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.