Behind those “unfair arbitration” numbers

Last month Public Citizen drew extensive and largely uncritical publicity for a report blasting credit card arbitration. The report’s most dramatic number, picked up by many papers, was based on newly available California data: “In a sample of 19,300 cases, arbitrators ruled in favor of consumers 5 percent of the time.” (Phuong Cat Le, “Binding […]

Last month Public Citizen drew extensive and largely uncritical publicity for a report blasting credit card arbitration. The report’s most dramatic number, picked up by many papers, was based on newly available California data: “In a sample of 19,300 cases, arbitrators ruled in favor of consumers 5 percent of the time.” (Phuong Cat Le, “Binding arbitration a loser for consumer”, Seattle Post-Intelligencer, Sept. 27). Such results, charged a Public Citizen official, show “a stunning bias against consumers”. Kansas City Star consumer columnist Paul Wenske’s reaction was typical: “Would you agree to let someone arbitrate your dispute with a credit card company if you knew he or she almost always decided in favor of the company?” (“When you sign up for a credit card, you sign up for arbitration”, Oct. 6). It was all a great publicity coup for the litigation lobby, which has been gearing up a campaign to do away with predispute arbitration agreements that divert potentially lucrative disputes away from the lawsuit system.

If, however, you happened to read Bob Ambrogi’s Legal Blog Watch entry on the story, you might have noticed the following reader comment:

Bob, I am an arbitrator for NAF [National Arbitration Forum]. My statistics would show that I rule for the Claimant in an extremely high percentage of cases. The statistic is misleading as 95% plus cases are default cases, where the consumer never bothers to answer.

Posted by: legal eagle | Sep 28, 2007 1:19:06 PM

And there you have the little trick behind Public Citizen’s sensational assertion that only 5 percent of consumers manage to beat the house. The vast majority of cases that go before the arbitrators are in fact uncontested collections, which present no active dispute to resolve one way or the other. Where there is an active dispute, it is plain that consumers’ win rate is very much higher than 5 percent. Why did so many journalists in recent weeks convey the mistaken impression that there’s almost no hope of success for the consumer who contests the lender’s story at arbitration? Because those journalists were falling into a hole skillfully dug for them by Public Citizen.

Any system of resolving routine consumer collections, including traditional courtroom litigation, is likely to generate a high rate of default judgments or their procedural equivalent. The National Arbitration Forum at its website refers to one pertinent study which it summarizes as follows:

Default Judgments Against Consumers: Has the System Failed? (Sterling & Schrag, 1990; 67 Denv. U. L. Rev. 357, 360-61)

A Georgetown University law professor analyzed a sample of claims filed in 1988 against consumers in the Small Claims and Conciliation Branch of the Superior Court of the District of Columbia. The small claims procedure did not require the consumer to submit a written answer. Instead, the consumer only had to show up in court at the specified time. Nevertheless, according to the study, 74% of the cases resulted in a default judgment. In 22% of the cases, the consumer acceded to full liability. In the remaining 4%, the plaintiff voluntarily dismissed the case. None of the cases resulted in a trial.

Making full allowance for the somewhat different mix of cases in the two instances, one still is left here with an even lower “consumer win rate” than in the California data. And a recent news story from Texas about debt collection by lawsuit includes an allegation that more than 80 percent of consumers fail to contest the matter, resulting in default judgments; if creditors are winning even half of the contested cases, the resulting “consumer win rate” is below 10 percent. (Teresa McUsic, “Unpaid credit-card bills giving rise to lawsuits”, Fort Worth Star-Telegram, Aug. 31).

Of course, some of us would suspect that Public Citizen’s really major beef with arbitration clauses is not so much with the way they divert the collections process away from the courts, but with a quite different effect they have on litigation: they impede the filing of class actions by the entrepreneurial plaintiff’s bar (arbitration clauses typically rule out class treatment of complaints, which means law firms who’ve signed up one client can’t proceed to enroll millions of other cardholders as plaintiffs too without their say-so). But of course the casual newspaper reader is likely to be a good bit more sympathetic to individual consumers supposedly facing a deck stacked 95-to-5 against them than with the business reverses of class action law firms who find themselves no longer able to extract the sorts of fee-driven settlements they once did.


  • Then what you’re saying is that arbitration is such a good thing that there’s no need for pre-dispute binding mandatory arbitration agreements. After all, consumers will flock to arbitration if it’s so cheap and useful.

    It’s good to know we can count on your support for the Arbitration Fairness act of 2007.

  • I do believe the media’s accounts in this instance are biased. Arbitration is, often, a fair way to resolve disputes: quicker, cheaper and less complex than full-blown litigation. Where I live, personal injury civil cases have mandatory arbitration for values admitted less than $50,000.

    Perhaps oddly, those forums are generally plaintiff-friendly. Attorneys are deciding cases (as judge and jury) for other attorneys and their clients. The judgments often come in more generously than those of juries, who (at least in the venue in which I live) are generally skeptical of plaintiffs asking for money.

    If the defendant believes the judgment is unjust they can appeal (“trial de novo”) but would owe the plaintiff’s increased attorney fees if they do not improve their position at jury trial. (The same goes for the plaintiff if they appeal and don’t improve their position).

    So, the media’s insistence to portray arbitrators as shills for the big, evil credit card companies fall on deaf ears, at least for me. This is pointed out in Olson’s post—that many of the (essentially) default judgments against consumers in arbitration are not because the companies are leveraging their resources against the consumer, but only that they simply failed to respond to the arbitration proceedings and defaulted in the action. And, the remainder is simply decided on their merits.

  • So then the question becomes, of the 95% that are default cases how many of those are defaulted because cardholder knew they didn’t have a case and how many were defaulted because they were didn’t think they by themselves had a chance against the credit card companies lawyers and the amount was too small to make hiring a lawyer (if you could even find a lawyer who would take such a small case) or were just too unsophisticated to be able to follow the process to conclusion?

  • No, Shelley, because all those default judgments are far cheaper to obtain in arbitration than in litigation. But without mandatory arbitration, firms will not be able to obtain the consent to bring those actions, and consumers will not get the benefit of cheaper costs.

  • And could Paul Wenske, Phuong Cat Le, Shelley or anyone from Public Citizen give us an EXAMPLE of a case that should have been won by a credit card holder, but wasn’t?

    Didn’t think so.

    A 98 percent conviction rate would be too low if 99 percent of those charged were in fact guilty.

    I suspect this isn’t an overly factually complex situation. You owe the money or you don’t. I’m sure most tagged with owing, owe. In my experience with disputed charges, credit card companies are pretty good about dealing with those quickly and on good terms for the cardholder.

  • Anonymous Attorney:

    The Consumerist has many bad arbitration articles their website.

  • Hmmm…

    Calling them “Godless Bloodsuckers” is always a sure bet that you’re about to get some reliable information from serious people. Ditto for the WEST VIRGINIA judge who weighs in… ahem. But alright, check out the site. “Consumerist,” it’s called? Would that be because they protect consumer choice and keep prices down?

    Again, hmmm.

  • “Because those journalists were falling into a hole skillfully dug for them by Public Citizen.”

    …and also because those journalists, like so many self-described journalists working in today’s reporting environment, either don’t have the training, education, intelligence, or curiosity, to perform any independent investigation of their subject, or they just don’t care enough about accuracy to do so.

  • OK you flap about “default cases” but yet you don’t research how they “serve” notice to the defendants.

    Kinda hard to show up if you’re unaware the case even exists. Media sensationalism indeed.

  • How about someone Lawyer type) answer Bumper’s points.

    For your average consumer, even arbitration is surrealistic and overly expensive.

    By that measure, all the frivilous lawsuits against Fortune 500 companies are justified in that they settle out of court 90% of the time.

  • […] that suggests it’s not the bogeyman trial lawyers have been painting it as (we’ve touched on the topic before). I’ve got a summary excerpt and a few more links over at Point of […]