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Law professor calls for centrist approach to arbitration, removing it from 'class-action battlefield'

Monday, November 13, 2017

LAWRENCE — After a hard-fought political battle so close that an evenly divided U.S. Senate required the tie-breaking vote of Vice President Mike Pence, President Donald Trump recently signed the repeal of a Consumer Financial Protection Bureau rule that would have prevented banks from using arbitration agreements to insulate themselves from class-action lawsuits. This news shows the enduring divisiveness of class actions — in which a lawyer combines claims of many consumers — and the spillover effects on arbitration, said University of Kansas law professor and arbitration expert Stephen Ware. His forthcoming article in the Harvard Negotiation Law Review argues for a centrist approach to arbitration law that would remove arbitration from what he calls the “class-action battlefield.”

“Powerful interest groups fighting about class actions is the longstanding norm,” Ware said, “but newer is the centrality of that fight to debates about arbitration law.”

The CFPB studied consumer arbitration for years and could have greatly restricted it but instead chose to issue a rule that would significantly affect only one aspect of it: class actions.

Arbitration’s connection to class actions grew in 2011 when the Supreme Court’s conservative majority approved arbitration agreements requiring disputes to be resolved individually, rather than as part of a class, even though similar “class waivers” in nonarbitration agreements were rarely enforced. The CFPB rule — issued by a bureau directed by a Democrat — would have ended enforcement of arbitration agreements’ class waivers had it not been overridden by the Republican Congress and president.

The predictably partisan pattern of Republicans and business groups opposing class actions, while Democrats and progressive groups support them, increasingly extends to arbitration debates, according to Ware’s research. In contrast, his centrist position on arbitration would not take sides on whether to enforce arbitral class waivers but instead would instruct courts to enforce arbitral class waivers only when they would enforce a class waiver in a similar nonarbitration contract. This would allow courts in different states to have different standards about when to enforce class waivers and would allow such standards to evolve over time as views about class actions develop. Most beneficially for arbitration law, Ware believes, this approach would allow arbitration law to stop choosing sides in the long interest group fight over class actions, as arbitration law would simply adopt whatever approach other areas of law take to class waivers.

More broadly, Ware’s article in the Harvard Negotiation Law Review is the third in a trilogy arguing for a centrist approach to consumer arbitration law, in contrast with both current conservative arbitration law and progressive proposals to prohibit consumer arbitration agreements entirely.

“The law has been dealing for generations with a variety of provisions on consumers’ form contracts,” Ware said. “Few people want courts always to enforce all the words on these forms, and few people want courts never to enforce any of those words. Most people want the law to keep finding a happy medium.”

Courts presumptively enforce most terms on consumer contracts in most cases but sometimes find a particular provision “unconscionable,” or overly harsh, and thus unenforceable. Also, state and federal regulatory agencies such as the Federal Trade Commission and CFPB sometimes prohibit contract terms harsh to consumers.

“The CFPB apparently decided an agreement to arbitrate is not necessarily harsh to consumers,” Ware said. “And for good reason. The Bureau is receptive to the standard economic argument that arbitration agreements tend to lower businesses’ costs and some of these savings are passed through to consumers in the form of lower prices. In addition, the most relevant empirical evidence does not show consumers faring worse in arbitration of one-on-one disputes than they do in litigation of such disputes.”

The better-documented disparity between arbitration and litigation, Ware said, is the potential for a class action.


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