Let us imagine a writer for a left-wing magazine, we’ll call her Mephanie Stencimer, who wants to buy a car. But she has particular tastes: she doesn’t just want any old car. She wants a three-wheeled vehicle, perhaps because the feng shui is better, perhaps because she wants to spend less money on tires forced upon her by Big Rubber. She goes from car-dealer to car-dealer around town, but every single one of the dastardly businessmen insist that her only choice is a four-wheeled vehicle. She patiently explains the aesthetics of the triangular approach, but they shrug their shoulders and tell her it’s out of their hands and she has to have a four-wheeled car or nothing. Finally, she surrenders her preference for the three-wheeled vehicle, and takes a model with the extra wheel.
If you were to take seriously the arguments of Stephanie Mencimer at Mother Jones and the commenters there, and perhaps the occasional judge, this is an outrageous “contract of adhesion” that should be outlawed: Stencimer didn’t have a choice, didn’t have the bargaining power to make the auto-dealer sell her a three-wheeled car, and was forced to buy an extra wheel. But is this really a problematic failure of the market that requires government intervention?
Mencimer is actually complaining about the insistence of car-dealers to arbitrate claims, rather than the number of wheels on a vehicle. But the principle is precisely the same, and Mencimer’s complaint is just as invalid as Stencimer’s.
When certain choices are absent from a competitive market, there’s usually a good reason for it—such as a lack of consumer demand that makes the provision economically infeasible. After all, if consumers really wanted to pay the extra money for a car contract without a mandatory arbitration clause or a three-wheeled vehicle, car-dealers would have a strong incentive to offer it. Witness the boom in hybrid vehicles: a small percentage of consumers demanded greener vehicles, and they’re selling. It’s not the case that it’s impossible to enter the used-car market: witness the success of CarMax, which went public only ten years ago, and has a market capitalization of nearly $5 billion today. ATLA Autos could put up a big banner: “No Arbitration Clauses In Our Contracts!” the way CarMax made no-haggle sales popular.
But the fact of the matter is that arbitration clauses save consumers money, and ex ante, if you ask a consumer if they’d rather have the money or the right to make an extortionate claim in court over a contractual dispute where they’re in the wrong, they’d rather have the money. (If mandatory arbitration clauses weren’t actually money-saving, then, again, the market provides plenty of incentive to cut costs by removing them from the contracts.) A car-dealer that made a point of omitting arbitration clauses for its contract, and passing the higher legal expenses on to the consumer, would quickly find itself out of business.
Let’s make clear why an argument Mencimer repeats is dishonest. Mencimer quotes former Georgia Governor Roy Barnes that “a mandatory arbitration clause is ‘a contract for a crime.’ It’s a sign that the bank knows it’s going to rip us off in some fashion, or if not us specifically, people like us, and it doesn’t want to pay if it gets caught.” Not so. A mandatory arbitration clause is a way to make sure that dishonest consumers don’t raise prices for the honest consumers. The vast majority of arbitrations (as well as court-adjudicated business/consumer disputes) involve default or otherwise uncontested judgments against deadbeats who didn’t pay their bills—which is why you hear so much about the supposed 96% or 99% success rate of business in arbitration, when the actual success rate in contested arbitrations is actually better for consumers than in court. I won’t link to it, but a Google search readily finds numerous products available to people teaching how to use the court system to scam creditors out of legitimate collections by raising their expenses; the only people who benefit from court versus arbitration are those who hope to abuse legal procedures to delay the inevitable (or to make collection so painful and expensive that they can finagle a reduction in debt). By using the mandatory arbitration mechanism to reduce the expense of collections, the auto-dealer or bank can provide a less expensive service to the honest consumer who plans to honor their debts. (Mencimer complains that her car loan was for 9%, but that doesn’t mean that it wouldn’t have been at an even higher rate had arbitration not been available.)
Now, perhaps I’m wrong; perhaps consumers are better off overall if they don’t have mandatory arbitration clauses. But why have Congress dictate that? Why not let the market decide? As CarMax demonstrated by offering a new no-haggle model of selling vehicles and CommerceBank demonstrated by offering banking without bankers’ hours, there’s no monopoly of car dealers or banks prohibiting entry by innovators offering new business models: get some of the trial lawyer billionaires funding Public Citizen screeds against arbitration to instead fund new businesses to offer different choices, and let consumers decide for themselves whether they want the lower prices that mandatory arbitration clauses make possible. Heck, the trial-lawyer-funded businesses could even waive non-economic damages caps, venue reform, and all of the tort reforms Mencimer and Public Citizen dislike. Nothing makes businesses yield faster than competition and consumer demand.
Of course, what’s really happening is that consumers don’t want the expensive legal “protections” that the litigation lobby are railing about. Trial lawyers thus try to get Congress to pass laws to force consumers to take them. If the local auto-dealers association heavily lobbied Congress to legally mandate consumers to force them to buy overpriced “rust protection” or “anti-rhinocerous-trampling” plans that benefited only the auto dealers, consumer groups would quite properly raise an uproar. It’s a sad commentary how badly the consumer movement has been captured by the litigation lobby that the consumer groups are failing to raise a similar uproar at the self-dealing of the litigation lobby regarding the anti-consumer anti-arbitration legislation pending in Congress.
Further reading: Christopher R. Drahozal, “Unfair” Arbitration Clauses, 2001 U. ILL. L. REV. 695; Stephen J. Ware, Paying the Price of Process: Judicial Regulation of Consumer Arbitration Agreements, 2001 J. DISPUTE RESOLUTION 89; Christopher R. Drahozal, Privatizing Civil Justice: Commercial Arbitration and the Civil Justice System, 9 KAN. J.L. & PUB. POL’Y. 578 (2000). Peter B. Rutledge, Whither Arbitration, 6 GEORGETOWN J. L & PUB. POL’Y __ (forthcoming 2008), ExpressO Available at: http://works.bepress.com/peter_rutledge/2. The three-wheeled example comes from Doug Baird’s Contracts class at Chicago, and can be found in Douglas G. Baird, The Boilerplate Puzzle, 104 MICH. L. REV. 933 (2006).
Update, Dec. 16: Further data on arbitration win-rates in contested arbitration.
Update, Dec. 17: As Mencimer documents in her story, she sure showed the car dealers: she bought her desired vehicle on Craigslist from a West Virginia man. And that’s the way the market works: if enough people think like Mencimer does, auto dealers will have the incentive to offer an arbitration-free contract to attract their business. Of course, as commenter JP points out, Mencimer’s irrational hatred of arbitration almost certainly made her worse off:
Note that the practical result of all of her time and effort is that she now has the right to sue an individual (who likely has no assets since he’s selling his car due to a divorce), in court in a different state (where the seller lives and the transaction took place). For that she gave up the right to a local arbitration with a dealership that’s not only likely to be solvent, but also probably has the ability to resolve most issues that might arise.