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New Report - Class Actions, Arbitration, and Consumer Rights: Why Concepcion is a Pro-Consumer Decision

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In a newly released legal policy report, "Class Actions, Arbitration, and Consumer Rights: Why Concepcion is a Pro-Consumer Decision," Ted Frank, adjunct fellow with the Manhattan Institute's Center for Legal Policy and editor of Point of Law, outlines why fears of the effects of pro-arbitration rulings are overstated. Arbitration agreements and the Supreme Court's endorsement of freedom of contract is a benefit to consumers. Recent decisions will not end the class action, and consumer advocates would be better off working to end the abuse of class actions that benefit attorneys at the expense of consumers, rather than fighting arbitration agreements that consumers would prefer ex ante.

On February 27, 2013, the Supreme Court will hold oral arguments in American Express Co. v. Italian Colors Restaurant. Like the Court's 2011 decision in AT&T Mobility v. Concepcion, Italian Colors involves the intersection of two mechanisms for resolving legal disputes not easily handled by high-cost individually filed lawsuits: arbitration and class action litigation.


In class action litigation, similarly situated legal claims are aggregated under a single lawsuit. Given the cost of litigation, class action suits can be efficient mechanisms for resolving large numbers of relatively low-dollar claims, but they also can enrich lawyers at legitimate claimants' expense because such lawsuits' low value to individual plaintiffs reduces the incentive for any plaintiff to monitor the lawyers handling the claim.

Arbitration, a form of dispute resolution outside the courts, involves imposing as legally binding and enforceable the decision of a third party, typically specified in advance in contracts. Arbitration is generally favored and enforceable under federal law, through the 1925 Federal Arbitration Act (FAA). Potential corporate defendants have sought to use mandatory arbitration clauses to avoid the expense of class actions. The trial bar and allies in the legal academy criticized such clauses as "anticonsumer" and, for years, had success, particularly in California state court, in obtaining judicial rulings finding the clauses unenforceable, notwithstanding the language of the FAA.

Read The Full Report

5 Comments

You're kidding right?

If arbitration were such a good thing, then consumers would be happy to agree to post-dispute arbitration once they had full knowledge of what their injuries were. However, businesses know that, once an individual has suffered injury they are more reluctant to give up their right to a jury. Pre-dispute arbitration is simply an attempt by the sophisticated to take advantage of the unsophisticated.

Arbitration is often simply a rigged game in favor of business. For example, statistics for arbitration using the National Arbitration Forum showed that businesses won 94% of the time. Public Citizen, How Credit Card Companies Ensnare Consumers , Sept. 2007.

The article indicates that class actions often take more time with less reward for the individual consumer. It fails to mention that a consumer can always "opt-out" of the class case and pursue their individual remedies. Thus, if a consumer would rather pursue their individual remedies they have every right to do so.

I have never understood why consumers are not offered a choice of contracts, one with an arbitration clause and one without--but with different prices to reflect the cost savings which the arbitration clause is expected to bring in case of a dispute. I would think the estimate of cost savings would have to be reasonable but I suspect that even a modest or moderate price differential would cause most consumers to choose the arbitration clause, particularly if it was designed to make the consumer's risks in choosing arbitration (fees, etc.) manageable.

I think it might be more difficult to "price" a "no class action" clause so alternative clauses either banning or permitting class actlions might not be feasible.

Neither commenter read the report, since each of those arguments is addressed there.

I don't think my "arguments" (really questions) were addressed in the report. I actually think Concepcion is a good decision, the AT&T contract had provisions that made it manageable for a consumer to pursue an effective arbitration.

But, the report (at least that which was linked to the posting) didn't discuss the question of allowing two contracts, one with and one (more expensive) without an arbitration clause. I don't know if such a system is practical, but I have never seen it discussed.

As to class actions, I suppose my question about a "no class action" clause is the perennial issue of what remedy exists when only a small amount of money is involved for the individual consumer. Even an arbitration for, say, $5.00 or even $50.00 is not realistic, hence not feasible. But, there may be other ways of dealing with this sort of problem.

I do agree wholeheatedly that most contemporary class actions are a farce, and in far too many cases the best analogy is the Mafia practice of extorting "protection money" except, of course, the class action is lawful. I would hope efforts like yours might tame the beast but far too many judges are, at minimum, asleep at the switch.

Paul: that issue is discussed at endnote 10 in almost the same way you did in your comment.

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Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.