Equifax Data Breach

New York Consumer Law Blog

Wednesday, October 5, 2016

Class Actions or No Action

Class actions are often the only viable mechanism to address widespread consumer harm.  Read more in this insightful piece.

June 26, 2016 12:00 AM

What would you do if your client told you her bank had charged her account a $25 fee she didn’t owe? Would you sue the bank?

Probably not, given that the cost of the litigation would greatly exceed $25. That’s why we have class actions.

When, say, a million consumers have been taken advantage of, the total is enough to justify a lawyer bringing suit. If businesses know that preying on many consumers for small amounts may generate a class action in which they might have to pay millions of dollars, they may behave better.

Businesses understandably don’t like being sued in class actions. Consequently, many put in their consumer contracts a clause saying that disputes must be heard by a private arbitrator, and, more important, that the disputes can’t be brought as class actions in court.

What happens to that $25 claim when consumers agree to arbitration? When the Consumer Financial Protection Bureau studied consumer arbitrations, it found that consumers almost never filed a claim for less than $1,000, much less $25. The result is that the company keeps the money.

But that is changing. Recently the CFPB proposed a regulation to bar financial institutions from using arbitration clauses to block class actions. If the regulation becomes final, banks will have to think twice before taking advantage of consumers.

The proposal still faces challenges. Affected businesses are likely to sue (in court, ironically) to try to block it. In a move that conjures up the famous scene from “Blazing Saddles” in which Cleavon Little takes himself hostage, the financial industry has threatened to abandon consumer arbitration altogether if the regulation takes effect. Thus, the Chamber of Commerce has written of its concern that consumers who have unique $25 claims that couldn’t be heard in class actions wouldn’t be able to arbitrate them.

(Never mind that this imaginary consumer — remember, consumers rarely bring $25 claims — could presumably still sue in small claims court). But even that wouldn’t be a problem unless arbitration benefits consumers; therefore, the industry claims that it does.

Except that it doesn’t. The CFPB study found that, on average, 6.8 million consumers a year obtain relief through settlements in consumer finance-related class actions in federal court. In contrast, it reported, about 600 consumer finance disputes were filed each year with the main arbitration provider. Even if consumers filed and won 1,000 times that many arbitration proceedings a year, federal class actions would still help more than 10 times as many consumers as arbitration in a typical year. That’s why class actions can deter misconduct while arbitration doesn’t.

Industry has responded to the CFPB study by using the same kind of misdirection that causes consumers to agree to contracts with arbitration clauses in the first place. Trade organizations argue that individual consumers recover more in arbitration than in class actions. But of course that’s because consumers don’t bring arbitrations unless larger amounts are at issue while class actions are used for tiny claims. The industry would have you believe that it is more interested in protecting consumers than are the 164 consumer organizations supporting the CFPB’s rulemaking.

The CFPB was founded in part to block financial institutions from using tricks and traps consumers don’t understand — like arbitration clauses. It’s good news for consumers that the industry’s tricks and traps have not deceived the CFPB.

Jeff Sovern is a professor of law at St. John’s University in Jamaica, N.Y., and co-coordinator of the Consumer Law and Policy Blog.


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