New empirical study of AAA arbitrations is a study in contradictions

A new empirical study of approximately 5,000 American Arbitration Association (AAA) consumer arbitrations conducted between 2009 and 2013 purports to find a “repeat player” effect favoring companies that previous researchers, including the Consumer Financial Protection Bureau (CFPB) itself, have not discerned. In an article to be published later this year in the Georgetown Law Journal, two University of California (Davis) professors, David Horton and Andrea Cann Chandrasekher, claim that this advantage gives businesses “a boost in the handful of matters that trickle into the arbitral forum.” The authors state that they will shed light on what occurs behind the “black curtain” of arbitration because prior commentators “have only the dimmest sense of what actually happens in the extrajudicial forum.”

Although the study purports to be objective and is replete with statistics, formulas and regression analyses, it reflects the authors’ clear preference for class actions over individual consumer arbitration. According to the study, Supreme Court decisions such as AT&T Mobility, Inc. v. Concepcion and American Express v. Italian Colors Restaurants created a “consumer arbitration revolution” that “shields big business from class action liability.” The authors argue that their study should provide an “independent reason for Congress to forbid class arbitration waivers” and assert that “[r]eestablishing class arbitration would prevent the gulf between large companies and consumers from deepening.” Policy statements such as these cast a cloud over the purported objectivity of the study.

In any event, the study is based on a fundamentally incorrect premise – that “arbitration has displaced litigation as the primary method by which consumers resolve disputes against companies.” According to the study, arbitration has caused the “the demise” and “the abolition” of the consumer class action and a “massive shift” in the way that consumers resolve disputes with companies. Not only are these extreme assertions not supported by any facts or figures, but they contradict the study’s own statement that only a “handful of matters… trickle into the arbitration forum.” They also contradict statistics contained in the CFPB’s 728-page empirical study of consumer arbitration issued in March 2015. The CFPB found that arbitration was a factor in only 8% of the 562 class actions studied. That is because the defendant companies moved to compel arbitration in only 94 of the 562 class actions (16.7%), and those motions were granted in only 46 (one-half) of the class actions. Thus, arbitration had no causal effect whatsoever on 92% of the class actions studied by the CFPB, which included post-Concepcion filings. To paraphrase Mark Twain, the report of the death of consumer class actions has been greatly exaggerated.

Moreover, even if a company is a “repeat player” (i.e., frequently appears) before the AAA, the study does not explain how that has any effect on any particular arbitrator’s award in any particular case. Companies don’t choose to get sued; the appearance of a respondent company in an AAA arbitration is a wholly random event that depends on the fortuity of a claimant plaintiff suing or commencing an arbitration against the company. Nor do companies select the arbitrators under the AAA Consumer Rules; the AAA selects the arbitrator.

The study itself acknowledges that the AAA has adopted Consumer Due Process Protocols which strive for fundamental fairness. In particular, as the study admits, the AAA “attempts to safeguard consumers’ interests during the arbitrator-selection process. Unless the parties have agreed otherwise, the AAA will appoint an arbitrator from its roster, task that individual with divulging potential conflicts of interest, and consider objections to her nomination.” As a result of these “prophylactic steps,” the study concludes, “the AAA may be more amenable to consumer plaintiffs than other venues.”

In addition, although not mentioned in the study, before an AAA arbitrator is appointed, he or she must answer a litany of conflict of interest questions, beginning with the admonition that “It is most important that the parties have complete confidence in the arbitrator’s impartiality.” The AAA also requires the arbitrator to take a sworn oath attesting that he or she will “faithfully and fairly hear and decide matters in controversy between the parties in accordance with their arbitration agreement, the Code of Ethics, and the rules of the American Arbitration Association [and] will make an Award according to the best of the arbitrator’s understanding.”

The study also “confirmed that arbitration is almost certainly faster than litigation.” It found that the average fully-litigated case in federal or state court takes about two years. By contrast, the average lifespan of an arbitration in which an award was issued was eight months. 35% of consumers represented themselves; 32% chose to submit the case on the documents; and 45% opted for phone-only hearings.

So where is the alleged arbitrator bias against consumers caused by corporate “repeat players”? It turns out there is none. Having insinuated that arbitration is part of a nefarious scheme by companies to deprive consumers of their rights, the study itself completely dispels such a notion, concluding that “fortunately, we found little proof that private judges are prejudiced against consumers.” The study further acknowledges that the AAA’s due process protocol “makes it harder for arbitrators to feather their own nests. Unless the parties agree otherwise, the institution [AAA] takes the initiative and picks a decision-maker from its roster. Because there were 1,279 different arbitrators in our dataset, companies no longer have much control over the identity of the private judge.” “We simply do not find evidence linking the extreme repeat player effect to arbitrator partiality,” the study admits. (Emphasis added). Obviously, these are findings that strongly support consumer arbitration, not findings that impugn it.

What “repeat player” boils down to, we learn on page 65 of the 65-page study, is the proposition that the “individualization of claims” allegedly resulting from Concepcion and Italian Colors “allows high-level and super repeat-players to hone their arbitral skills and therefore flourish in bilateral arbitration.” In other words, experience in arbitration matters (just as it does in court proceedings). The CFPB’s own study found that while almost all of the arbitration proceedings it examined involved companies with repeat experience in the forum, that was counter-balanced by the fact that counsel for the consumers were also usually repeat players in arbitration. The present study simply confirms that the whole “repeat player” debate is a tempest in a teapot. It most certainly is not a ground that would weigh in favor of CFPB regulation of consumer arbitration agreements.