According to a report issued earlier this month, the Maryland Financial Consumer Protection Commission is considering the adoption of the “Model State Consumer and Employee Justice Enforcement Act” developed several years ago by the National Consumer Law Center.

The Model Act proposes a number of “state interventions” aimed at preventing the alleged harms caused by “forced arbitration.”  Based upon the Model Act and the U.S. Consumer Financial Protection Bureau’s since-repealed final arbitration rule, the Commission’s report concludes that “forced arbitration clauses lessen consumer protection.”  It assigns three reasons for this: “(1) many clauses require consumers to pursue what are often small dollar claims individually, without the benefit of a class or group; (2) arbitration can be very expensive due to mandatory fees or requirements to use arbitration in another geographic location; and (3) businesses’ greater familiarity with the process may allow them to prolong the duration of arbitration.”

Fortunately, based on strong opposition by the Maryland Bankers Association and other industry groups, the Commission stopped short of recommending adoption of the model act.  Instead, it has recommended “further study to identify remedies which may serve to establish increased fairness for consumers.”  That is a good thing – for consumers – because individual arbitration has been proven to be cheaper, faster and more beneficial to consumers than class action litigation.

The CFPB’s own statistics prove that arbitration is a far superior choice for consumers (though not for the lawyers who represent them in class actions).  After exhaustively studying arbitration and class actions for several years, the CFPB came to these empirical conclusions:

• Arbitration was found to be faster and less costly than class action litigation.  Disputes were resolved in two to five months instead of two years or more, and consumers paid just $200 in fees or, in many cases, nothing.  By contrast, it cost consumers $400 just to file a complaint in federal court.
• The average consumer recovery in arbitration was nearly $5,400.  But the average class member received a mere $32 (166 times less).  Most class members did not even get that paltry sum.  According to the CFPB, 87% of class members got no benefits at all.  The lawyers for the class, by contrast, made a whopping $424,495,451 in attorneys’ fees.
• Moreover, disputes actually get resolved in arbitration.  None of the 562 class actions studied by the CFPB went to trial.  By contrast, of 341 cases resolved by arbitrator, in-person hearings were held in 34% of the cases, and arbitrator reached merits of the claims in 146 cases.  Arbitration produces results, not foot-dragging.

The Commission’s report also suggests that companies win more often in arbitration than consumers.  Not so.  A 2009 Northwestern University School of Law study of more than 300 arbitrations showed that consumers won relief in 53.3% of the cases and recovered their attorneys’ fees in 63.1% of them.  And, a 2005 Harris Interactive poll of 609 consumers who participated in arbitrations found that arbitration was seen by most of the participants as faster, simpler and cheaper than going to court, and two-thirds of them said they would be likely to use arbitration again.

Facts such as these lead to one inexorable conclusion: consumers will be harmed if arbitration is replaced by class action litigation as a way to resolve disputes.  A study by the U.S. Chamber of Commerce showed that 90% of the claims that consumers bring against financial services companies are not even suitable for class action treatment because they involve unique, individualized facts that do not apply to others.  The Commission should consider how these consumers will resolve their disputes if arbitration is eliminated.

The Commission’s report also notes that relatively few consumers avail themselves of arbitration when they have disputes with companies.  But that is due, in large part, to the fact that consumers have not been educated in any systematic fashion on the benefits that arbitration has to offer.  Unfortunately, the CFPB did not take the opportunity to do so.  But consumers who experience arbitration like it.  We strongly suggest that the Commission consider the implementation of a consumer arbitration education program as one of the “remedies which may serve to establish increased fairness for consumers.”