Arbitration data procedures .......................................................................... 136 Appendix C .............................................................................................................. 149 Identifying credit card cases in federal district courts .................................. 149 Appendix D .............................................................................................................. 151 Additional arbitration data ............................................................................ 151 Appendix E .............................................................................................................. 155 Small claims court data and methodology .................................................... 155 Appendix F .............................................................................................................. 167 Defined terms ................................................................................................. 167 3 CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY PRELIMINARY RESULTS 1. 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 pre-dispute arbitration contract provisions in connection with the offering or providing of consumer financial products or services, and to provide a report to Congress on the same topic. The Bureau is in the process of conducting that study. This document presents preliminary results reached in the Bureau’s study to date. These results are subject to revision when the Bureau submits its statutorily-mandated report to Congress if further analysis so warrants. Furthermore, the Bureau’s report to Congress will contain additional analyses that the Bureau is planning to conduct but for which the Bureau does not yet have even preliminary results. A concluding section identifies work that the Bureau may or expects to cover in later stages of its study that will also inform its report to Congress. 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.1 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 1 Section 1002(5) of the Dodd-Frank Act defines “consumer financial product[s] or service[s].” See 12 U.S.C. § 5481(5). 4 CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY PRELIMINARY RESULTS 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, all members of the class—for example, customers of a company who have been adversely 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, all 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 contract can agree to an alternative means of resolving any disputes that arise between the parties, including both contractual disputes and disputes under state or federal law. The most common form of alternative dispute resolution is final and binding arbitration in which a privately-appointed individual—an arbitrator—is empowered to resolve claims that arise between the parties.2 As discussed in detail in section 3, 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 described as “mandatory.” Under the terms of such agreements, either side can mandate that a dispute that arises between the parties be resolved in binding arbitration.3 The clauses are described as “pre-dispute” because they commit the parties to this arrangement before there is a dispute between them. 2 In some cases, more than one arbitrator may be involved in resolving a dispute. 3 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 5 CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY PRELIMINARY RESULTS 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 party that went to court instead proceed, if at all, in arbitration. Arbitration clauses almost always specify the private arbitration organization that will administer the dispute if and when the clause is invoked by the consumer or the company. The American Arbitration Association (or “AAA”) is one such “arbitration administrator”; JAMS, Inc. is another. For the consumer financial contracts we have reviewed to date, our research shows that the AAA is the most commonly specified organization in such pre-dispute arbitration clauses. We review certain AAA data in section 4 below.4 Arbitration clauses may have a number of other features that address where disputes may be adjudicated, the timing for filing disputes, and the remedies that may be awarded. Additionally, arbitration clauses may include limitations on the use of class proceedings and “carve-outs” for small claims court proceedings.5 Pre-dispute arbitration has become a contentious legal and policy issue. Following a series of Supreme Court cases interpreting the 1925 Federal Arbitration Act (the “FAA”), courts regularly enforce pre-dispute arbitration clauses in consumer, employment, and other contexts in which the relevant contract is not subject to negotiation between the contracting parties.6 At least from 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). 4 The AAA is a non-profit organization. It was founded in 1926, following enactment of the Federal Arbitration Act, with the specific goal of helping to implement arbitration as an out-of-court solution to resolving disputes. It describes itself as being dedicated to “the development and widespread use of prompt, effective and economical methods of dispute resolution.” Its mission statement and other information are available at the AAA’s website, www.adr.org. 5 We discuss these two features at sections 3.4.2 and 3.4.5. 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. See 6 CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY PRELIMINARY RESULTS the late 1990s, the inclusion of arbitration clauses in consumer financial contracts appears to have become more common.7 In 2011, the Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion.8 In that case, the Court held that the FAA 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. Some commenters take the view that pre-dispute arbitration clauses contained in standard-form contracts are unfair to consumers. Critics generally focus on three areas. First, they attack arbitration as a dispute resolution process. They contend that it reduces or eliminates procedural protections—such as a right of appeal or access to discovery—that are generally available in court.9 There are also claims that arbitration may be biased against consumers, and that it may not be as fast or cheap as its proponents claim.10 Second, especially in the wake of the Supreme Court’s decision in Concepcion, critics argue that arbitration clauses may immunize companies from a range of private civil liabilities, such as by reducing the availability of discovery or by eliminating class proceedings.11 According to this argument, arbitration clauses may undermine deterrence and leave widespread wrongdoing against consumers unaddressed. Finally, critics assert that arbitration, which is almost always conducted in private, undermines David S. Schwartz, The Federal Arbitration Act and the Power of Congress over State Courts, 83 OR. L. REV. 541, 541- 630 (2004); Christopher R. Drahozal, Federal Arbitration Act Preemption, 79 IND. L.J. 393, 393-440 (2004). 7 For example, a number of large credit card issuers moved to include arbitration clauses in their consumer credit card contracts from the late 1990s. The reasons for this shift are contested and the focus of a court case, Ross v. Bank of America et al., 05-Civ. 7116, which is pending in the United States District Court for the Southern District of New York. We discuss the Ross case further in section 3. The detailed timeline for adoption by credit card issuers is discussed, inter alia, in the report of the Ross defendants’ expert, Professor Kenneth G. Elzinga, dated September 21, 2010. The timeline of adoption for other products may differ, of course, and adoption has not been universal, as we discuss in section 3.2. 8 AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). 9 See, e.g., National Association of Consumer Advocates (“NACA”) and National Consumer Law Center (“NCLC”) RFI Comment at 5. 10 See, e.g., Americans for Financial Reform (“AFR”) RFI Comment at 5. 11 See, e.g., Public Justice RFI Comment at 4. 7 CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY PRELIMINARY RESULTS benefits inherent in the public nature of the court system, such as transparency and the development of clear precedents.12 In contrast, defenders of pre-dispute arbitration clauses take the view that arbitration offers “a faster, more efficient and more cost-effective method of resolving disputes than court litigation.”13 According to this point of view, arbitration “minimizes the disruption and loss of good will that often results from litigation and … reduces litigation costs.”14 Arbitration proponents also claim that these cost savings inure to the benefit of consumers through lower prices and/or expanded access.15 Finally, while proponents of arbitration clauses may acknowledge the potential impact on class proceedings, many take the view that such proceedings typically are meritless, inefficient, and provide little or no benefit to consumers.16 They contend that the reduced cost of arbitration together with various provisions of arbitration clauses (including the availability of small claims court as well as contingent minimum awards in arbitration) provide ample opportunity for consumers to obtain redress for asserted wrongs that involve relatively small amounts of money. 1.2 The Bureau’s mandate to study consumer arbitration Section 1028(a) of the Dodd-Frank Act requires the Bureau to “conduct a study of, and . . . 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.” “Covered persons” are defined as “any 12 See, e.g., NACA & NCLC RFI Comment at 5-6. 13 American Bankers Association (“ABA”), Consumer Bankers Association (“CBA”), and The Financial Services Roundtable (“FSR”) RFI Comment at 2. 14 Id. 15 See, e.g., American Financial Services Association (“AFSA”), RFI Comment at n.30. 16 See, e.g., ABA/CBA/FSR RFI Comment at 9 n.16. 8 CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY PRELIMINARY RESULTS person that engages in offering or providing a consumer financial product or service.”17 Because section 1028(a) specifically addresses the use of pre-dispute arbitration clauses in consumer financial contracts, those “agreements”—and the consumer disputes that may be subject to their terms—have been and will remain the focus of the Bureau’s study. 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 for the required study.18 We received 60 comments in response to the RFI. We refer to a number of those comments in this presentation.19 Most comments came from trade associations, consumer groups, academics, or law firms. We received almost no comments from individual financial institutions that include arbitration clauses in their standard-form contracts with consumers. 1.3 What does this presentation cover? This presentation includes preliminary results reached in the Bureau’s study to date. As our study effort continues, we will refine and place this work into fuller context. The Bureau is disclosing these preliminary results at this time to provide stakeholders with greater transparency into the work the Bureau has undertaken to date and to provide further detail on the work the Bureau is planning to undertake before issuing its report to Congress. This presentation has five sections:  Section 2 is an Executive Summary of the results to date.  Section 3 addresses our preliminary findings with respect to the incidence of arbitration provisions in the three markets which we have studied thus far: consumer credit card, 17 12 U.S.C. § 5481(6)(A). 18 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). 19 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. 9 CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY PRELIMINARY RESULTS checking account, and general purpose reloadable prepaid card agreements. It identifies the extent to which these clauses are included in consumer contracts in these three markets. It also reviews the features of these clauses.  Section 4 provides a typology of consumer disputes filed with the AAA by consumers and/or companies from January 1, 2010 through to the end of 2012 for two of the markets for which we have studied the incidence of arbitration clauses—the credit card and checking account markets—and also in the payday loan market.20 We review several data points, such as the number of filings, the legal claims that they cover, claim amounts, initial fee assessments, whether the parties are represented by counsel, and demographic distributions of consumers in these arbitrations. We may expand our analysis of AAA dispute filings to other consumer financial products in the next phase of our work.  Section 5 reviews filings in small claims courts by consumers and companies in the credit card marketplace. Many arbitration clauses contain small claims court “carve-outs”— generally enabling either the consumer or the company to use small claims courts, rather than arbitration, for claims resolution. This section reviews available data in the states and largest counties that provide electronic access sufficient for these purposes to see how much use consumers and companies make of small claims court.  Finally, section 6 describes areas that the Bureau expects to cover in the remainder of its study of pre-dispute arbitration provisions. Because the Bureau’s work on this study is ongoing, any of the findings presented here may be refined or modified when we issue our report to Congress pursuant to section 1028(a). Furthermore, that report will provide additional context to the preliminary results included here in at least the following four respects.  This presentation focuses on the “front-end” of formal disputes involving consumers: who files these disputes, in what numbers, against whom, and about what. In later work, 20 We have identified only four prepaid cases in the data we received from the AAA. We have not provided data specific to that market because there are so few of these filed disputes. 10 CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY PRELIMINARY RESULTS