Arbitration and “coercion”

Relevant to a recent comment discussion, words of wisdom from Judge Easterbrook in IFC Credit Corp. v. United Business & Indus. Federal Credit Union:

Ever since Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991), enforced a forum-selection clause printed in tiny type on the back of a cruise-ship ticket, it has been hard to find decisions holding terms invalid on the ground that something is wrong with non-negotiable terms in form contracts. See also, e.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991) (unequal bargaining power does not justify refusal to enforce an arbitration clause in a form contract); Seawright v. American General Financial Services, Inc., 507 F.3d 967 (6th Cir.2007). As long as the market is competitive, sellers must adopt terms that buyers find acceptable; onerous terms just lead to lower prices. See, e.g., Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.1997); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996); George L. Priest, A Theory of the Consumer Product Warranty, 90 Yale L.J. 1297 (1981). If buyers prefer juries, then an agreement waiving a jury comes with a lower price to compensate buyers for the loss-though if bench trials reduce the cost of litigation, then sellers may be better off even at the lower price, for they may save more in legal expenses than they forego in receipts from customers.

There is no difference in principle between the content of a seller’s form contract and the content of that seller’s products. The judiciary does not monitor the content of the products, demanding that a telecom switch provide 50 circuits even though the seller promised (and delivered) 40 circuits. It does not matter that the seller’s offer was non-negotiable (if, say, it offered 40-circuit boxes and 100-circuit boxes, but nothing in between); just so with procedural clauses, such as jury waivers. As long as the price is negotiable and the customer may shop elsewhere, consumer protection comes from competition rather than judicial intervention. Making the institution of contract unreliable by trying to adjust matters ex post in favor of the weaker party will just make weaker parties worse off in the long run. Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273, 282 (7th Cir.1992) (โ€œThe idea that favoring one side or the other in a class of contract disputes can redistribute wealth is one of the most persistent illusions of judicial power. It comes from failing to consider the full consequences of legal decisions. Courts deciding contract cases cannot durably shift the balance of advantages to the weaker side of the market; they can only make contracts more costly to that side in the future, because [the other side] will demand compensation for bearing onerous terms.โ€).


  • Nicely done. Personal favorite: consumer protection comes from competition rather than judicial intervention.

    Ted, are you the real “John Galt?”

  • Ted,

    With respect to the intelligent argument from both you and Judge Easterbrook, I still have to disagree that the market is providing choices in this context. Clearly once one vendor discovers a cost savings via mandatory binding arbitration, all other vendors must follow suit or risk being left at a competitive disadvantage. I notice that no consumer product vendor I know of offers their products with and without arbitration at differentiated prices. The fact that vendors could take the immediate revenue increase from selling a higher-priced product without mandatory arbitration and invest it in an anti-litigation insurance policy or self-insure with low-risk investments of their own choosing puts the lie to the idea that the market is giving us choices.

    I propose an experiment. Over the next several years, attempt to negotiate out the mandatory arbitration portions of you’re a party to. We all know that you have no interest in suing product vendors in a court of law and prefer arbitration for dispute resolution, but there’s no harm to you (except for a little lost time) or the vendor to try to negotiate these terms out of the contracts you sign since you’ll never actually sue in court. You could then report back here on your efforts. I don’t know what the outcome of the experiment will be, but I’d be willing to bet that there are a large number of vendors that will be completely unwilling to negotiate these terms away at any price.

    For the record, I’m not advocating legislation or executive regulation of these terms in contracts, but I do have concerns in general about the kinds of terms our judiciary allows in form contracts and contracts of adhesion. I don’t know where I am on mandatory arbitration terms–I’m still thinking about them.

  • Clearly once one vendor discovers a cost savings via mandatory binding arbitration, all other vendors must follow suit or risk being left at a competitive disadvantage.

    You prove my point. This only works if (1) MBA provides a cost savings and (2) consumers prefer the cost savings to jury trials. If either is not true, there is no competitive advantage. Banning MBA therefore makes consumers worse off.

    Over the next several years, attempt to negotiate out the mandatory arbitration portions of you’re a party to. We all know that you have no interest in suing product vendors in a court of law and prefer arbitration for dispute resolution, but there’s no harm to you (except for a little lost time)

    My time is pretty valuable. Why would I want to waste it like that when I prefer arbitration to begin with? And it costs companies a lot of money to renegotiate contracts; of course they’re going to decide that they’d rather not hire a $400/hour attorney to renegotiate every credit-card contract and insist on a take-it-or-leave-it affair, and it would be silly of them to do otherwise.

    Why limit your objections to negotiating for MBA waivers? Why not try to negotiate for a three-wheeled car or a free blue pony with every credit card bill? No company will offer me a contract with a free blue pony, no matter how much I offer to raise my interest rates. Again, hardly a matter of legal concern. We’ve discussed the bogus issue of “contracts of adhesion” here before; (see this law review article) no point in repeating it.

  • Billb,

    I think you underestimate the costs involved in supporting multiple agreements. For example, a credit card issuer would have to pay for the time a skilled negotiator talked to Ted and for the time a lawyer spends reviewing the new agreement unless they already supported these terms. For the small profits expected, the startup costs of entering into these agreements would make them unprofitable to even consider.

  • You couch the argument over arbitration in economic terms (willing buyer/seller). Unfortunately, there is a recent trend toward “take it or leave it” in transactions where the consumer has no choice. I really can’t do without my phone and my local carrier simply doesn’t care if I don’t like the terms. My gas and electricity provider is similarly situated. No choice arbitration is increasingly inserted into laws such as traffic control. Fighting a bogus traffic ticket often means a judgement by an “arbitrator” with no incentive to be fair at all.

    But all this is moot when many people accept the “evil of binding arbitration” as received wisdom. They talk to legislators and the legislators pass laws with no objective economic consideration.

  • Given that I was a participant in that conversation, and that the word adhesion only appears twice, I’m not sure we really discussed it thoroughly there, but since that was an aside in my more recent comment, let’s put contracts of adhesion aside for the moment.

    BTW, I think you mostly lost the argument over the three-wheeled car analogy in that thread, as well, Ted, since it’s pretty clear that there are companies out there that would be happy to sell you a three-wheeled car. I’d also bet that if you wanted Ford to make you a three-wheeled car, and they thought you were serious, they’d be able to come up with a price tag. Sure, no Ford dealer is going to negotiate one wheel off an existing car, but you’d be silly to walk into a Ford dealer demanding three-wheeled vehicles when there are dealers out there selling other brands with three wheels. I’m under the impression that there are no credit cards available without an MBA clause, I’d be willing to consider evidence to the contrary.

    Now, if you want a free blue pony with your credit card statements, I’ll be happy to start a credit card company just for the fun of negotiating the contract. I’m sure we can come to an agreement. I’ll start the negotiations with an offer of one point shy of usury for the interest rate, with the balance compounded continuously starting at the time of each purchase, and an annual fee of $1B. For that, I’ll throw in a FREE BLUE PONY every month. I hope you have a big stable and a lot of grooms.

    BTW, you would want “waste” your time on my suggested experiment to get a handle on what sort of choices the market really offers. You could do the same by refusing any contracts with MBA terms, but I didn’t suggest that because I figured it would be beyond the pale. I’m also not sure that Visa would need to get a $400/hr attorney involved to renegotiate some credit card terms. Do you get your lawyer involved in every contract you sign? I don’t imagine so, so why would they? ๐Ÿ™‚ Given that you could simply strike the terms, initial your changes, sign the agreement (if there is even such a place to do so), and send them a copy, I can’t imagine that it would cost you more than an additional thirty seconds in your review of the contract (you are reading these contracts, right?) and maybe 5 minutes for photocopying and a dollar at the post office the next time you go (you’ve got to mail back the credit card application anyway). What’s 5.5 minutes of your time worth these days? ๐Ÿ™‚

    Perhaps we should all just agree to disagree that the same take-it-or-leave-it conditions imposed by all sellers in a market (tacit collusion a al Baird?) constitute an opportunity for choice in the market.

    Regarding the Baird article, I find it amusing that you offer it as evidence that we shouldn’t worry about boilerplate terms in form contracts given that one of his suggestions (top of pg. 939) is that courts have wide discretion in applying legal rules about boilerplate (including, one is left to presume, refusing to enforce MBA terms). Also, given that on the very next page Baird makes the same mistake about how many wheels car manufacturers offer in their products, I’m not sure that this is the best article to be leaning on. The summary dismissal of the court’s argument in Henningsen v. Bloomfield Motors, Inc. doesn’t really convince me either.

    On the other hand, Baird’s argument on knowing and deliberate waivers (pp. 946-947) is pretty convincing, and while he mentions MBA clauses there, he does not come down on one side or the other regarding whether deliberate waiver should be required. And, finally, in that OMG!!! internet sort of way, the arguments on pg 950 about MBA are perhaps completely opposite those that you make here. He explicitly argues that enforcement of fineprint/boilerplate MBA clauses is often contrary to good legal policy. Yes, Baird argues that blanket refusal to enforce boilerplate is a bad policy, but he explicitly notes that where the fine print goes against broad and traditional legal principles, knowing waiver, conspicuous presentation, etc. probably ought to be required before the terms are enforced. I was dubious of this article when I first started reading, Ted, but I have to thank you now for pointing it out.

    Finally, I’d like to point out that I explicitly stated that I was not advocating bans of MBA provisions. You’re probably right that banning such provisions is bad policy, but that doesn’t mean that we shouldn’t debate the manner by which they enter our contracts. Furthermore, it doesn’t make your arguments about choice any more correct.

  • OBQuiet: I imagine a simpler model. No negotiation, but something more of a menu. Put a dollar figure on contract terms that are often objected to by savvy customers. They can then pay more for the privilege to strike such terms (or, heck, turn it on its head and offer to add terms for increased discounts). I think the argument over knowing waiver would be moot if everyone was presented the opportunity to shave half a point on their CC interest rate or save $5 a month on their cell service plan by agreeing to BA. It wouldn’t be waiver anymore it would be given up “for valuable consideration”. ๐Ÿ™‚

  • Billb:

    1) I wouldn’t object strongly to requiring arbitration clauses to be printed in bold or to require an affirmative waiver.

    2) Your blue-pony sidestep isn’t playing fair. I’d be happy to provide you a credit card without MBA for a billion dollars a year, too, so if that’s all you need to solve your problems, you’re on board.

  • As long as the price is negotiable and the customer may shop elsewhere, consumer protection comes from competition rather than judicial intervention.

    But if every single company has the same clause, and there is no way to back out, then there really isn’t a consumer choice.

    If so, the answer isn’t “judicial intervention”, but “legislative intervention”.

    The last time I bought a car, I actually read through the purchase agreement and asked if there was a BA clause. The dealer just shrugged, but I’m sure there was one buried in there somewhere. I’m not a lawyer, so I just went ahead and bought the car.

    What if there was a clause and I crossed it out? Is the dealer able to alter a contract created by Ford Motor Company? Is the only alternative to MBA “don’t every buy a new car”? If one company has it, usually they all do.

  • Billb

    The problem I see with your logic is that it still exposes businesses to frivolous lawsuits. The credit card companies (and similar businesses) put the BA on every contract to reduce their risk. If 25% of their customers opted out then suddenly the benefit to the company is reduced. A lawsuit that is unsuccessfully pursued can still cost the company millions. Should the people who opted out of the MBA have to bear to brunt of those cost or will they be spread out to the entire customer base? My guess is the later.

    There is a class of people in this country who are always looking for a chance for the big pay day. Those are the people who will opt out of the MBA.

  • Ted: I think we can agree on the latter half of #1. I’m not sure some bold type in pages of legal documents is really all that affective for knowing waiver, but if people are initialing/signing next to a clause without thinking about the consequences, that’s another story. It’s probably enough to make sure that consumers are asking themselves if they’re getting the value they want from signing away the right to a regular lawsuit.

    On #2, care to make a counter-offer? ๐Ÿ™‚ I mostly framed my offer that way because you said, “No company will offer me a contract with a free blue pony, no matter how much I offer to raise my interest rates,” which is clearly not true. Such absolute statements beg to be confronted with ridiculous evidence to the contrary. What fun would it have been to offer to do it for the cost of the blue pony?

    All this being said, I’m still not comfortable with the situation I mentioned in your 3-wheeler post. I.e., the way a typical car sale goes down: you negotiate the car with a salesman and handshake on a deal, and then go back to the business office to “work out the details” wherein the buyer gives up more in return for nothing explicit. I don’t really have a good solution, since the savvy buyer must assume that these are factored into the price while, I assume, the unsavvy simply suffer the additional clauses or sign without reading. It’d be nice to make clear somehow that when you go to buy a car, you’re really buying a contract with the car company.

    Tracy: Insurance is specifically designed to hedge such risks. Assuming that by offering a price for the MBA clause, a company loses no sales (a reasonable assumption, I think, it might even gain some sales), then all of the additional revenue can be used to hedge the risk either through insurance products or, more likely, through disciplined investment (don’t giant companies have lawsuit funds already?). Presumably the price they set for buying off the MBA clause will reflect the odds of jackpot lawsuits, the popularity of buying it off, and the average settlement cost over the past several years (inflation adjusted), and whatever other actuarial metrics seem important.

    Maybe I’m wrong, and there’s no interest in a market for the right to sue. In which case, my proposal will die on the vine, but if there is a market, if the companies don’t do it themselves, somebody will come along and agree to take on some of that risk for the money.

  • Not to turn this thread into a dissertation (lord knows I don’t need to write another one), but do you have any idea, Ted, why the market went to binding arbitration rather than stipulated damage caps? It seems to me that if the data is right and consumers tend to do better in arbitration than they do in front of juries, the right way to avoid jackpot lawsuits would be to put clauses in limiting non-economic damages. Perhaps that’s what bothers me most now that I’ve really thought about it in detail. Given that these corporations think that most consumers will acquiesce to these sorts of terms, why not get the best of both worlds by guaranteeing that frivolous awards are capped? Is the concern that judges are less predictable than arbiters? Or does this idea lend some credence to the argument that corporations and the arbiters they use are somehow colluding (or at least appear to collude)?

  • Courts won’t enforce damages caps in contract, calling such limits “unconscionable.” E.g., Collins v. Uniroyal, 315 A.2d 216 (N.J. 1974). I’ve long thought that the most effective tort reform would be to legislatively undo this judicially created limit on the right to contract. Better to let the marketplace decide the appropriate limits on damages than legislatures.

  • A good portion of regular mail consists of credit card solicitations. If there was a niche for contracts without MBA, there would be somebody to pick up that market share. Such a niche would appear if there was any credible evidence of systemic unfairness against the average customer. There would be hundreds of newspaper stories and score of television spots showing how the credit card companies are screwing people.

    The market has selected for MBA contracts.

  • One problem with MBA is that arbitrators do not always follow the law, and that’s a problem. When I was in law school, I was helping out a buddy with a claim under Ohio’s lemon law, and there was an MBA, and the arbitrator basically ruled contrary to the law in calculating damages, when we called to ask what was up, we were told that the law was just a guide. Now I am sorry, I don’t like out-of-control suits etc., but the bottom line is that arbitration company should have suffered some serious consequences. Arbitrators should be on the hook for crap like that.

  • As long as the price is negotiable and the customer may shop elsewhere, consumer protection comes from competition rather than judicial intervention.

    But if every single company has the same clause, and there is no way to back out, then there really isn’t a consumer choice.

    Where do I go to buy marshmallows soaked in blue food coloring? If I want them, and nobody sells them the solution must be judicial intervention, right?

    What good is choice if I can’t choose what I want?

    The point is, a contract term you don’t like is no different from a product you don’t like.