April 13, 2000
I am writing to request the opportunity to participate in the June 6-7 workshop on the above topic.
As a professor of law, my teaching, research and writing focus on Alternative Dispute Resolution ("ADR"). I have written extensively on the subject in scholarly journals, as well as for practicing lawyers and the broader public. I routinely teach ADR to law students and to practicing lawyers. My curriculum vitae is enclosed.
The focus of my work has been, and continues to be, consumer arbitration. See, e.g., Stephen J. Ware, Consumer Arbitration as Exceptional Consumer Law, 29 McGeorge L. Rev. 195 (1998), and Stephen J. Ware, Arbitration and Unconscionability after Doctor's Associates, Inc. v. Casarotto, 31 Wake Forest L. Rev. 1001 (1996). I have also just completed an article entitled ADR in Cyberspace, which is forthcoming in the Ohio State Journal on Dispute Resolution. In short, my interests and expertise make me especially well-suited to address the topic of consumer ADR in the online marketplace.
Recently, I examined online the public comments you have received thus far. I noticed a number of strongly-worded comments critical of current arbitration law, especially as that law applies to consumer transactions. In contrast, I am much more favorable to the arbitration law currently governing consumer transactions. I believe that my voice would provide a helpful balance to the workshop. I briefly summarize my views below.
I. Freedom of Contract
The core of arbitration law is freedom of contract. The Federal Arbitration Act ("FAA") has, for 75 years, endorsed contractual freedom regarding arbitration. Under the FAA, no one is obligated to arbitrate unless he or she has agreed to arbitrate. Only a contract can create the duty to arbitrate. Furthermore, the scope of that duty is determined by contract. The parties are free to agree on matters such as the process for selecting the arbitrator, the location of the arbitration, and the process for arbitration, including discovery and the taking of evidence.
This contractual freedom permits parties to customize their adjudication. Unlike courts, which basically offer only a one-size-fits-all process, arbitration offers different processes for different needs. Unlike court systems, which are government bureaucracies, arbitration is free enterprise in a competitive market. Arbitration often does a better job than courts of finding creative and innovative ways to improve adjudication procedures.
II. Amount of Awards and Access to Justice
Assessing whether arbitration is good or bad for consumers is complicated. Simplistic opponents of arbitration assert that claims by consumers against business win more dollars from juries than from arbitrators so arbitration must be harmful to consumers.
First, there is little, if any, reliable data on whether litigation or arbitration leads to higher awards. The answer might vary depending on the: type of claims, characteristics of parties and lawyers, region of the country, method of selecting the arbitrator and other factors.
Furthermore, any comparison of awards in litigation and arbitration would be misleading if it did not also compare settlement payments in litigation and arbitration, and dismissal before trial, as by summary judgment and motion to dismiss. There is reason to believe that claims going all the way through litigation to trial tend to be concentrated among the strongest, while those going all the way through arbitration to hearing tend to be more mixed.
Finally, any comparison of awards in litigation and arbitration would be misleading if it did not also compare the cost of pursuing a case to decision, including the cost of legal fees, the cost of discovery and the cost of delay. These costs are so high in litigation as to effectively preclude litigation of many consumer claims. The availability of fee-shifting and class actions only partially addresses this "access to justice" concern.
III. Pre-Dispute and Post-Dispute Arbitration Agreements
Those who oppose consumer arbitration often say that it is only "mandatory" arbitration they oppose. Many businesses present consumers with the take-it-or-leave-it choice of agreeing to arbitrate any disputes that might arise with that business or having no interaction at all with that business. Arbitration opponents incorrectly characterize this as "mandatory" arbitration even though the consumer has the take-it-or-leave-it choice to leave it. What opponents of so-called "mandatory" arbitration really oppose is freedom of contract. In particular, they oppose enforcement of a particular category of contract, the pre-dispute, take-it-or-leave-it arbitration agreement.
In contrast to the pre-dispute arbitration agreement, is the post-dispute arbitration agreement. If a consumer who has not previously agreed to arbitrate now has a claim against a business, that consumer and business may agree to arbitrate the particular dispute that has already arisen. These post-dispute arbitration agreements are uncontroversial. Nobody seems to mind when courts enforce them.
IV. Effects of Enforcing Pre-Dispute Arbitration Agreements
Those who oppose enforcement of pre-dispute arbitration agreements suggest that businesses who want to arbitrate with consumers should be limited to post-dispute agreements. When consumers form post-dispute arbitration agreements, they are likely to be advised by counsel and mentally focused on the dispute. In contrast, when they form pre-dispute arbitration agreements, they are unlikely to be advised by counsel, unlikely to be focused on the possibility of a dispute, and perhaps unaware of the existence of the arbitration clause in the contract. The argument of those who oppose enforcement of pre-dispute arbitration agreements seems to be that if arbitration is truly beneficial to consumers, as well as to businesses, then consumers will agree to it post-dispute.
These arguments fail to address the distinction between consumers with disputes and consumers as a whole. Even if it would typically be against a particular consumer's interests to agree to arbitration once a dispute has arisen, enforcement of pre-dispute, take-it-or-leave-it arbitration agreements is probably in the interests of consumers as a whole.
That is because arbitration almost certainly lowers prices. Arbitration reduces a business's costs, just like a technological advance or a better way of organizing an assembly line reduces a business's costs. Anything that reduces costs to business ultimately reduces the prices charged to consumers. That is Economics 101, as well as plain common sense about how competition works. And it does not rely on the assumption that consumers understand, or even read, the contracts they sign. Arbitration clauses give consumers lower prices regardless of how many consumers are aware of the arbitration clause in the contract.
For consumers as a whole, it is likely that the lower prices resulting from arbitration agreements are worth giving up the extra post-dispute leverage that may (depending on the case) come from having a right to litigate, rather than arbitrate. Post-dispute, on the other hand, the price for giving up that leverage increases dramatically because the probability of a dispute has risen from very low to certain. In other words, it is entirely rational for a consumer to prefer, at the time of contracting, that an arbitration clause be in the contract even if, at the time of a dispute, the consumer prefers that an arbitration clause not be in the contract.
To put a finer point on it, the question of take-it-or-leave-it arbitration agreements may cut differently for different consumers. If you are the sort of consumer who is especially likely to have a claim against your seller or lender then you may be better off if consumer arbitration agreements are unenforceable. But if you are the typical consumer who is extremely unlikely to have a claim against your seller or lender then you are probably better off with the current law enforcing these agreements and giving you lower prices (which, in the credit context, means lower interest rates).
V. Legislation Versus Caselaw
There are cases in which arbitration agreements should not be enforced. These include agreements induced by misrepresentation, duress, mistake, undue influence and other circumstances that, under ordinary contract law, make any contract unenforceable. The FAA already applies these ordinary contract law doctrines to arbitration agreements.
Some advocates of legislative or regulatory action are concerned about arbitration agreements that are unconscionable because they require the consumer to pay excessive fees or to use arbitrators allegedly sympathetic to the opposing party. But the FAA already gives courts the tools to avoid enforcing unconscionable arbitration clauses. There is a growing body of case law clarifying which arbitration agreements are unconscionable.
These questions of ordinary contract law doctrines, including unconscionability, necessarily require a case-by-case analysis. In short, they should continue to be handled by case law made in the courts. They are not suited to the broad brush with which regulation necessarily paints. This is an area in which the case law is evolving. FTC regulation would be counter-productive.
I appreciate the chance to contribute to public discussion of this important issue. Please do not hesitate to contact me if I can offer anything further.
Very truly yours,
Stephen J. Ware