The National Arbitration Forum Blog

The Current State of Consumer Arbitration authors Sarah Rudolph Cole and Theodore Frank take a look at empirical evidence on consumer arbitration in the Fall issue of the ABA Dispute Resolution Magazine. After analyzing the Public Citizen report and evidence collected in California and elsewhere, they conclude that claims that arbitration is inherently unfair to consumers are overstated. Data, in fact, reveals different, and more positive, conclusions about the state of consumer arbitration.

National Arbitration Forum Blog readers may know Professor Cole from her work at the ADR Profs Blog; she is on the faculty at Moritz College of Law at Ohio State University. Mr. Frank blogs at Overlawyered.com and Point of Law; he is also a resident fellow at the American Enterprise Institute for Public Policy Research.

The authors' conclusions based upon empirical evidence analyzed in the The Current State of Consumer Arbitration:

• The Public Citizen Report (2007) – "A closer examination of Public Citizen’s findings…raises significant concerns with its selective use and interpretation of data."
• California Consumer Arbitration Data (Navigant, 2008) – "[T]he consumer was frequently successful in reducing the amount the business sought."
• Consumer and Employment Arbitration in California: A Review of Website Data Posted Pursuant to Section 1281.96 of the Code of Civil Procedure (California Dispute Resolution Institute, 2004) – "[F]indings offer further support for the notion that consum­ers do find success in arbitration and that, regardless of the outcome, do not pay exorbitant fees."
• Outcomes of Arbitration: An Empirical Study of Consumer Lending Cases (Ernst & Young, 2004) – "The results of this report suggest that consumers fare extremely well in consumer-initiated arbitration."
• The Same Result as in Court, More Efficiently: Comparing Arbitration and Court Litigation Outcomes (Mark Fellows, 2006) – "[C]onsumers fare better in arbitration than Public Citizen’s report alleges."
• Arbitration - A "Good Deal" for Consumers (Professor Peter Rutledge, 2008) – "[C]ompared to litigation, arbitration is a relatively inexpensive and fair mechanism that produces positive outcomes for consumers."

Notably, they debunk the myth that businesses win at a "stunning" rate when debt collection cases are arbitrated.

"In a collections case, the consumer is the defendant. Typically, there is no question that the consumer owes the debt to the credit card issuer. In mediation, the consumer admits the debt and then typically works out a payment plan with the issuer. In arbitration, though, the debtor will lose, because he owes the debt. In such situations, all an arbitrator can do is enter an award against the debtor. Thus, the win-loss record for consumers in these cases is not cause for concern. Moreover, it mirrors consumer success, or, more aptly, lack thereof, in court collection cases."

They also address the "lop off" factor that was brought to light by the Navigant study. In many of the cases where the business entity prevailed in arbitration, the arbitrator protected the consumer from overreaching claims by awarding less than the full amount requested.

"Moreover, even in the cases where Public Citizen identifies the business as the prevailing party, the con­sumer was frequently successful in reducing the amount the business sought. Consumers won reductions in 37.4 percent of the cases that went to hearing, with a median reduction of $824."

This effect is even more compelling in arbitration cases where the consumer party does not respond to contest the claims, because arbitration provides more protection than the consumers would typically receive in a default judgment proceeding in court.

"More impressive, in 3,632 of the 16,054 cases where there was no hearing because the respondent defaulted, the arbitrator refused to award the entire amount the business requested. The median reduc­tion for consumers was $599. This may be because "[i]n cases administered under the NAF Code of Procedure, the arbitrator considers all evidence, whether or not there is a response to the claim." This added layer of protection is unavailable to consumers in civil litigation, where default judgments are entered on sums certain without consider­ation of the underlying evidence. The average consumer thus comes out ahead in arbitration, compared to court."

The authors conclude by noting the "one-sided media coverage" that accompanied the Public Citizen report criticizing consumer arbitration: "One hopes that the Navigant refutation of Public Citizen's misleading numbers will garner the same publicity."