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The judicial system should compete with consumer arbitration, not displace it: A response to Richard Alderman

[Updated 2011-05-16]

Professor Alderman really dislikes mandatory consumer arbitration

Law professor Richard Alderman, director of the Consumer Law Center at the University of Houston, is a long-time critic of provisions in consumer contracts that require mandatory arbitration of disputes with the provider. He writes in Business Law Today that:

Businesses do not impose arbitration to provide consumers with an easier and more efficient way to resolve disputes. They impose arbitration to keep the courts out of the business of consumer protection.

Arbitration allows business to effectively opt-out of our civil justice system and replace it with a system of private justice. A recent law review article shows that, in fact, arbitration is not mere forum shopping, it is result shopping. …

Richard A. Alderman, What’s Really Wrong with Forced Consumer Arbitration?, Business Law Today, Nov. 22, 2010 (accessed Nov. 23, 2010) (emphasis and extra paragraphing added).

Disclosure: As associate dean of the law school, Professor Alderman oversees the school’s part-time adjunct professors, one of whom is me.

Compulsory consumer arbitration does indeed have its problems

There’s no doubt that mandatory arbitration provisions in consumer contracts can have problems, as Professor Alderman notes. For example:

  • Sometimes a business is a “repeat customer” of a particular arbitrator, who might thus be biased toward keeping that business happy, lest he not be hired for the next case.
  • An arbitration provision might require the consumer to pay half the cost of the arbitration, which could be prohibitively expensive for many consumers, especially in low-value disputes.
  • If an arbitration provision purported to preclude class actions, each consumer’s cost of arbitrating his or her single low-value case could effectively let the business off the hook for the harm it putatively caused.

(Footnote: The latter two of these problems might be fixable via unconscionability analysis, and the first problem, by providing in the arbitration clause that the selection of an arbitrator is subject to court approval if either party objects to the selection — and by holding that the arbitration clause is substantively unconscionable if it forces the parties to wait to challenge the arbitrator’s potential bias until after they’ve incurred the expense of arbitrating the case.)

And sometimes businesses are indeed bad actors

There’s no doubt that — as in most other walks of life — some business decision-makers are selfish, valuing their own interests above anything else. Such worthies and their counsel can be quite clever in dreaming up ways to game the system and dodge account­ability for their actions. Any lawyer who has practiced business- or consumer law has seen this — as have many lawyers who have had to go up against take-no-prisoners corporate litigants.

But requiring litigation for the resolution of consumers’ contract-based disputes might be like taking up smoking to lose weight

Overweight people sometimes ask whether they should start smoking to help them drop the excess poundage. Doing so might well help you achieve that goal — but the side effects can be deadly.

So too, it could be argued, for compulsory use of litigation to adjudicate consumers’ contract-based disputes: Litigation does get you to a decision — but in the view of many business people, the side effects of cost and unpredictability are harmful to the nation’s economic health.

It’s eminently rational for companies to opt for mandatory consumer arbitration instead of trying to change the law

Footnote: Professor Alderman criticizes companies that abandon litigation in favor of arbitration, instead of tackling the perceived problems of the litigation system:

Instead of appealing through the courts, working through the legislative process to enact change, or using the political process to elect different decision makers, [Alabama] car dealers and home builders simply included a short clause in their contracts, opting out of the civil justice system. A simple clause in a take-it-or-leave it boilerplate contract enacts major substantive changes in the substance and application of the law.

So (supposedly), business executives who want to put fences around their legal risk are blameworthy for taking a quick, cheap, already-available approach to that goal.

Instead (according to this supposition), business executives should voluntarily pick a political fight with the well-funded plaintiffs’ bar and its legislative allies, starting down a path that would almost certainly be slow, contentious, expensive, and unpredictable of outcome.

Um, sure; good luck persuading business execs to choose that path.

Perhaps reformers should work on helping civil litigation compete more effectively for contract-dispute business

It doesn’t seem carved in stone that the judicial system will always be the preferred institution for adjudicating civil disputes. Certainly in tort- and other non-consensual cases, only courts have the societal legitimacy to impose a decision, by force if necessary.

But when parties have stated their willingness to use other tribunals, courts should think of themselves as playing a different role: They should view themselves, at least in the first instance, as competitors for the parties’ decision-making business, not as wielders of a legal monopoly who can displace other “firms.”

With that in mind, arbitration reformers who want companies to take their consumer-contract disputes back to court might have better luck — especially in view of the GOP’s nationwide successes in the 2010 mid-term elections — if they refocused on making the litigation system more competitive, by fixing the problems that have made companies take their business elsewhere.

UPDATE: Three justices of the Texas Supreme Court appear to be thinking along lines similar to this last point. In the Nafta Traders case, Chief Justice Jefferson and two other justices (including my son’s former Little League coach, Dale Wainwright!) said in a concurring opinion:

[O]ur system is failing if parties are compelled to arbitrate because they believe our courts do not adequately serve their needs. If litigation is leaving because lawsuits are too expensive, the bench and the bar must rethink the crippling burdens oppressive discovery imposes. If courts have yet to embrace modern case-management practices, the Legislature should ensure that the justice system has resources to improve technology and to hire qualified personnel—two sure ways to improve efficiency.

Comments on this entry are closed.

  • John Vail 2011-03-09, 10:32 am

    You quote the dean, and then add your own thoughts:

    “‘Instead of appealing through the courts, working through the legislative process to enact change, or using the political process to elect different decision makers, [Alabama] car dealers and home builders simply included a short clause in their contracts, opting out of the civil justice system. A simple clause in a take-it-or-leave it boilerplate contract enacts major substantive changes in the substance and application of the law.’

    So (supposedly), business executives who want to put fences around their legal risk are blameworthy for taking a quick, cheap, already-available approach to that goal.”

    Here’s one problem: One of the fictions The Federal Arbitration Act is based on is that arbitration is merely a change of forum. Here, you endorse it BECAUSE it changes substantive outcomes. It’s a telling admission, but one made many times before by many executives.

    You also advocate changes in the civil justice system: “fixing the problems that have made companies take their business elsewhere.” The problem here is that adjusting disputes is often not simply the the business of companies. For the purposes for which the FAA was envisioned – specific enforcement of arbitration clauses in contracts between large businesses, so that thye could quickly resolve disputes about matters not of public concern (what to do if oyu get blue widgets instead of red ones) – enforcement of pre-dispute arbitration clauses is not objectionable. But many disputes now routinely subject to mandatory arbitration – built on the fiction of consent in such things as consumer click-through agreements – are matters of public concern (wage claims; employment discrimination issues; consumer fraud), the kinds of claims that Marshall, in Marbury v. Madison, identified as being among the fist duties of any government to resolve. Public resolution, in a transparent way not a feature of arbitration, is necessary to inform the public of excesses of private power.

    Blame Hank for sending me.

  • D. C. Toedt 2011-03-09, 10:55 am

    Ha! Tell Hank hi for me.

    You write of “… the fiction of consent in such things as consumer click-through agreements ….” I’m not at all sure it’s a fiction.

    It seems to me that I always have a choice to forego whatever it is that the provider is offering, if I don’t like the provider’s T&Cs. It wasn’t brought down from Mt. Sinai on stone tablets that I’m entitled to (say) cell phone service on terms that I decide are acceptable.

    I managed to live a reasonably successful life before acquiring my first cell phone in 1988. If I decided I really hated AT&T’s terms and conditions, and if I couldn’t find an alternative cell phone service whose terms I did like, then I’d be free to revert to my pre-1988 lifestyle. Of course, I’d have to give up the many advantages of using a cell phone, but that’s my choice.

    What we have here could be summarized as: “Yes, we took what you offered, but we’ve decided in hindsight that we want it on our terms, not yours, so we’re going to renege on the deal we agreed to.”

    Certainly there are egregious situations when allowing consumers to renege on their agreements would be justified. As a Faustian hypothetical example, if a set of click-wrap T&Cs required you to sell your children into slavery, no serious person would argue that this requirement should be enforceable.

    And indeed, some of the matters that you characterize as being “of public concern” are legitimately that, in which case arguably a public resolution of the dispute is the best course.

    But if we’re going to re-trade the deal after the fact, reneging on a previous agreement, then let’s call it that. We don’t need to try to justify it by pretending that the consumers’ consent to the T&Cs was a fiction.

    Thanks for commenting, John.

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