There has existed for some time a tension between two provisions commonly found in consumer contracts of adhesion; i.e., the requirement that all claims be resolved by arbitration and the prohibition against any claims being pursued in a class action.
Large corporations see that combination as providing them with the greatest possible protection; the arbitration serves as a refuge from runaway jury verdicts, and the preclusion of class actions eliminates the risk of prodigious adverse awards when thousands of small claims are combined and pursued in one arbitration. But the double whammy imposed on consumers does more than provide comfort to manufacturers, financial institutions, brokerage firms and the like; in many cases, it effectively eliminates any right of recovery whatsoever.
Consumer claims for wrongful billing, or a defective product, or false advertisement, or securities misrepresentation, often give rise to minimal damages on an individual basis, such that no attorney can make economic sense of representing an individual, and even pro se pursuit is difficult to justify. So many states have enacted laws making such class action waivers unconscionable and unenforceable in consumer contracts. But in a 2011 decision, the U.S. Supreme Court, in a 5-4 decision, held that the Federal Arbitration Act (FAA) preempts such state laws and makes them invalid, because “requiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and this creates a scheme inconsistent with the FAA.” So the plaintiffs in that case were left to pursue their $30.22 sales tax claim against AT&T in an individual arbitration.
This result was seen by many consumer advocates as an abuse of both the federal preemption doctrine and the FAA, and they began clamoring for congressional corrective action. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 soon became the focus of reform efforts, because that statute gives the Consumer Financial Protection Bureau the authority to regulate such pre-dispute arbitration agreements in consumer contracts. But Dodd-Frank requires such a move to be supported by a prior study demonstrating the need and justification for such action.
In anticipation of a study by the Consumer Financial Protection Bureau producing just such a result, the Chamber of Commerce’s Institute for Legal Reform (CCILR) decided to launch a pre-emptive strike. It hired the law firm of Mayer Brown (which, perhaps not surprisingly, represented AT&T in the Supreme Court case described above) to conduct an empirical study of class actions to determine whether they do, in fact, provide a vehicle for meaningful recovery by consumers who cannot realistically pursue their claims individually.
The Mayer Brown study purports to have found “strong evidence that class actions provide far less benefit to individual class members than proponents of class actions assert.” Even those who would argue that those results of the Mayer Brown study were pre-ordained would have to admit the particular findings are startling.
Analyses of 148 putative consumer and employee class action lawsuits filed in federal court in 2009 revealed that:
• Not one ended in a final judgment on the merits for the plaintiffs; none went to trial before a judge or jury.
• Over one-third resolved during the four-year study period were dismissed voluntarily by the plaintiff—providing no recovery to the class members.
• Another one-third of the resolved cases were dismissed by the court on the merits—again providing nothing for the class members.
• One-third were settled on a class basis, which is one-half of the average federal court settlement rate for non-class action cases. Because the distribution of class action settlements is not typically available, it is difficult to know what percentage of a settlement ultimately gets distributed to the class members. The Mayer Brown study claims to have identified six settlements where that data was available, and those showed only a miniscule portion of the class actually received a part of the settlement.
So, according to Mayer Brown’s investigation, over half the class action cases studied and nearly two-thirds of all resolved cases in the study, members of the class received nothing. In many others, they received a pittance.
The Mayer Brown study is only recently published. It will, of course, be subjected to careful scrutiny from consumer advocates, including the staff counsel of the Consumer Financial Protection Bureau. But if the conclusions stand up, the Chamber of Commerce will have strong ammunition to oppose any regulation or prohibition of class action waivers in consumer contracts. Why should the law be amended to permit class actions in arbitration agreements, it will argue, if a class action so seldom provides anything for the class members? Or, as a recent Wall Street Journal editorial put it, “The only beneficiaries of expanding the potential pool of class-action lawsuits are the plaintiffs attorneys —and their yacht-builders.”
But even if the methodologies and conclusions of the Mayer Brown study are determined to be sound, can it really be said that the ultimate distribution to class members is the only measure of the class action’s worth and efficacy? We would argue that the ability of the class action to confront the manufacturer, financial institution, or employer with prodigious exposure and thereby force sea changes in corporate policy and behavior that could never be accomplished by one-off lawsuits is the true value of that legal construct. The trend among some state legislatures to render enforceable any waiver of the class action rights in consumer contracts should, therefore, be applauded and followed by other states. And Congress should amend the Federal Arbitration Act to accommodate class actions. •