In a recent op-ed, I argued that the Consumer Financial Protection Bureau should ban arbitration clauses in boilerplate consumer contracts because people generally don't understand them. Financial industry lawyers Alan Kaplinsky, Mark Levin, and Daniel McKenna responded with an op-ed that took issue with the article, as well as the underlying study on which it was based. Unfortunately, their arguments largely miss the mark.
Let me first clear away some underbrush. The industry lawyers charge that our survey "did not interview consumers who actually had participated in arbitration." In fact, 57 of the 647 people in our survey who answered a question about their experience with arbitration claimed to have participated in the past. Their answers to the eight questions that had right and wrong answers were statistically indistinguishable from the answers given by respondents who said they had no such experience. In other words, respondents who had been involved with arbitration did not understand arbitration clauses any better than those who had not.
The industry lawyers also suggest that it would be helpful to know if consumers understand arbitration clauses better or worse than other contract clauses. While we didn't examine this issue, in fact consumers may well have a better grasp of non-arbitration terms. Credit card arbitration clauses, on average, require more than two years of college to understand, according to the CFPB. Other credit card contract clauses typically require an eleventh-grade education or less.
But even if we assume that consumers are just as confused by other terms as by arbitration clauses, and that consumers should be bound by other terms they cannot comprehend, arbitration clauses still call for different treatment. That is because arbitration clauses take away constitutional rights that our country's founders fought for: the right to a jury trial, which is referred to in the Declaration of Independence, and the right to a day in court. Americans should not lose fundamental rights without being aware that they are doing so.
Let me now turn to the industry lawyers' main argument. They suggest it's fine if consumers sign away constitutional rights without realizing they are doing so: after all, they say, consumers fare better under arbitration than in litigation. They base this view on a report issued by the Searle Civil Justice Institute. Plenty of others disagree and argue that arbitration is inferior to litigationincluding Georgetown professor Adam Levitin, writing in these pages.
The question of whether arbitration or litigation is better for consumers is an important one. But it is one that our study did not attempt to address. That's because before you can figure out which option is better, you have to determine whether consumers are able to make up their own minds about giving up their constitutional rights. As my co-author, Montana Law School dean-designate Paul Kirgis, has explained:
Citizens cannot be forced into alternative processes simply because someone has made a determination that they would in fact be better served by the alternatives. It is certainly true that citizens can choose to give up their adjudicative rights, but those choices have legitimacy only if they are knowing and voluntary. Our research suggests that consent to arbitration is seldom knowing and voluntary.
The framers of the constitution decided, in their wisdom, that courts should settle disputes. That foundational document makes courts legitimate forums for the resolution of legal arguments.
Our study found that many respondents believed they retained the constitutional right to have disputes decided by a court, even when an arbitration clause had taken it away. In other words, we found that consumers did not consciously agree to surrender their rights.
Therefore the arbitration emperor lacks the clothing of legitimacy. And it does not gain legitimacy because some think that consumers are better off under arbitration.
Jeff Sovern is a professor of law at St. John's University and a coordinator of the Consumer Law and Policy Blog.