Companies can provide wonderful results for consumers or they can be a huge disappointment.  When they short change us or act against our interests, we need ways to force them to make amends.  That’s when we remember the “boilerplate” we agreed to right after the sale took place.  Most of the time that contract will call for arbitration.  Those whose primary business is conducted in courtrooms may be disappointed, but consumers should be pleased because consumers will get reasonable, expeditious treatment under arbitration at a fair or no cost.

Arbitration has become a popular way for companies to seek agreement from consumers on how to handle disputes that need to be resolved in a formal manner.  Arbitration agreements are a regular part of installing new software, signing up for social networking services, or purchases of non-IT goods. For an example, see how Adobe includes arbitration as the primary means for dispute resolution.

While some will fantasize over a chance to “stick it to the man” with a big financial win in court, in most cases the class action outcome for consumers is slow, tedious and the payout per class member award comes in small fragments equivalent to cents-off coupons.  Attorneys, if successful, are almost always the financial victors.  This is not hearsay.

The Journal of Empirical Legal Studies published a study of class action settlements for the years 2006 and 2007.  In those two years, there were 688 federal class action lawsuits which received a settlement, but a large number produced no settlement.  Of a total $33 billion in settlements received, lawsuits focused on consumer issues were a small part.  There were just 87 consumer issues settlements with a median value of $2.9 million and they had dragged through the courts for an average of 963 days.  Although the percentage of the settlement award to be devoted to lawyers’ fees and expenses is at the judge’s discretion, an average of 25% of awards go to the winning plaintiff’s attorney.  In consumer cases just 74% of awards are in cash and the rest is in in-kind (coupons) or “injunctive relief.”

Despite the dismal performance of class action suits, in 2015, a group of 34 US Senators urged that long term care facilities ban inclusion of pre-dispute arbitration clauses in admission agreements.  They felt that the resident’s rights would be better served if arbitration were merely an option to consider after a dispute has ripened.  Some disputes will never reach that stage and some will bode poorly for the (consumer) plaintiff.  For disputes that suggest a promising payoff, attorneys will work on a contingency basis to bring the case to a lucrative conclusion.

Subsequent to the pro-class action sentiment from some senators, the Centers for Medicare & Medicaid Services (CMS) in its 700 page “final rule” for long term care banned the use of binding pre-dispute arbitration clauses in long term care home admission agreements.  The ban was to be effective by November 28, 2016.  The American Health Care Association (AHCA) filed suit claiming the ban exceeded CMS’ powers and a federal court granted a temporary injunction on grounds that CMS lacked authority.

If the injunction on use of arbitration is not made permanent, problems that should be handled in low-cost arbitration will be replaced by lawsuits where on average, the attorney receives one-quarter to one-third of the award.  By comparison the total cost of reaching a settlement through arbitration is much cheaper, especially for securities litigation.  The AHCA and cost effectiveness studies suggest arbitration is less costly for the plaintiff and for the rest of society, who ultimately bear the total litigation costs of class action lawsuits.

The Class Action Fairness Act of 2005 removed some of the most unjust tactics of the class-action bar, including “coupon” settlements where clients win discounts on products from the companies they sued, while the lawyers are paid in cash.

The health care sector is not the only arena where today’s government is opting to create jobs for trial lawyers.  The Consumer Financial Protection Bureau (CFPB) has decided that arbitration clauses in consumer finance agreements are to be outlawed if they prohibit use of class action suits.  This unilateral decision would overturn both federal law and supreme court precedent supporting the legitimacy of arbitration.  While the CFPB may answer to no one, it clearly favors the interests of trial lawyers over that of consumers.

Arbitration and class action lawsuits are just alternative ways of providing consumers a venue to obtain redress from companies whose behavior has harmed them.  Given the relatively high cost and slow conclusion of class action suits, consumers are better served by arbitration, and government should not preclude merchants and consumers from choosing efficiency at low cost.  Since several federal agencies have marshalled against allowing consumers and merchants to agree on efficient dispute resolution, the Administration or Congress should act to preserve consumers’ and merchants’ freedom to engage in lawful contracts.