In an American Banker op-ed, Consumers Fare Better with Arbitration, Alan Kaplinsky, Mark Levin, and Daniel McKenna, lawyers from Ballard Spahr, a leading firm representing banks and others in the consumer financial services industry, commented on the St. John’s Arbitration Study, and responded to an earlier American Banker op-ed authored by Professor Jeff Sovern. Sovern rebutted in another American Banker op-ed, Arbitration Tricks Consumers into Giving Up Their Rights. In addition, Maryland law professor Peter Holland offered his own views on the study in a blog post.
The American Banker ran Professor Jeff Sovern’s op-ed, Arbitration Clauses Trap Consumers with Fine Print, on the St. John’s Arbitration Study. Professor Sovern collaborated on the study with Professors Elayne Greenberg and Paul Kirgis, and the director of St. John’s Institutional Assessment, Yuxiang Liu. The full study can be found here.
Cleveland Plain Dealer consumer affairs columnist Sheryl Harris reported on the St. John’s arbitration study in her column, Arbitration – what you don’t know about fine print can hurt you: Plain Dealing. Here is an excerpt:
Well, lawyers at St. John’s University Law School recently conducted [a study] and found that even when [consumers] know there’s an arbitration clause in a contract, they often don’t understand what it really means — even when they think they do know.
Researchers showed consumers a standard credit card contract with a binding arbitration clause and then asked them a series of questions.
- Most people didn’t realize there was an arbitration clause in the contract.
- Of the 40-odd percent who spotted the clause, almost two-thirds believed – wrongly – that if the disputed amount was too big for small claims court, they could still go to common pleas or federal court.
- Less than 9 percent both spotted the arbitration clause and correctly said it would prevent all consumers from going to [a] court [other than a small claims court] to resolve a dispute.
Remarkably, 87 percent of the 303 people who swore they’d never agreed to a contract that contained an arbitration clause were flat-out wrong
How did researchers know? They asked people if they did business with AT&T Mobility, Sprint, Verizon, PayPal or Skype – companies whose contracts routinely require consumers to agree up front that if they ever have an issue with the company, they can only resolve it through binding arbitration.
“We don’t know about the remaining 13 percent,” says law prof Jeff Sovern, one of the authors of the study. Sovern says the number of people who had unwittingly agreed to mandatory arbitration is likely higher because researchers asked consumers about contracts with those five companies, not about every company they did business with.
Professors Jeff Sovern, Elayne Greenberg, and Paul Kirgis, along with Yuxiang Liu, have posted a draft of their article, ‘Whimsy Little Contracts’ with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, to SSRN. Here is the abstract:
Arbitration clauses have become ubiquitous in consumer contracts. These arbitration clauses require consumers to waive the constitutional right to a civil jury, access to court, and, increasingly, the procedural remedy of class representation. Because those rights cannot be divested without consent, the validity of arbitration agreements rests on the premise of consent. Consumers who do not want to arbitrate or waive their class rights can simply decline to purchase the products or services covered by an arbitration agreement. But the premise of consent is undermined if consumers do not understand the effect on their procedural rights of clicking a box or accepting a product.
This article reports on an empirical study exploring the extent to which consumers are aware of and understand the effect of arbitration clauses in consumer contracts. We conducted an online survey of 668 consumers, approximately reflecting the population of adult Americans with respect to race/ethnicity, level of education, amount of family income, and age. Respondents were shown a typical credit card contract with an arbitration clause containing a class action waiver and printed in bold and with portions in italics and ALLCAPS. Respondents were then asked questions about the sample contract as well as about a hypothetical contract containing what was described as a “properly-worded” arbitration clause. Finally, respondents were asked about their own experiences with actual consumer contracts.
The survey results suggest a profound lack of understanding about the existence and effect of arbitration agreements among consumers. While 43% of the respondents recognized that the sample contract included an arbitration clause, 61% of those believed that consumers would, nevertheless, have a right to have a court decide a dispute too large for a small claims court. Less than 9% realized both that the contract had an arbitration clause and that it would prevent consumers from proceeding in court. With respect to the class waiver, four times as many respondents thought the contract did not block them from participating in a class action as realized that it did, even though the class action waiver was printed twice in bold in the sample contract, including one time in italics and ALLCAPS. Overall, of the more than 5,000 answers we recorded to questions offering right and wrong answers, only a quarter were correct.
Turning to respondents’ own lives, the survey asked if they had ever entered into contracts with arbitration clauses. Of the 303 respondents who claimed never to have done so and who also answered a question asking whether they had accounts with certain companies that include arbitration clauses in their contracts, 264, or 87%, did indeed have at least one account subject to an arbitration clause.
These and other findings reported in this Article should cause concern among judges and policy-makers considering mandatory pre-dispute consumer arbitration agreements. Our results suggest that many citizens assume that they have a right to judicial process that they cannot lose as a result of their acquiescence in a form consumer contract. They believe that this right to judicial process will outweigh what one respondent referred to as a “whimsy little contract.” Our results suggest further that citizens are giving up these rights unknowingly, either because they do not realize they have entered into an arbitration agreement or because they do not understand the legal consequences of doing so. Given the degree of misunderstanding the results demonstrate, we question whether meaningful consent is possible in the consumer arbitration context.
Law360 quoted Professor Sovern in an article, CFPB No-Action Letters May Be Small Comfort For Innovators. As stated in the article:
Granting no-action letters could provide a major benefit for consumers, said Jeff Sovern, a professor at St. John’s University School of Law.
Previous attempts at financial innovations that ended up providing a real boost to consumers, like car leases and home equity loans, were caught up in confusion over whether they violated existing consumer protection and fair lending laws. Congress eventually amended the Truth In Lending Act to accommodate those products, Sovern said.
“But revising any law, including disclosure laws, takes time, and it is preferable for consumers not to have to wait,” he said. “No-action letters permit innovators to move forward more quickly.”
The Philadelphia Inquirer story, Consumers Rarely Use the Right to Cancel a Contract reports on Professor Jeff Sovern’s article, Written Notice of Cooling-Off Periods: A Forty-Year Natural Experiment in Illusory Consumer Protection and the Relative Effectiveness of Oral and Written Disclosures, forthcoming in the University of Pittsburgh Law Review. The article also quotes from an interview with Professor Sovern. The article states:
Sovern, who teaches consumer law and civil procedure at New York’s St. John’s University Law School, analyzed survey responses from 155 businesses that informed consumers of their right to cancel a deal. It rarely seemed to matter. . . .
“I’ve been teaching these laws for more than a quarter-century, and I’ve been wondering if they actually helped anybody,” [Sovern] told me last week.
For the full story, with additional quotes and discussion of Sovern’s research go to the full article.
ContractsProf Blog has organized a virtual symposium on Omri Ben-Shahar’s and Carl Schneider’s book, More That You Wanted to Know: The Failure of Mandated Disclosure. So far, ten scholars have provided posts, including professors from Georgetown, NYU, Minnesota, Fordham, Cornell, Washington, Iowa, and other law schools. Professor Jeff Sovern’s contribution is about whether single-letter grade disclosures, such as those seen at the entrances of New York City restaurants, are a useful form of disclosure.
The New York Times has published Professor Jeff Sovern’s letter responding to an article, Baby Pictures at the Doctor’s? Cute, Sure, but Illegal. The letter states in part:
You report that federal privacy laws block doctors from posting pictures of patient babies where others can see them. Surely parents sending baby pictures to physicians do not expect the photos to be secret.
The law should be amended to permit their posting, unless parents request that they be kept private. This is the type of regulation that fuels claims that government is the problem.
It is Professor Sovern’s 41st letter in the Times.
Arbitration Study by Sovern, Greenberg, Kirgis, and Liu Presented to State Appellate Court Judges at Pound Forum
Professor Jeff Sovern presented the results of the arbitration study he, Professors Elayne Greenberg, Paul Kirgis, and St. John’s University Director of Institutional Assessment Yuxiang Liu have conducted to the Pound Civil Justice Institute’s Forum for State Appellate Court Judges on July 26. Professor Sovern was the luncheon speaker, at an event attended by judges from three dozen states.
The National Law Journal reported on Professor Jeff Sovern‘s article, Law Student Laptop Use During Class for Non-Class Purposes: Temptation v. Incentives, 51 University of Louisville Law Review 483 (2013), in a story titled Laptops Found More Likely to Distract 2Ls and 3Ls in Class. The report quoted both from the article and from an email interview with Professor Sovern.
The article quotes Sovern’s reaction to his findings and their relation to the current debate on the length of law school as follows: “I was surprised and disappointed at how many upper-year students tune out. Those arguing that law school should be only two years may find support in the findings that many upper year students are not engaged during doctrinal classes. But the study sheds no light on the value of small seminars or skills courses.”
The Legal Skills Prof Blog also posted an item about Sovern’s article, in which it noted that the article had “generated a lot of buzz.”