By Thomas J. Stipanowich
The American Review of International Arbitration (forthcoming 2012)
In the highly politicized struggle over employment and consumer arbitration, expectations regarding the future of the arbitration law and policy shift dramatically with the variable political climate in Washington. . . .1
Underlying today’s debate is a fundamental disagreement about the ability of binding arbitration to provide justice for consumers and employees,2 a debate that in some respects reflects the larger political divide. Although there is a growing body of empirical research on arbitration in employment and consumer settings,3 proponents and opponents of arbitration both find empirical support for their positions.4 Some studies may be flawed by polemic,5 others offer considerable room for interpretation,6 and no single study, however carefully constructed, has offered a complete picture.7
If we are ever to bridge the gap in understanding and perception, we must find a way to address a number of tough realities. First, there is the difficulty of obtaining sufficient reliable data on largely private arbitration processes.8 Second, there is a growing and shared recognition that data harvested in one specific context is of little or no relevance to other scenarios, and that empirical research must take account of a variety of contextual factors including the transactional setting;9 the status or identity of disputants (such as employees);10 the role of counsel in dispute resolution;11 the rules governing arbitration12 and their provenance;13 as well as the quality of administration or regulation by the arbitral institution (AAA, FINRA, etc.),14 if any. As one scholar concludes, the nature and performance of arbitration procedures in different settings presents a very complex picture, making it impossible to “draw confident conclusions about the effect of invalidating wide swaths of arbitration agreements.”15
Third, we cannot simply examine and evaluate arbitration in isolation, but must compare its operation to the “default option,” going to court.16 Critically, a recent federal trade Commission study examining the need for changes in the debt collection system concluded “that neither litigation nor arbitration currently provides adequate protection for consumers.”17
Fourth, there is the difficulty of identifying appropriate parameters for measuring and comparing the operation of arbitration, including process costs,18 time to resolution of the dispute,19 outcomes,20 and user perceptions.21 In some circumstances “outcomes” may require measurement by qualitative, as well as quantitative means.22
Fifth, comparisons between adjudicative processes must factor in the potential impact of pretrial dismissals, which are much more likely in court than in arbitration,23 and defaults.24 Sixth, there is the much-discussed but little-understood “repeat player” dynamic, which has gripped academic imaginations for a number of years but which may be more complex and multifaceted than previously posited.25 26 27 28 29 30 31
Good decision making about process choices must begin with careful, distanced reflection on what we need to know and how we get it.32 The inquiry should be framed to enable us to move well beyond the virtually meaningless “arbitration is good/arbitration is bad” dichotomy to look at the capabilities, limitations, and real costs of different process choices as played out in the dynamics of different contractual settings.33 Since Dodd-Frank decreed that regulatory bodies should examine arbitration in the context of different consumer finance transactions and of securities brokerage disputes,34 transactional scenarios within these arenas are obvious starting points. Given proper time, space, and technology, we would want to answer questions like these in each context:
- What are the essential elements (measured in terms of process costs, cycle time, due process, and outcomes) of a satisfactory system of justice for consumers?
- Are there forms of binding arbitration that meet the criteria in (1)?
- To the extent they do not, is it possible to meet these criteria through enhanced statutory standards for judicial oversight, regulation by a public body, or other means?
- What are the transaction costs associated with ensuring that arbitration meets the criteria in (1), and how are they/should they be borne?
- The courts
- How well do court procedures meet the criteria in (1)?
- To the extent they do not, is it possible to conform court procedures to these criteria?
- What are the transaction costs associated with providing court procedures that meet these criteria?
- Are there other cost-beneficial process options (administrative hearing procedures, other “hybrid” processes) to satisfy the criteria in (1)?
- To what extent might other approaches, employed alongside or in advance of binding adjudication (customer service desks, hotlines, mediation, etc.), contribute to effective management of conflict?35
- To what extent might the effective use of online dispute resolution (ODR) affect the foregoing calculi?
- What is the proper role of and framework for consolidated/ class actions?
Thomas J. Stipanowich holds the William H. Webster Chair in Dispute Resolution and is academic director of the Straus Institute for Dispute Resolution. He has written widely in the dispute resolution field, especially in the area of arbitration, publishing several books and numerous articles. He currently is serving as an advisor on the ALI Restatement of U.S. Law on International Arbitration. In 2008 he was honored with the D’Alemberte/Raven Award, the ABA Dispute Resolution Section’s highest honor, for his contributions to the field.
Reprinted with permission of the American Review of International Arbitration.
2 See generally Alan Morrison, Summary of Proceedings, Symposium on The Future of Arbitration, George Washington University School of Law (Mar. 17-18, 2011) (on file with author) (summarizing facilitated discussion of issues surrounding use of arbitration agreements in adhesion contracts involving consumers and employees).
3 Compare Thomas J. Stipanowich, ADR and the “Vanishing Trial”: The Growth and Impact of “Alternative Dispute Resolution,” 1 J. Empirical Legal Studies 843 (2004) (surveying empirical studies of the operation of arbitration in consumer and employment settings as of several years ago) and Edna Sussman, et al, Comments to the Consumer Financial Protection Bureau in Connection with Its Review of Arbitration for Consumer Financial Products or Services, New York State Bar Association Dispute Resolution Section (2011), 12 Cardozo J. Conflict Resol. 491, 520-525 (2011) (current listing of empirical studies to date).
4 See, e.g., Christopher R. Drahozal & Samantha Zyontz, An Empirical Study of AAA Consumer Arbitrations, 25 Ohio St. J. on Disp. Resol. 843, 848-49 (summarizing differing conclusions from data on costs).
5 See Sarah R. Cole & Kristen M. Blankley, Empirical Research on Consumer Arbitration: What the Data Reveals, 113 Penn. St. L. Rev. 1051 (2009) (extensively critiquing the analysis and conclusions of the 2007 Public Citizen report entitled, “The Arbitration Trap: How Credit Card Companies Ensnare Consumers”). See also Drahozal & Zyontz, supra note 534, at 919-27 (summarizing various studies of consumer arbitration and related criticisms).
7 See Morrison, supra note 532 (making references to various empirical data, raising questions about data). See also Amy M. Schmitz, Legislating in the Light: Considering Empirical Data in Crafting Arbitration Reforms, 15 Harv. Neg. L. Rev. 115, 118 (Spring 2010) (lack of empirical data regarding consumer arbitration makes policymaking difficult); Christopher R. Drahozal & Samantha Zyontz, Creditor Claims in Arbitration and in Court, 7 Hastings Bus. L.J. 77 (Winter 2011) (noting several limitations on data in comparison of debt collection arbitration under AAA auspices and in some court settings); Alexander J.S. Colvin, An Empirical Study of Arbitration: Case Outcomes and Processes, 8 J. of Empir. L. Stud. 1, 3 (Mar. 2011) (noting that AAA data may not be representative of employment arbitration under other rules, administration).
8 See Cal. Disp. Resol. Inst., Consumer and Employment Arbitration in California: A Review of Website Data Posted Pursuant to Section 1281.96 of the Code of Civil Procedure (Aug. 2004), http://www.mediate.com/cdri/ cdri_print_aug_6.pdf. (noting that “in general, inconsistencies, ambiguities and the lack of reported data in some areas limit this study’s utility for the purpose of informing policy”); Colvin, supra note 537, at 3-4 (discussing missing data in arbitration provider records).
9 See Cole & Blankley, supra note 535, at 1063 (stating that data from arbitration of debt collection cases should only be used to draw conclusions about arbitration in those kinds of cases and not other types of consumer arbitration).
10 See Colvin, supra note 537, at 9-11 (discussing relationship between arbitration experience and employee salary levels). See also Pat K. Chew, Arbitral and Judicial Proceedings: Indistinguishable Justice or Justice Denied?, 46 Wake Forest L. Rev. 185 (Summer 2011) (comparing results in arbitration and litigation of racial harassment cases).
11 See Sussman, et al, supra note 533, at 515-16 (noting that economic downturn may have caused more individuals to appear in adjudication pro se and encouraging policymakers to consider concerns relating to unrepresented consumers in court and in arbitration). See also Drahozal & Zyontz, supra note 534, at 903-907 (comparing recoveries, recovery rate of claimants with and without attorneys in AAA consumer arbitration); Colvin, supra note 537, at 16-17 (discussing self-representation versus representation by counsel in employment arbitration).
12 See generally Linda J. Demaine & Deborah R. Hensler, “Volunteering” to Arbitrate Through Predispute Arbitration Clauses: The Average Consumer’s Experience, 67 Law & Contemp. Prob. 55 (Winter/Spring 2004) (comparing and contrasting various terms of arbitration agreements and incorporated procedures in different consumer contracts; describing wide variation in terms, including scope of discovery, if any, and remedies).
13 See Colvin, supra note 537, at 5,7 (noting earlier studies that indicate employee win rates may be higher in cases based on individually-negotiated agreements, as compared to “employer-promulgated procedures”). The innovative qualitative research on consumer contracting processes by Amy Schmitz, which challenges traditional formalistic notions of contractual assent, is of particular value. See generally Schmitz, supra note 537.
14 See Drahozal & Zyontz, supra note 534, at 846 (stating that their study of data from AAA-administered consumer arbitration cannot be taken as representative of arbitration under the rules and administration of other providers). See id. at 853-54 (noting that National Arbitration Forum caseload consisted almost exclusively of debt collection cases, which involve extremely high win rates for creditors, contrary to other kinds of consumer disputes).
16 See generally Drahozal & Zyontz, supra note 537 (comparing experiences of consumers and businesses in AAA-administered arbitration of debt collection cases, and in court); Colvin, supra note 537, at 4-6 (discussing comparisons between arbitration and litigation of employment cases). See also Sussman, et al, supra note 533, at 498 (“Arbitration results alone without … a comparison to litigation signify nothing and cannot be a basis for evaluating the process.”); Drahozal & Zyontz, supra note 537, at 846 (noting need for a “baseline for comparison”).
17 See Sussman, et al, supra note 533, at 500, quoting Federal Trade Commission, Collecting Consumer Debts” The Challenges of Change—A Workshop Report iii (2009), http://www.ftc.gov/bcp/workshops/debtcollection/dcwr. pdf. See Rutledge, supra note 545, at 581 (discussing need for comparative approach, since “it is of little value to criticize arbitration if individuals would be worse off without it”).
18 A complete analysis of comparative process costs should address direct and indirect process costs to individual consumers or employees, businesses, and the court system. See Sussman, et al, supra note 533, at 493 n.1 (listing questions to be addressed regarding economic impacts, costs of different process choices in resolution of consumer finance disputes).
19 See Drahozal & Zyontz, supra note 534, at 892-896 (data from AAA consumer arbitration reinforces general impression that arbitration is “a relatively quick form of dispute resolution”); Colvin, supra note 549, at 8-9.
20 See, e.g., Drahozal & Zyontz, supra note 534, at 852-57 (noting that while studies normally look at the “win rate” in arbitration, there are various views about what constitutes a “win” for a consumer or business). Among other things, it may be difficult to identify a precise amount claimed, to compare that number to the amount awarded, and the meaning of a particular percentage recovery. Id. at 873-77, 916. See also Edward S. O’Neal & Daniel R. Solin, Mandatory Arbitration of Securities Disputes—A Statistical Analysis of How Claimants Fare (2007), http://smartestinvestmentbook.com/pdf/061307%20Securities%20Arbitration%20Outcome%20Report%20 FINAL.pdf (“win rates and percent of amount claimed that was awarded is an inaccurate and misleading basis” to assess fairness of securities arbitration); Colvin, supra note 537, at 4-8.
21 See generally Jill I. Gross & Barbara Black, When Perception Changes Reality: An Empirical Study of Investors’ Views of the Fairness of Securities Arbitration, 2008 J. Disp. Resol. 349 (extensive survey of investor’s perspectives of securities arbitration).
22 See Chew, supra note 540 (quantitative and qualitative analysis of arbitration and litigation of racial harassment disputes). In her study, Professor Chew notes “striking” similarities between arbitral and judicial decision making in racial harassment cases, but also concludes that claimants performed more poorly in arbitration. While carefully reserving final conclusions pending further research, she urges employees to be cautious about arbitration, observing that arbitrators are not chosen through “carefully crafted public vetting” but in “more idiosyncratic and less transparent ways.” See id. at 208.
23 See Cole & Blankley, supra note 535, at 1055-56 (arguing that pretrial dismissals of an opponent’s case should be described statistically as a “win”); Colvin, supra note 537, at 6 (noting that “different patterns of prehearing settlement may affect the distribution of cases heard in each system”); Schmitz, supra note 537, at 139.
25 See Drahozal & Zyontz, supra note 534, at 857-62, 908-16 (discussing possible grounds for repeat player effect and implications of studies, including their own analysis of AAA consumer data); Colvin, supra note 537, at 11-16 (nuanced discussion of repeat player dynamic in employment arbitration). See also Cole & Blankley, supra note 535, at 1079 (arguing that National Arbitration Forum data does not support a finding of “repeat player” bias against consumers).
32 A starting point for collective, constructive dialogue was The Consumer Arbitration Study Group, an ad hoc group brought together by the governing council of the ABA Section of Dispute Resolution to “talk about interests and options to ensure that consumers have reasonable access to effective and affordable dispute resolution process” and inform the Section as to any role it might play in assisting to resolve related issues. The group was convened in a facilitated, private gathering in January, 2010 in D.C. The author was one of the co-facilitators along with Professor Lisa Bingham. The results of the group dialogue are posted on the Section’s website. American Bar Association Section of Dispute Resolution, Report of the Consumer Arbitration Study Group (Jan. 15-16, 2010, Washington, D.C.) hereinafter ABA Consumer Study Group Report. Proposed guidance for inquiry of the Consumer Financial Protection Bureau respecting the arbitration of consumer financial disputes may be found in Sussman et al, supra note 533.