Last month Public Citizen drew extensive and largely uncritical publicity for a report blasting credit card arbitration. The report’s most dramatic number, picked up by many papers, was based on newly available California data: “In a sample of 19,300 cases, arbitrators ruled in favor of consumers 5 percent of the time.” (Phuong Cat Le, “Binding arbitration a loser for consumer”, Seattle Post-Intelligencer, Sept. 27). Such results, charged a Public Citizen official, show “a stunning bias against consumers”. Kansas City Star consumer columnist Paul Wenske’s reaction was typical: “Would you agree to let someone arbitrate your dispute with a credit card company if you knew he or she almost always decided in favor of the company?” (“When you sign up for a credit card, you sign up for arbitration”, Oct. 6). It was all a great publicity coup for the litigation lobby, which has been gearing up a campaign to do away with predispute arbitration agreements that divert potentially lucrative disputes away from the lawsuit system.

If, however, you happened to read Bob Ambrogi’s Legal Blog Watch entry on the story, you might have noticed the following reader comment:

Bob, I am an arbitrator for NAF [National Arbitration Forum]. My statistics would show that I rule for the Claimant in an extremely high percentage of cases. The statistic is misleading as 95% plus cases are default cases, where the consumer never bothers to answer.

Posted by: legal eagle | Sep 28, 2007 1:19:06 PM

And there you have the little trick behind Public Citizen’s sensational assertion that only 5 percent of consumers manage to beat the house. The vast majority of cases that go before the arbitrators are in fact uncontested collections, which present no active dispute to resolve one way or the other. Where there is an active dispute, it is plain that consumers’ win rate is very much higher than 5 percent. Why did so many journalists in recent weeks convey the mistaken impression that there’s almost no hope of success for the consumer who contests the lender’s story at arbitration? Because those journalists were falling into a hole skillfully dug for them by Public Citizen.

Any system of resolving routine consumer collections, including traditional courtroom litigation, is likely to generate a high rate of default judgments or their procedural equivalent. The National Arbitration Forum at its website refers to one pertinent study which it summarizes as follows:

Default Judgments Against Consumers: Has the System Failed? (Sterling & Schrag, 1990; 67 Denv. U. L. Rev. 357, 360-61)

A Georgetown University law professor analyzed a sample of claims filed in 1988 against consumers in the Small Claims and Conciliation Branch of the Superior Court of the District of Columbia. The small claims procedure did not require the consumer to submit a written answer. Instead, the consumer only had to show up in court at the specified time. Nevertheless, according to the study, 74% of the cases resulted in a default judgment. In 22% of the cases, the consumer acceded to full liability. In the remaining 4%, the plaintiff voluntarily dismissed the case. None of the cases resulted in a trial.

Making full allowance for the somewhat different mix of cases in the two instances, one still is left here with an even lower “consumer win rate” than in the California data. And a recent news story from Texas about debt collection by lawsuit includes an allegation that more than 80 percent of consumers fail to contest the matter, resulting in default judgments; if creditors are winning even half of the contested cases, the resulting “consumer win rate” is below 10 percent. (Teresa McUsic, “Unpaid credit-card bills giving rise to lawsuits”, Fort Worth Star-Telegram, Aug. 31).

Of course, some of us would suspect that Public Citizen’s really major beef with arbitration clauses is not so much with the way they divert the collections process away from the courts, but with a quite different effect they have on litigation: they impede the filing of class actions by the entrepreneurial plaintiff’s bar (arbitration clauses typically rule out class treatment of complaints, which means law firms who’ve signed up one client can’t proceed to enroll millions of other cardholders as plaintiffs too without their say-so). But of course the casual newspaper reader is likely to be a good bit more sympathetic to individual consumers supposedly facing a deck stacked 95-to-5 against them than with the business reverses of class action law firms who find themselves no longer able to extract the sorts of fee-driven settlements they once did.

Filed under: arbitration, class actions, Public Citizen, Seattle