Another Myth of Consumer Law?

07/31/13

As the CFPB gears up to regulate arbitration clauses,
a timely article by Omri Ben-Shahar has been posted on ssrn. Part of
Ben-Shahar’s “Myths of Consumer Law” project (see here, here, and here ), The Myth of Access-to-Justice in Consumer
Law 
contains some provocative insights, but key blind spots lead the
piece to unwarranted conclusions.

The conclusions are that pre-dispute arbitration and class
action waiver clauses in consumer contracts benefit weak consumers. To get
there, Ben-Shahar first notes that consumers are not a homogeneous group and access
to justice in the courts is far from evenly distributed. Because elites are
more likely to sue and are likely to collect higher damages (one of the many
reasons they are more likely to sue), giving all consumers the right to sue is,
in effect, a regressive cross-subsidy from poorer consumers to those elites.

That
is, everyone pays the same litigation tax on a toaster or a cellphone, but only
elite consumers will sue and receive compensation for their injuries if the
toaster blows up or the cellphone carrier adds bogus charges to the bill (and even
if poorer consumers sue in the toaster case, their damages will be lower). [The
toaster and cellphone examples are my own, but they help illustrate
Ben-Shahar’s argument.] Arbitration and class action clauses eliminate this
cross-subsidy, the tax on products that all consumers would otherwise pay to
subsidize the cost to firms of litigation by, and damages awarded to, elite
consumers, because the clauses effectively prevent many claims from being
brought at all.

Ben-Shahar recognizes that some class action litigation
brought by elite consumers can have trickle down deterrent effects that help
weak consumers, but he argues that most class actions are frivolous and do not deter
firms from producing exploding toasters or from adding bogus charges to bills. For
the exploding toasters, Ben-Shahar argues here (and elsewhere) that for the most part, reputation
is what makes products safe, not litigation or the threat of litigation. As for
the bogus cellphone charges, he argues that the effect of litigation or the
threat thereof is that firms add more fine print disclosures to their contracts
that allow them to charge these hidden fees. The benefits of these fine print
disclosures, as Ben-Shahar and Carl Schneider have argued more fully elsewhere,
are reaped by elites who can understand them, not the poor or even the average
consumer.

The article is still a draft, and so I will not nitpick here
about errors that will of course be fixed before publication. Ben-Shahar has
also told me he plans substantial revisions, and is now more convinced that
class actions might provide sufficient value to poor consumers to undo the
otherwise regressive effects of litigation. But the current draft has already
been downloaded over 400 times, and thus warrants public discussion.

The article makes some good points. Court enforcement of
fine print disclosures does favor elites. Charges disclosed in fine print
therefore ought to be unenforceable; every price component ought to be
disclosed in such a manner as to facilitate price-shopping. Damages calculations
in litigation do favor elites. Perhaps damages ought to be class-blind -- every
arm lost to an exploding toaster compensated at the same rate rather than
according to the income that arm would have otherwise generated, and every
countertop destroyed by that toaster compensated using a formula indifferent to
whether the countertop is made of marble or cheap laminate. (Better yet, if the wealth gap between
rich and poor were narrowed, the courtroom values of lost arms or lost countertops would no
longer be so disparate). Certainly access to attorneys ought to be more broadly
available so that the merit of the claim rather than the wealth of the
plaintiff would determine who gets a lawyer.

But the article’s suggested remedy for these ailments -- to
send all disputes between consumers and firms to arbitration and to eliminate
class actions -- would make matters worse, not better, for poor and, in some
cases, rich consumers as well.

Moving claims to arbitration and eliminating class actions
will only make the access disparity issue worse. To the extent that arbitration
is more expensive than litigation for consumers, weak consumers have less
ability to vindicate their claims. The elites can continue to bring their high
value claims for themselves, but without the class device they cannot obtain
any recovery for others. Further, the greater secrecy firms often enjoy in
consumer arbitration rather than litigation means that news of the claims of
these elites will also not reach: (a) policymakers or regulators who might
otherwise be able to force improvements in the toaster’s safety or the
cellphone carrier’s billing practices, (b) weak consumers who might pursue
copycat litigation once the rich consumer’s suit paves the way, even if they
could not or would not have pursued a groundbreaking claim, and (c) all
consumers who might benefit if they knew to avoid the toaster or cellphone
contract at issue in the future.

It is true that it took Edith Windsor, a woman who stood to
inherit so much money from her deceased wife’s estate that the tax treatment of
that money made a lawsuit financially viable, to take down the Defense of
Marriage Act. But if she had pursued the claim in arbitration
(impossible given the parties but for the sake of argument assume she had),
then she may well have had her tax burden reduced, but DOMA would still be
enforced against all the poorer gays and lesbians who lack the resources to
challenge the law.

So too for consumer cases against firms. It is both the
class action device and the public nature of litigation that makes firms change
practices; individual arbitration in secrecy does not. Sometimes only the rich
victim of the exploding toaster collects his damages in litigation, and even in
class litigation, sometimes weaker consumers have smaller recoveries. But, at
least where rich and poor buy the same toasters and cellphones, the reason the
toaster does not explode and the firm does not attempt to charge bogus fees in
the first place is, in part, due to the prospect of that rich victim’s
litigation and/or the prospect of class litigation.

To the extent that an arbitral forum is so controlled by
firms that even rich consumers cannot win, moving all claims to arbitration places
the relationship between firms and consumers in a state of lawlessness (outside
the space of what government enforcement, which can also be more responsive to elites than the poor, can do). Without tort law or consumer protection
law, elites and weaker consumers both suffer, but again the elites are
relatively better off. Without litigation to deter firms from making exploding
toasters and charging bogus cellphone fees, consumers must each protect
themselves. Elites have more resources with which to do this in the marketplace,
just as they have more resources to pursue litigation. In some cases even
elites are worse off as compared to a marketplace disciplined by tort and
consumer protection laws. It is cheaper for firms to make toasters safer than
for each consumer to identify which toasters are safe. It saves even the elites substantial effort when firms make
price components easy to locate, understand, and compare rather than hidden in
the fine print.

When rich and poor consumers are not buying the same
toasters and cellphones, moving claims to arbitration and eliminating class
actions might harm weak consumers even more. It is not only Ben-Shahar who has
noticed that consumers are not a homogeneous group; firms know it well. I know
little about toasters and perhaps even less about cellphones, but my guess is
that firms sell high and low end toasters and high and low end cellphone
contracts. Eliminating the claims of weak consumers through arbitration and
class action clauses prevents them -- those few weak consumers who might bring
suit -- from using litigation to try to discipline the low end of the product and
service markets. The low end markets are thus left in a state of lawlessness. Eliminating
the claims of elite consumers may not benefit weak consumers. If firms
specialize, then weak consumers do not pay a litigation tax that benefits
elites in the first place; if a single firm offers both high and low end
products and services, who pays the litigation tax (or any other firm costs)
will depend on whether the high or low end market is more price competitive.

In sum, eliminating a regressive litigation tax sounds
appealing in theory, but in practice the cure proposed here is likely to be
worse than the disease. Eliminating all access to justice is not a good way to
solve the problem of unequal access to justice.

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