July 20, 2015 

The Honorable Phyllis Borzi 

Assistant Secretary 

Employee Benefits Security 

Administration 

U.S. Department of Labor 

200 Constitution Avenue NW 

Washington, DC 20210 

Office of Regulations and Interpretations 

Employee Benefits Security 

Administration 

Attn: Conflict of Interest Rule 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue NW 

Washington, DC 20210 

Office of Exemption Determinations 

Employee Benefits Security Administration 

(Attention: D-11713) 

U.S. Department of Labor 

200 Constitution Avenue NW 

Suite 400 

Washington, DC 20001 

Re: Proposed Best Interest Contract Exemption (ZRIN 1210-ZA25)

Dear Assistant Secretary Borzi: 

 This letter is submitted on behalf of the U.S. Chamber of Commerce and the 

U.S. Chamber Institute for Legal Reform (“ILR”). The U.S. Chamber of Commerce 

(the “Chamber”) is the world’s largest business federation, representing the interests 

of more than three million companies of every size, sector, and region. ILR is an 

affiliate of the Chamber dedicated to making our nation’s overall civil legal system 

simpler, faster, and fair for all participants. Collectively, the Chamber and the ILR 

will be referred to as the “Chamber.” 

The Chamber appreciates the opportunity to comment on the U.S. Department 

of Labor’s (the “Department” or “DOL”) proposed Best Interest Contract 

Exemption (the “BICE Proposal”) issued by the Department and published in the 
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Federal Register on April 20, 2015.1 The Chamber has actively followed the 

Department’s efforts to promulgate a proposed regulation redefining who is a 

“fiduciary” of an employee benefit plan under the Employee Retirement Income 

Security Act of 1974 (“ERISA”), or of an individual retirement account under the 

Internal Revenue Code (“the Code”), as a result of giving investment advice to a plan 

or its participants or beneficiaries. Fiduciaries generally are prohibited from receiving 

payments from third parties in connection with their fiduciary activities; the BICE 

Proposal would create an exemption from that prohibition in certain specified 

circumstances for some individuals who would be encompassed within the proposed 

expanded definition of “fiduciary,” such as broker-dealers, insurance agents, and 

others who provide investment advice. 

 In this submission, we address two aspects of the BICE Proposal.2

First, the Proposal would unlawfully create a private right of action, a step that, 

under long-settled legal principles, is reserved to Congress and beyond the authority 

of an administrative agency. The Proposal quite deliberately does not follow the 

approach previously used by DOL and the Internal Revenue Service in creating 

exemptions from fiduciary obligations, prescribing by regulation the requirements that 

must be met in order to qualify for the exemption. Rather, the Proposal requires – as 

“the cornerstone of the proposed exemption” – a contract incorporating a variety of 

representations and warranties, and makes clear that the purpose of the contract 

requirement is to provide the Retirement Investor “with a basis on which [the 

contractual] rights can be enforced.”3

 

The Department has no authority whatsoever to create private causes of action 

not authorized by Congress, but that is precisely what the Proposal would do. Indeed, 

in an effort to promote national uniformity, Congress expressly preempted state-law 

causes of action to enforce ERISA’s prohibited transaction rules and provided no 

                                                           

1 Proposed Best Interest Contract Exemption, 80 Fed. Reg. 21960 (Apr. 20, 2015). 2 The Chamber and the U.S. Chamber Center for Capital Markets Competitiveness have submitted comments 

addressing other aspects of the BICE Proposal as well as the related proposed rule amending the definition of a 

“fiduciary.” 

3 80 Fed. Reg. at 21969. 
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mechanism for private enforcement of the Code’s prohibited transaction rules.4 The 

Department has no power to override Congress’s determinations. 

Requiring a contract in order to create private causes of action is also bad 

policy that will harm investors. The numerous contractual elements required by the 

BICE Proposal are so onerous and practically unworkable that they will force broker 

dealers, insurance agents, and other advisors to abandon the commission model that 

has been the norm in the industry for decades and instead charge investors for 

retirement advice and counseling, which will impose greater costs on investors 

particularly small investors. For those that utilize the contract approach, the 

unjustified class action lawsuits that will be the inevitable consequence will impose 

new costs that will be borne by investors through larger commissions and other 

charges. Those investors who cannot afford these costs will lose access to quality 

investment advice. 

For all of these reasons, the requirement of a “contract [that] creates actionable 

obligations”5

 must be eliminated. 

Second, the Proposal indicates that a contract between a Financial Institution or 

Advisor and a Retirement Investor may include “a pre-dispute binding arbitration 

agreement with respect to individual contract claims,” but that the exemption would 

not apply if the contract with the Retirement Investor includes a provision “under 

which the Plan, IRA or Retirement Investor waives or qualifies its right to bring or 

participate in a class action or other representative action in court in a contract dispute 

with the Adviser or Financial Institution.”6

 That proviso plainly exceeds the 

Department’s authority. 

Numerous courts have held that the Federal Arbitration Act7

 bars the National 

Labor Relations Board from invalidating as an unfair labor practice an arbitration 

provision containing a waiver of class proceedings, and the same settled legal 

                                                           

4 See pages 7-8 below. 5 80 Fed. Reg. at 21969. 6 Id. at 21973, 21985. 7 9 U.S.C. §§ 1-16. 
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principles preclude DOL from barring arbitration agreements with class waivers here.8

Moreover, the practical consequence of a ban on arbitration provisions with class 

waivers will be to deter the inclusion of arbitration provisions in contracts, which will 

harm investors – because they will lose access to a cheaper, quicker, and just as fair 

method of resolving disputes. 

I. The Department Lacks Authority To Structure The Regulation To 

Create Private Causes Of Action. 

 The proposal rests on two statutory provisions initially enacted at the same 

time as parts of one statute reforming federal law governing employee benefits and 

retirement savings vehicles.9

 These provisions – in ERISA and in the Code10 – 

prohibit fiduciaries from engaging in certain prohibited transactions with “parties who 

may be in a position to exercise improper influence over plan assets, and to prevent 

plan fiduciaries from taking actions with respect to a plan which involve self-dealing 

and conflicts of interest.”11 Each provision also permits the DOL to exempt 

administratively certain transactions and categories of transactions that would 

otherwise be prohibited by statute.12

 Every prior exemption created by DOL pursuant to the authority granted in 

ERISA has been framed in the traditional manner: a regulation sets forth the 

substantive requirements for eligibility. If the prescribed requirements are satisfied, 

the exemption applies.13 If someone claims the exemption but fails to satisfy its 

prerequisites, DOL can seek to assess civil penalties pursuant to its statutory 

                                                           

8 See pages 14-15 below. 9 Employment Retirement Income Security Act of 1974 (“ERISA”), Pub. L. No. 93-406 §§ 408, 2003(a). 10 See 29 U.S.C. § 408(a); 26 U.S.C. § 4975(c)(1). 11 Exemption Procedures under Federal Pension Law, U.S. Department of Labor, http://www.dol.gov/ebsa/publications/

exemption_procedures.html (visited July 16, 2015). 12 See 29 U.S.C. § 408(b); 26 U.S.C. § 4975(c)(2). The President transferred from the Secretary of the Treasury to the 

Secretary of Labor the authority to issue exemptions under Code section 4975. See Reorganization Plan No. 4 of 1978, 5 

U.S.C. App. 672 (2006). 

13 See generally Proposed and Granted Class Exemptions, U.S. Department of Labor, http:// www.dol.gov/ebsa/Regs/

ClassExemptions/main.html (visited July 16, 2015). 
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authority14 and, to the extent the private causes of action created by ERISA provide a 

remedy, an injured private party may invoke them.15 

 Every prior exemption created under the authority granted in the Internal 

Revenue Code has been framed in the same way, through a regulation specifying the 

substantive requirements.16 The Internal Revenue Service has the sole authority to 

enforce failure to satisfy the requirements for an exemption – by requiring the 

payment of the excise tax penalties specified in the statutory provision.17 Private 

parties have no right to recover damages resulting from harm caused by a failure to 

comply with the Internal Revenue Code provision or regulations promulgated 

thereunder, because Congress did not create a private cause of action.18

 The BICE Proposal differs fundamentally from all of these previously-created 

exemptions. Some of the requirements for claiming the exemption are set forth in the 

same manner as previous exemptions. Thus, the eligible transactions are specified in 

Section I(b); transactions excluded from the exemption are specified in Section I(c); 

disclosures regarding total cost must be made to the investor, as set forth in Section 

III; the range of investment options that must be made available is specified in 

Section IV; and certain recordkeeping and related obligations are set forth in Section 

V. 

Other requirements, however, are specified very differently – as terms that 

must be included in a contract with the investor. For example: 

                                                           

14 See, e.g., 29 U.S.C. § 1132(i). 15 See, e.g., id. § 1132(3). 16 See Proposed and Granted Class Exemptions, note 13 above. 17 See 26 U.S.C. § 4975(a)-(b). 18 See 26 U.S.C. § 7801(a) (providing that “the administration and enforcement of” the Internal Revenue Code “shall be 

performed by or under the supervision of the Secretary of the Treasury”); see also Reklau v. Merchants Nat’l Corp., 808 F.2d 

628 (7th Cir. 1986), cert. denied, 481 U.S. 1049 (1987) (Section 401 of the Internal Revenue Code does not create 

substantive rights under ERISA that can be enforced in a private cause of action); Keane v. Baker, 187 WL 8052, at *2 

(W.D.N.Y. Mar. 6, 1987) (finding lack of prudential standing to enforce the tax laws, because “the government’s 

business of administering and enforcing the tax laws has been delegated by the Congress to . . . the Secretary of the 

Treasury”). 
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 Rather than simply providing that the Adviser and Financial Institutions are 

“fiduciaries,” the proposal says that “[t]he written contract [must] affirmatively 

state[] that the Adviser and Financial Institution are fiduciaries under ERISA or 

the Code, or both, with respect to any investment recommendations”;19

 Rather than providing that investment advice provided must meet “Impartial 

Conduct Standards,” such as a “Best Interest of the Retirement Investor” 

standard, the proposal requires the contract to state that the advice will satisfy those 

standards;20 

 Rather than simply requiring the Financial Institution to adopt policies and 

procedures to mitigate conflicts of interest, the contract must include an affirmative 

warranty that the Institution “has adopted written policies and procedures 

reasonably designed to mitigate the impact of Material Conflicts of Interest and 

ensure that its individual Advisors adhere to the Impartial Conduct 

Standards”;21

 Rather than simply barring the use of “quotas, appraisals, performance or 

personnel actions, bonuses, contests, special awards, differential compensation 

or actions or incentives to the extent they would tend to encourage individual 

Advisers to make recommendations that are not in the Best Interest of the 

Retirement Investor,” the contract must include an affirmative warranty that 

these practices are not used.22

 The Proposal leaves no doubt regarding the reason for this unique and peculiar 

approach: the contract is the “cornerstone of the proposed exemption” because it 

creates “actionable obligations.” DOL is using the contract as a mechanism to create 

a private right of action.23 Indeed, the Proposal explains in detail how, in DOL’s view, 

                                                           

19 Section II(b); see 80 Fed. Reg. at 21984. 20 Section II(c); see 80 Fed. Reg. at 21984. 21 Section II(d)(2); see 80 Fed. Reg. at 21984. 22 Section II(d)(4); see 80 Fed. Reg. at 21984. 23 80 Fed. Reg. at 21969. DOL states that the contract “creates a mechanism by which a Retirement Investor can be 

alerted to the Advisor’s and Financial Institution’s obligations” (id.), but a contract is not needed to fulfill that purpose, 

as the Proposal’s requirement of non-contract disclosures (in Section III) demonstrates. 
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“this contractual tool” confers “a contract claim” on “IRA Owners”; and on “Plans, 

Plan Participants and Beneficiaries,” which could bring claims under the private action 

created by ERISA and also “could enforce their obligations in an action based on 

breach of the agreement.”24 

 That candid explanation also provides the reason why these elements of the 

BICE Proposal are invalid. As discussed below, long-settled principles make clear that 

the Department has no power to create private rights of action.25 It therefore lacks the 

power to issue a regulation imposing a “contractual tool” in order to achieve that 

impermissible result. 

 Congress may create private rights of action expressly by statute or impliedly by 

a clear statement of congressional intent.26 But it is well settled that administrative 

agencies lack power to create remedies that Congress has not authorized.27 

 Permitting use of the “contract mechanism” would render meaningless the 

judicial authority barring agencies from creating private causes of action. Any agency 

could simply require a “contract” with specified obligations and warranties, secure in 

the knowledge that the “contract” would give rise to a private cause of action under 

state law. For that reason alone, imposition of the “contract mechanism” exceeds the 

Department’s statutory authority and would be unlawful if included within a final rule. 

 But there is more. The relevant statutes here specifically preclude enforcement 

through state-law causes of action, as explained below. 

 The Supreme Court has recognized time and again, “ERISA’s ‘comprehensive 

legislative scheme’ includes ‘an integrated system of procedures for enforcement.’”28

                                                           

24 80 Fed. Reg. at 21972. 

25 See page 7 below. 26 See, e.g., Nw. Airlines, Inc. v. Transport Workers Union of America, AFL-CIO, 451 U.S. 77, 90-91 (1981). 27 See, e.g., Stew Farm, Ltd. v. Nat. Res. Conservation Serv., 767 F.3d 554, 564 (6th Cir. 2014) (holding that because a 

“regulation [is] not ‘created by Congress,’ . . . it cannot have created a private right of action to enforce federal law”); S. 

Camden Citizens in Action v. N.J. Dep’t of Envtl. Prot., 274 F.3d 771, 790 (3d Cir. 2001) (“if there is to be a private 

enforceable right ..., Congress, and not an administrative agency or a court, must create this right.”); cf. Abrahams v. 

MTA Long Island Bus., 64 F.3d 110, 120 n.7 (2d Cir. 2011) (“[N]o private right of action [exists] to enforce a regulation 

that creates obligations that are not imposed by the regulation’s controlling statute.”). 
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“[T]he exclusivity and uniformity of ERISA’s enforcement scheme remains 

paramount.”29 ERISA contains an express preemption clause,30 and courts have also 

found state-court actions to be impliedly preempted where they conflict with 

Congress’s “comprehensive legislative scheme.”31 “The six carefully integrated civil 

enforcement provisions found in § 502(a) of the statute as finally enacted ... provide 

strong evidence that Congress did not intend to authorize other remedies that it 

simply forgot to incorporate expressly.”32 

 ERISA thus precludes state-law enforcement of its prohibited transaction rules. 

It also therefore would bar the Department from circumventing this prohibition by 

requiring “contracts” embodying the exemption requirements for the purpose of 

creating the very state-law enforcement regime that Congress expressly precluded. 

 Moreover, a system of state-by-state enforcement of these national standards 

would conflict with ERISA’s basic principles. When Congress enacted the statute, it 

recognized the importance of maintaining national uniformity for matters of 

employee benefits.33 Otherwise, multistate employers and fiduciaries operating in 

multiple states would face a dizzying array of forum-specific obligations and 

beneficiaries’ rights would vary depending on their residences or the locations of their 

plan administrators. If state courts were to assess compliance with the mandatory 

terms of the best interest contracts, then those states would develop state-specific 

interpretations of the requirements, and there would be no judicial mechanism for 

ensuring nationally uniform interpretations. In short, the result would be the 

conflicting array of forum-specific obligations that Congress specifically sought to 

avoid. 

 The same conclusion applies with respect to the Internal Revenue Code 

restrictions and exemption authority relating to IRAs. It is long-settled that private 

                                                                                                                                                                                               

28 Aetna Health Inc. v. Davila, 542 U.S. 200, 208 (2004) (quoting Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 147 (1985)). 29 Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 393-94 (2002). 30 See 29 U.S.C. § 1144. 31 Aetna Health, 542 U.S. at 208-09. 32 Id. at 209 (quoting Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) and Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 

134 (1985)). 

33 See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 98-99 (1983) (citing, e.g., 120 Cong. Rec. 29197, 29933 (1974)). 
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parties have no authority to enforce the tax laws.34 By including the statutory 

provision relating to IRAs in the tax code, Congress clearly intended that principle to 

apply. That is particularly true for two additional reasons. 

 First, Congress specified in the tax code provision the method of enforcement: 

imposing of an excise tax by the Internal Revenue Service.35 Second, in the very same 

statute that enacted this tax code provision, Congress created the limited, express 

federal cause of action described above with respect to private enforcement of 

ERISA. Given the similarity of the prohibited transaction requirements, the 

Congressional determination not to authorize even a limited federal private right of 

action with respect to the tax code provision is strong evidence that Congress rejected 

any private enforcement of that provision and sought to ensure uniformity of 

interpretation by granting exclusive enforcement authority to the IRS. 

 That conclusion is not surprising. Just as it is essential that ERISA prescribe 

uniform standards for plan fiduciaries, it is essential that the Code prescribe uniform 

standards for IRA fiduciaries. Exposing the mandated contractual agreements to nonuniform state-by-state enforcement would result in irreconcilable conflicts as to the 

obligations of IRA fiduciaries. 

 In sum, Congress has already decided that ERISA’s prohibited transaction 

provisions should be enforced privately only pursuant to the federal cause of action 

set forth in the statute and that the prohibited transaction provisions of the tax code 

should be enforced only by the IRS. The Proposal’s attempt to condition an 

exemption to the prohibited transaction rules on contracts to be enforced by nonuniform state laws exceeds the Department’s statutory authority and, in addition, 

would introduce regionalized requirements that conflict with the objectives of ERISA 

and the Code. The Department therefore may not impose the “contract mechanism” 

to create an avenue for state-law enforcement of prohibited transaction rules or 

exemptions. 

                                                           

34 See note 18 above. 35 26 U.S.C. § 4975(a) & (b). 
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 Finally, the Proposal’s unauthorized private cause of action would extend far 

beyond claims for violation of the substantive requirements for eligibility for the 

exemption. One of the “warranties” required to be included in the “contract” is the 

following: 

The Adviser, Financial Institution, and Affiliates will 

comply with all applicable federal and state laws regarding 

the rendering of the investment advice, the purchase, sale 

and holding of the Asset, and the payment of 

compensation related to the purchase, sale and holding of 

the Asset.36 

The obvious purpose of this “warranty” is to expand the private cause of action 

created by the “contract mechanism” so that it is not limited to alleged violations of 

the exemption eligibility requirements but also encompasses claims of violations of 

every federal or state statute that in any way relates investment advice. 

 But, as with ERISA and the federal tax code, many of these laws (and there are 

a very large number when all federal laws and the laws of every State are taken into 

account) do not provide for private enforcement – the federal Investment Advisers 

Act of 1940 is one example.37 Limiting enforcement authority to government 

regulators is not an oversight: Congress and state legislatures often draft regulatory 

statutes broadly, relying on government officials to exercise enforcement discretion 

and apply these laws only when warranted by an assessment of the costs and benefits, 

and in a manner that will not deter beneficial conduct. 

 Private parties, and particularly private class-action plaintiffs’ lawyers, are 

motivated by their own interests, not the public interest. Granting them blanket 

authority to bring private lawsuits based on regulatory violations is not only outside 

the Department’s authority because it intrudes on an area reserved to Congress, it also 

overturns important policy judgments made by Congress and the States that enacted 

these statutes, and would disrupt regulation in this important area of the economy. 

                                                           

36 Proposed Section II(d)(1). 

37 Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 24 (1979). 
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 For all of these reasons, the “contract mechanism” is unlawful and should be 

eliminated from any final exemption promulgated by the Department. 

II. The Department Lacks Authority To Ban Class Action Waivers In 

 Arbitration Agreements And, In Addition, Any Such Ban Would Harm 

 Investors And Would Therefore Be Arbitrary And Capricious. 

 The Proposal states that “[t]he written contract shall not contain” a provision 

“under which the Plan, IRA or Retirement Investor waives or qualifies its right to 

bring or participate in a class action or other representative action in court in a dispute 

with the Adviser or Financial Institution.”38 The Federal Arbitration Act bars the 

Department from imposing that requirement. In addition, the requirement would 

harm investors by making it more difficult for them to vindicate their rights, and is 

therefore arbitrary. 

A. The Federal Arbitration Act Precludes The Department From 

 Banning Arbitration Clauses Providing That All Disputes Will Be 

 Resolved Through Individualized Arbitration. 

 “The Federal Arbitration Act reflects an ‘emphatic federal policy in favor of 

arbitral dispute resolution.’”39 Although arbitration agreements remain subject to 

generally applicable state contract law, the FAA affords contracting parties the 

freedom to “structure their arbitration agreements as they see fit,” and to “specify by 

contract the rules under which...arbitration will be conducted.”40

 Two well-settled legal principles demonstrate that DOL may not prohibit 

parties from specifying in an arbitration clause that arbitrations will be conducted on 

an individualized basis and thereby waiving the use of class procedures in arbitration 

or in court. First, the Supreme Court has held that requiring class procedures is 

antithetical to the right to enter into arbitration agreements that is protected by the 

FAA. Second, the Court has held repeatedly that the rights protected by the FAA may 

                                                           

38 Proposed Section II(f)(2). 

39 KPMG LLP v. Cocchi, 132 S. Ct. 23, 25 (2011) (per curiam) (quoting Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc., 

473 U.S. 614, 631 (1985)). 

40 Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 479 (1989). 
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be overridden only by a “clear congressional command,” and there is no such 

congressional command authorizing the Department to override the FAA. 

 First, federal law protects parties’ freedom to determine which issues will be 

arbitrated and who will participate in each arbitration proceeding; to prescribe the 

procedural rules that will govern the arbitration; and to select the arbitrator who will 

resolve their disputes.41 In short, the FAA “makes arbitration agreements ‘valid, 

irrevocable, and enforceable’ as written.”42 

 The Supreme Court has twice held that the FAA guarantees the right to enter 

into enforceable agreements that require the parties to arbitrate on an individual basis 

and to forgo aggregating their claims through class or collective actions. 

 The plaintiffs in Concepcion argued that because their arbitration agreement 

precluded them from pursuing class-wide relief, it was unconscionable—and therefore 

unenforceable – under California’s Discover Bank43 rule (which effectively imposed a per 

se ban on agreements to arbitrate modest sized claims on an individual basis).44 But 

the Supreme Court rejected that argument, holding that the FAA preempts Discover 

Bank because “[r]equiring the availability of classwide arbitration procedures interferes 

with fundamental attributes of arbitration.”45 

 The Court explained: “The point of affording parties discretion in designing 

arbitration” is “to allow for efficient, streamlined procedures tailored to the type of 

dispute” at issue.46 That purpose would be frustrated if class-action waivers were not 

fully enforceable. Because class-wide resolution of claims “requires procedural 

formality” to comply with due process, mandating class arbitration “sacrifices the 

                                                           

41 See, e.g., AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748-49 (2011); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 

130 S. Ct. 1758, 1774 (2010). 

42 Concepcion, 131 S. Ct. at 1748 (quoting FAA, 9 U.S.C. § 2). 43 Discover Bank v. Super. Ct., 113 P.3d 1100 (Cal. 2005). 44 Concepcion, 131 S. Ct. at 1745. 45 Id. at 1748. 46 Id. at 1749. 
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principal advantage of arbitration—its informality—and makes the process slower, 

more costly, and more likely to generate procedural morass than final judgment.”47 

 In short, a legal rule requiring class procedures, whether in court or in 

arbitration, “interferes with fundamental attributes of arbitration and thus creates a 

scheme inconsistent with the FAA.”48 

The Court reached the same conclusion in American Express Co. v. Italian Colors 

Restaurant,

49 holding that the FAA required enforcement of an arbitration agreement 

requiring individualized resolution of disputes in the context of a federal antitrust 

claim. The Court held that its prior ruling in Concepcion essentially resolved the case: 

There we invalidated a law conditioning enforcement of 

arbitration on the availability of class procedure because 

that law “interfere[d] with fundamental attributes of 

arbitration.” “[T]he switch from bilateral to class 

arbitration,” we said, “sacrifices the principal advantage of 

arbitration – its informality – and makes the process 

slower, more costly, and more likely to generate procedural 

morass than final judgment.” We specifically rejected the 

argument that class arbitration was necessary to prosecute 

claims “that might otherwise slip through the legal 

system.”50 

The Supreme Court’s decisions in Concepcion and Italian Colors thus make clear 

that the FAA precludes interference with arbitration contract terms that provide for 

individualized resolution of disputes and bar class proceedings in arbitration and in 

court. 

 Second, the federal policy favoring arbitration is so strong that a “clear 

congressional command” is necessary to displace the FAA “even when the claims at 

                                                           

47 Id. at 1751 (emphasis omitted). 48 Id. at 1748. 49 133 S. Ct. 2304 (2013). 

50 Id. at 2312. 
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issue are federal statutory claims.”51 When federal law is “silent” as to whether 

Congress intended to override the FAA for a particular type of claim, “the FAA 

requires the arbitration agreement to be enforced according to its terms,” regardless 

of whether the source of the claim is federal or state law.52 

 Nothing in ERISA or the Internal Revenue Code supplies the necessary clear 

command – indeed, nothing in either statute indicates any intent whatsoever to limit 

the availability of arbitration. The FAA therefore applies with full force.53 Because 

“[i]t is a fundamental precept of administrative law that an agency action, rule, or 

regulation ‘cannot overcome the plain text enacted by Congress,’”54 the Department 

cannot, without express statutory authority, prohibit what the FAA protects. 

Certainly Congress knows how to grant the necessary authority when it wants 

to. In the Dodd-Frank Act, for example, Congress authorized the Securities and 

Exchange Commission to issue rules “prohibit[ing], or impos[ing] conditions or 

limitations on the use of” predispute arbitration agreements in agreements between 

certain broker-dealers and their clients, and between investment advisers and their 

clients.55 

Congress used similar language in authorizing the Consumer Financial 

Protection Bureau to conduct a study and report to Congress regarding the use of 

arbitration agreements in consumer financial products and services, and to issue a rule 

prohibiting or effectively eliminating arbitration if it “finds that . . . [it] is in the public 

interest and for the protection of consumers.”56 

                                                           

51 CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012). 52 Id. at 673. 53 Indeed, a number of federal courts have held that Congress did not intend in ERISA to preclude arbitration of 

fiduciary breach claims. See, e.g., Bird v. Shearson Lehman/American Express, Inc., 926 F.2d 116, 119-20 (2d Cir. 1991); 

Pritzker v. Merrill Lynch Pierce Fenner & Smith, Inc., 7 F.3d 1110 (3d Cir. 1993); Kramer v. Smith Barney, 80 F.3d 1080 (5th 

Cir. 1996); Simon v. Pfizer, Inc., 398 F.3d 765, 774 (6th Cir. 2005); Arnulfo P. Sulit, Inc. v. Dean Witter Reynolds, 847 F.2d 475 

(8th Cir. 1988); Williams v. Imhoff, 203 F.3d 758 (10th Cir. 2000); but see Amaro v. Continental Can, 724 F.2d 747 (9th Cir. 

1988). 

54 Sierra Club, Inc. v. Sandy Creek Energy Associates, L.P., 627 F.3d 134, 141 (5th Cir. 2010). 55 15 U.S.C. §§ 78o(o), 80b-5(f). 

56 12 U.S.C. § 5518(b). 
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Congress enacted no similar language in Dodd-Frank, ERISA, or anywhere else 

that would authorize the Department’s Proposal. 

Indeed, the proposal here closely resembles the National Labor Relations 

Board’s attempt to prohibit as an unfair labor practice any arbitration clause in an 

employment agreement that provided for individualized decisionmaking and 

precluded class proceedings.57 That ruling was set aside by the Court of Appeals for 

the Fifth Circuit on the ground that it violated the FAA.58 Every other appellate court 

to address the issue has reached the same conclusion.59 

That precedent leaves no doubt that the Department lacks the legal authority to 

ban arbitration clauses that preclude class proceedings.60

B. Arbitration Benefits Retirement Investors By Providing A Fair 

 Means Of Resolving Disputes That They Cannot Practically 

 Litigate In Court. 

Not only does the Department lack authority to prohibit arbitration on an 

individual basis – in lieu of class action litigation in court – but the Proposal is also 

bad policy. Arbitration enables retirement investors – just as much as consumers, 

employees, and others – with grievances to obtain redress for a large number of 

claims for which litigation in court is impractical. Arbitration is quicker and less costly, 

and it is at least as likely to result in positive outcomes for claimants. Indeed, the 

empirical evidence demonstrates that individuals in arbitration fare at least as well as

                                                           

57 In re D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012). 58 D.R. Horton, Inc. v. NLRB, 737 F.3d 344, 355-62 (5th Cir. 2013). 59 See Richards v. Ernst & Young, LLP, 734 F.3d 871, 873-74 (9th Cir. 2013); Sutherland v. Ernst & Young LLP, 726 F.3d 

290, 297-98 n.8 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1055 (8th Cir. 2013); Iskanian v. CLS Transp. Los 

Angeles, LLC, 327 P.3d 129, 141 (Cal. 2014). 60 The Proposal mentions that FINRA’s arbitration rules require its members to permit class actions to be brought in 

court. 80 Fed. Reg. at 21973; see also FINRA Rule 2268(d)(3); FINRA Customer Code 12204(d). FINRA has rejected the 

argument that its rules violate the FAA, finding the requisite congressional intent to override the FAA in the general 

grant of authority to the SEC to review and approve FINRA rule changes. In re Department of Enforcement v. Charles Schwab 

& Co., No. 2011029760201 (FINRA Board of Governors, Apr. 24, 2014). That analysis is squarely inconsistent with the 

holding of the Fifth Circuit in D.R. Horton and the rulings of every other appellate court. See notes 58-59, above. 

Whatever FINRA’s authority as a membership organization might be, the Department cannot rely on the FINRA 

precedent in Charles Schwab to provide the legal authority to justify its proposal. 
The Honorable Phyllis Borzi 

Office of Regulations and Interpretations 

Office of Exemption Determinations 

July 20, 2015 

Page 16 

– if not better than – they would have in court. Arbitration thus benefits 

retirement investors by providing a fair means of adjudicating claims that 

would be left without redress in the absence of arbitration. Requiring arbitration 

agreements to permit the assertion of class actions in court will as a practical matter 

mean that companies that have a choice will not use arbitration as a means for settling 

disputes, thereby harming investors. 

The relevant arguments and supporting information are set out in detail in 

Attachment A and summarized below: 

 Arbitration enables retirement investors (like consumers, employees, and other 

individuals) with grievances to obtain redress for the kind of dispute they are 

most likely to have – small, individualized claims for which litigation in court is 

impractical. For typical disputes, claimants are unable to hire attorneys to 

navigate the court system, or find that a hearing on their claims is long delayed 

by overcrowded dockets in underfunded courts. 

 Arbitration is at least as likely, and often more likely, than litigation in court to 

result in positive outcomes for consumers, as empirical studies repeatedly have 

shown. 

 Arbitration is more user-friendly and inexpensive than litigating in court – 

especially when (as is increasingly common) parties agree to include fee-shifting 

or cost-shifting provisions in their arbitration agreements. 

 In addition, arbitration agreements offer fair and simplified procedures for 

consumers – something that is ensured by the protections of generallyapplicable state unconscionability law as well as the due process safeguards of 

the nation’s leading arbitration providers, including the American Arbitration 

Association and JAMS. 

 The arguments advanced by critics of arbitration do not stand up to careful 

scrutiny. 
The Honorable Phyllis Borzi 

Office of Regulations and Interpretations 

Office of Exemption Determinations 

July 20, 2015 

Page 17 

 Some say that, while they recognize the benefits of arbitration, they 

believe that parties would be better served if they were precluded from 

committing to arbitration until after a dispute arises. But permitting only 

“post-dispute arbitration agreements” is an illusory option that actually 

would have the effect of eliminating arbitration. As scholars have 

recognized, without arbitration agreements that commit both sides to a 

potential dispute to arbitrate before the dispute arises, arbitration agreements 

in fact will be rare indeed – and the result will be that consumers are 

relegated to the judicial system in precisely those cases where 

burdensome court procedures and overcrowded courts are likely to 

stymie their claims. 

 Class action proponents decry the fact that arbitration typically takes 

place on an individual basis. But their defense of class actions rests on 

purely theoretical arguments about the supposed virtues of that 

procedural device. In reality, consumer class actions deliver (at best) 

minimal benefits to most consumers. 

 Consumers can pursue their claims without the class action device. As 

even the dissenting Justices in the Supreme Court’s recent decision in 

American Express Co. v. Italian Colors Restaurant expressly recognized, 

“non-class options abound” for effectively pursuing claims on an 

individual basis. In particular, many arbitration agreements require 

businesses to pay all or most of arbitration filing fees, authorize the 

payment of attorneys’ fees and other costs of proof in meritorious cases, 

and provide incentives for individuals to bring claims. And other, more 

informal, methods of obtaining economies of scale exist, including the 

use by multiple claimants of the same attorneys and expert witnesses, 

where necessary. 

 The claim that class procedures should be mandated because class 

actions provide benefits to consumers therefore is not supported by the 

reality of class actions outcomes. And, because requiring class 

procedures would result in the elimination of arbitration – companies 
The Honorable Phyllis Borzi 

Office of Regulations and Interpretations 

Office of Exemption Determinations 

July 20, 2015 

Page 18 

would not be willing to absorb the additional costs of arbitration and the 

huge legal fees associated with defending class actions – consumers 

would lose the ability to pursue the myriad individualized claims that are 

not practicable to litigate in court. Indeed, the only beneficiaries of such 

a requirement would be lawyers – both plaintiff’s lawyers and defense 

lawyers – who are the only clear winners in class action litigation. 

In short, any rational assessment of the benefits and costs of arbitration must 

conclude that prohibiting or regulating arbitration will harm retirement investors 

much more than it would benefit them.61

                                                           

61 The Consumer Financial Protection Bureau recently issued a report regarding arbitration. See Consumer Financial 

Protection Bureau, Arbitration Study: Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act 

§ 1028(a), http://files. consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf (visited July 

17, 2015). That report provides no basis for assessing the benefits and costs of arbitration, for the reasons explained in 

Attachment B. 
The Honorable Phyllis Borzi 

Office of Regulations and Interpretations 

Office of Exemption Determinations 

July 20, 2015 

Page 19 

* * * * * 

 Thank you for your consideration of these comments. We would be happy to 

discuss these issues further with appropriate members of the Department’s staff. 

Sincerely, 

 David Hirschmann Lisa A. Rickard 

President & Chief Executive Officer President 

Center for Capital U.S. Chamber Institute for Legal Reform 

Markets Competitiveness 

U.S. Chamber of Commerce 

Randel Johnson 

Senior Vice President 

Labor, Immigration & Employee Benefits 

U.S. Chamber of Commerce 
Attachment A 

 
 

December 11, 2013 

Consumer Financial Protection Bureau 

Attention: Ms. Monica Jackson 

1700 G Street NW 

Washington, DC 20552 

Re: Request for Information Regarding Scope, Methods, and Data Sources 

 for Conducting Study of Pre-Dispute Arbitration Agreements, Docket 

 No. CFPB-2012-0017—Supplemental Submission 

Dear Ms. Jackson: 

 This letter and its appendix are submitted on behalf of the U.S. Chamber of 

Commerce Center for Capital Markets Competitiveness (“CCMC”) and the U.S. 

Chamber Institute for Legal Reform (“ILR”). The U.S. Chamber of Commerce (the 

“Chamber”) is the world’s largest business federation, representing the interests of 

more than three million companies of every size, sector, and region. The Chamber 

created CCMC to promote a modern and effective regulatory structure for capital 

markets to fully function in a 21st century economy. ILR is an affiliate of the 

Chamber dedicated to making our nation’s overall civil legal system simpler, faster, 

and fair for all participants. 

We write regarding the Consumer Financial Protection Bureau’s (“Bureau”)

study, authorized by Section 1028(a) of the Dodd-Frank Act and now underway, 

concerning pre-dispute arbitration agreements in consumer financial contracts. 

Congress provided that the Bureau must conduct a study of pre-dispute arbitration 

agreements as a prerequisite to any proposed regulation. Specifically, any 

“prohibit[ion] or impos[ition of] conditions or limitations” on arbitration must be 

supported by a finding “that such a prohibition or imposition of conditions or 

limitations is in the public interest and for the protection of consumers. The findings 

in such rule shall be consistent with the study conducted under subsection (a).”1 Stated 

 

1

 12 U.S.C. § 5518(b) (emphasis added). 
Consumer Financial Protection Bureau

December 11, 2013

Page 2

another way, the Bureau cannot regulate arbitration without conducting an 

appropriate study, and any proposed regulations must be based on and supported by 

that study.

 Arbitration is an important means of resolving disputes that provides extremely 

significant benefits to consumers and businesses. As we have previously explained in 

comments submitted to the Bureau,2 arbitration of consumer disputes has been 

common practice for decades; there are perhaps hundreds of millions of consumer 

contracts currently in force that include arbitration agreements—many of them 

relating to consumer financial products or services. 

 The Bureau initially requested comment on how it should conduct the study. 

A number of commenters—including CCMC and ILR—suggested topics that should 

be addressed in the study and, in addition, urged the Bureau to issue a public notice 

identifying the topics that it had decided to study and requesting public comment 

regarding those topics.3 

 Unfortunately, the Bureau has done neither—it has not informed the public 

of the topics it is studying and it has not solicited information regarding those 

topics. As a result, interested individuals and organizations have had no real 

opportunity to inform the Bureau of available evidence bearing on the issues the 

Bureau has decided to study, or to develop additional empirical data relevant to those 

issues. That failure to enable the public to comment on the subjects of the Bureau’s 

study introduces a critical flaw in the study—and, therefore, will completely 

undermine any rulemaking that may be undertaken on the basis of the study’s 

findings.4

 

2

 Letter from David Hirschmann & Lisa Rickard to Matthew Burton & PRA Office, Re: “Telephone Survey Exploring 

Consumer Awareness of and Perceptions Regarding Dispute Resolution Provisions in Credit Card Agreements,” Docket No. CFPB2013-0016 (Aug. 6, 2013), http://www.regulations.gov/#!documentDetail;D=CFPB-2013-0016-0015 (Chamber Comment 

II); Letter from David Hirschmann & Lisa Rickard to Monica Jackson, Re: Request for Information Regarding Scope, Methods, 

and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements, Docket No. CFPB-2012-0017 (June 12, 2012), 

available at http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0017-0051 (Chamber Comment I). 

3 Chamber Comment I at 3-5, 10-20. 

4 The Bureau has sought one round of comments regarding a proposed consumer survey of “awareness of dispute 

resolution provisions in their agreements with credit card providers”—and promised the opportunity for a second round 

of comments—but only because the Paperwork Reduction Act required it to take that step. Telephone Survey Exploring 

Consumer Awareness of and Perceptions Regarding Dispute Resolution Provisions in Credit Card Agreements, Docket No. CFPB-2013-
Consumer Financial Protection Bureau

December 11, 2013

Page 3

In order to try to ameliorate these deep flaws in the Bureau’s study plan, ILR 

and CCMC submit the information in this letter and its attachment, which are 

designed to help the Bureau assess the relative benefits and costs of different dispute 

resolution systems. This information makes clear that arbitration before a fair, 

neutral decision maker leads to outcomes for consumers and individuals that 

are comparable or superior to the alternative—litigation in court—and that are 

achieved faster and at lower expense.

 This submission by ILR and CCMC is designed to address empirical issues that 

should be at the center of the Bureau’s study. Given the near-total absence of 

information from the Bureau about its study design, however, it is impossible for 

interested parties to offer information tailored appropriately to the topics the Bureau 

is studying. In any event, the information we are providing is highly relevant to any

rational study of the relevant issues.5

 We focus on several fundamental points: 

 Arbitration enables consumers with grievances to obtain redress for the vast 

majority of disputes they are likely to have—small, individualized claims for 

which litigation in court is impractical. This access to an inexpensive and simple 

system of dispute resolution is an extremely significant benefit that is often 

overlooked entirely in the debate over arbitration. 

 For typical consumer disputes that are small and individualized, consumers are 

highly unlikely to be able to hire an attorney to help navigate the court system. 

 

0016, 78 Fed. Reg. 34352 (June 7, 2013). It is disappointing that the Bureau has devoted such attention to soliciting 

comment on what presumably is a minor component of the overall study. Indeed, as ILR and CCMC explained in their 

comment, the consumer survey will not produce any information useful to the study specified by Congress. See Chamber 

Comment II at 11-21.

5

 We again respectfully urge the Bureau to provide the public with at least some transparency regarding its study plan in 

order to enable interested parties to provide relevant information and prevent the Bureau from producing a study that is 

fatally flawed because it was produced in an informational vacuum. Soliciting public input would surely benefit the 

Bureau’s work: Although the Bureau possesses or can retain able staff and consultants, there is a great deal of 

information regarding both judicial litigation and arbitration that either has been developed or (more likely) could be 

developed that is highly relevant to the Bureau’s statutory mandate. A legitimate study process would welcome—and 

facilitate—the submission of such information.
Consumer Financial Protection Bureau

December 11, 2013

Page 4

 Those consumers who do brave the courts find that a hearing on their claims is 

long delayed by overcrowded dockets in our underfunded courts. 

 Arbitration is at least as likely, and often more likely, than litigation in court to 

result in positive outcomes for consumers, as empirical studies repeatedly have 

shown. 

 Arbitration is more user-friendly and inexpensive than litigating in court—

especially when (as is increasingly common) parties agree to include fee-shifting 

or cost-shifting provisions in their arbitration agreements. 

 In addition, arbitration agreements offer fair and simplified procedures for 

consumers—something that is ensured by the protections of generallyapplicable state unconscionability law as well as the due process safeguards of 

the nation’s leading arbitration providers, including the American Arbitration 

Association and JAMS. 

 The arguments advanced by critics of arbitration do not stand up to careful 

scrutiny. 

 Some say that, while they recognize the benefits of arbitration, they believe that 

parties would be better served if they were precluded from committing to 

arbitration until after a dispute arises. But permitting only “post-dispute 

arbitration agreements” is an illusory option that actually would have the effect 

of eliminating arbitration. As scholars have recognized, without arbitration 

agreements that commit both sides to a potential dispute to arbitrate before the 

dispute arises, arbitration agreements in fact will be rare indeed—and the result 

will be that consumers are relegated to the judicial system in precisely those 

cases where burdensome court procedures and overcrowded courts are likely to 

stymie their claims. 

 Class action proponents decry the fact that arbitration typically takes place on 

an individual basis. But their defense of class actions rests on purely theoretical 

arguments about the supposed virtues of that procedural device. In reality, 

consumer class actions deliver (at best) minimal benefits to most consumers. 
Consumer Financial Protection Bureau

December 11, 2013

Page 5

 A new empirical assessment of class actions that the Chamber has 

commissioned demonstrates that the class actions studied provide little or no 

benefit to consumers. 

 None of the class actions studied resulted in a trial or in a judgment for 

plaintiffs on the merits. 

 The overwhelming majority of cases are dismissed voluntarily by the named 

plaintiffs—either because they decide not to proceed with the case or because 

they settle out on an individual basis—or are dismissed by courts because they 

are not legally sustainable. Either way, the result is that class members do not 

benefit. 

 And the remaining minority of class actions that are settled on a class-wide 

basis usually provide class members with little, if any, tangible benefit. As a 

result, only a handful of class members—often fewer than 10 percent, and 

sometimes less than 1 percent—even bother to submit claims for benefits. 

 Consumers can pursue their claims without the class action device. As even the 

dissenting Justices in the Supreme Court’s recent decision in American Express 

Co. v. Italian Colors Restaurant expressly recognized, “non-class options abound” 

for effectively pursuing claims on an individual basis. In particular, many 

arbitration agreements require businesses to pay all or most of arbitration filing 

fees, authorize the payment of attorneys’ fees and other costs of proof in 

meritorious cases, and provide incentives for individuals to bring claims. And 

other, more informal, methods of obtaining economies of scale exist, including 

the use by multiple claimants of the same attorneys and expert witnesses, where 

necessary. 

 The claim that class procedures should be mandated because class actions 

provide benefits to consumers therefore is not supported by the reality of class 

actions outcomes. And, because requiring class procedures would result in the 

elimination of arbitration—companies would not be willing to absorb the 

additional costs of arbitration and the huge legal fees associated with defending 

class actions—consumers would lose the ability to pursue the myriad 
Consumer Financial Protection Bureau

December 11, 2013

Page 6

individualized claims that are not practicable to litigate in court. Indeed, the 

only beneficiaries of such a requirement would be lawyers—both plaintiff’s 

lawyers and defense lawyers—who are the only clear winners in class action 

litigation. 

 In short, any rational assessment of the benefits and costs of arbitration must 

conclude that prohibiting or regulating arbitration will harm consumers much 

more than it would benefit them. 

I. Arbitration Benefits Consumers By Providing A Fair Means Of 

Resolving Disputes That Consumers Cannot Practically Litigate In 

Court. 

 Arbitration enables consumers, employees, and others with grievances to 

obtain redress for a large number of claims for which litigation in court is impractical. 

Arbitration is quicker and less costly, and it is at least as likely to result in positive 

outcomes for claimants. Indeed, the empirical evidence demonstrates that individuals 

in arbitration fare at least as well as—if not better than—they would have in court. 

Arbitration thus benefits consumers by providing a fair means of adjudicating 

claims that would be left without redress in the absence of arbitration. 

A. The Judicial System Is Not A Realistic Means Of Obtaining 

Redress For Most Injured Consumers. 

 If the judicial system were free of transaction costs, if every legitimate claimant 

could obtain legal representation, and if lawsuits were resolved expeditiously, then 

perhaps the courts could be relied upon as the exclusive means of redress for injured 

consumers. In fact, of course, today’s judicial system falls far short of that ideal; each 

of these three prerequisites is absent, and the reality of judicial litigation is getting 

significantly worse each year. 

 Recourse to the judicial system therefore simply is not a realistic option for 

most injured consumers. Most claims are individualized and too small to attract the 

legal representation needed to navigate the complex legal system; costs of litigating are 

too great; and the courts—even many small claims courts—impose requirements 

(such as appearing in person during the working day) that make litigating there 
Consumer Financial Protection Bureau

December 11, 2013

Page 7

burdensome and costly. All of these costs are multiplied by the myriad inefficiencies 

of the judicial system, including time-consuming procedures, delays and 

postponements in court appearances, and the like. 

1. The Vast Majority of Consumer Claims Cannot as a 

Practical Matter be Pursued in Court. 

 Litigation in court is complicated and expensive—non-lawyers need legal 

representation to have any hope of successfully navigating the judicial system. And 

even with a lawyer, claims are difficult and time-consuming to litigate. 

 Most wrongs suffered by consumers are relatively small and individualized—

excess charges on a bill, a defective piece of merchandise claim, and the like. These 

claims are simply too small to justify paying a lawyer to handle the matter and in any 

event most consumers do not have the resources to do so. 

 As Justice Breyer has recognized, without arbitration, “the typical consumer 

who has only a small damages claim (who seeks, say, the value of only a defective 

refrigerator or television set)” would be left “without any remedy but a court remedy, 

the costs and delays of which could eat up the value of an eventual small recovery.”6

Thus, for the largest category of injuries suffered by consumers, the choice is 

“arbitration—or nothing.”7 

 In the employment context, for instance, it has been estimated that the 

potential recovery is too small in 72% of the cases currently resolved using predispute arbitration8

 and in 95% of all potential claims9 to justify litigation in court and 

 

6 Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 281 (1995). 

7

 Theodore J. St. Antoine, Mandatory Arbitration: Why It’s Better Than It Looks, 41 U. Mich. J.L. Reform 783, 792 (2008) 

(discussing analogous situation of employees with low-dollar claims). 

8

 Jyotin Hamid & Emily J. Mathieu, The Arbitration Fairness Act: Performing Surgery with a Hatchet Instead of a Scalpel?, 74 Alb. 

L. Rev. 769, 785 (2010/2011); accord, Lewis L. Maltby, Out of the Frying Pan, Into the Fire: The Feasibility of Post-Dispute 

Employment Arbitration Agreements, 30 Wm. Mitchell L. Rev. 313, 318 (2003); accord Steven C. Bennett, The Proposed 

Arbitration Fairness Act: Problems And Alternatives, 67 Disp. Resol J. 32, 37 (2012). 

9

 St. Antoine, 41 U. Mich. J.L. Reform at 790. 
Consumer Financial Protection Bureau

December 11, 2013

Page 8

the retention of counsel. There is no reason to believe that the universe of consumer 

claims differs.10 

 Such claims do not—and could not—attract lawyers willing to work on a 

contingency-fee basis. Research demonstrates that lawyers accept contingent-fee 

cases only if the claim promises both a substantial recovery and a substantial 

percentage of that recovery as a legal fee. One study reported that a claim must be 

worth at least $60,000 before a lawyer will consider taking it.11 In some legal markets, 

this threshold may be as high as $200,000.12 The vast majority of consumer claims are 

so small that they will “not . . . elicit a lawyer’s attention.”13 

 But the complexities of judicial litigation make it difficult, if not impossible, for 

most individuals to represent themselves effectively in court. The rules are opaque to 

non-lawyers, and navigating these obstacles can therefore be burdensome to 

individuals. The requirement of in-person appearances during the workday 

compounds the economic burden. 

 Small-claims courts were developed to make it easier for individuals to proceed 

without representation, but they do not provide a realistic alternative because state 

budget cuts have severely hobbled these courts. For example, the New York Times 

reported in 2011 that in New York, night court sessions were being cancelled in many 

locales, waits had quadrupled, and court officials were unable to work through their 

overburdened daily dockets, forcing individuals to leave empty-handed, only to return 

another day in the hope that their disputes will eventually be heard.14 

 

10 See, e.g., Christopher R. Drahozal & Samantha Zyontz, An Empirical Study of AAA Consumer Arbitrations, 25 Ohio St. J. 

on Disp. Resol. 843, 898 (2010) (noting that “the number of consumers bringing large claims” in consumer arbitration 

“is small”).

11 Elizabeth Hill, Due Process at Low Cost: An Empirical Study of Employment Arbitration Under the Auspices of the American 

Arbitration Association, 18 Ohio St. J. on Disp. Resol. 777, 783 (2003). 

12 Recommendations of the Minnesota Supreme Court Civil Justice Reform Task Force 10 (Nov. 23, 2011), 

http://www.mnbar.org/sections/outstate-practice/11-23-11%20Civil%20Justice%20Reform.pdf. 

13 Id.

14 See William Glaberson, Despite Cutbacks, Night Court’s Small Dramas Go On, N.Y. TIMES, June 2, 2011, available at

http://www.nytimes.com/2011/06/03/nyregion/despite-cutbacks-new-york-small-claims-courts-trudge-on.html. 
Consumer Financial Protection Bureau

December 11, 2013

Page 9

Similarly, cases filed in San Joaquin County, California’s small-claims court in 

September 2012 had still not been scheduled for trials as of May 2013.15 The court’s 

presiding judge explained: “In our county, if you file a small claims case it simply sits 

in the proverbial box waiting to get a trial date. Your case sits and goes nowhere. It’s 

not right, but you have to have sufficient resources to get those cases done, and we 

don’t have those resources.”16 Meanwhile, a Texas law that went into effect in August 

2013 “abolish[ed] small claims courts across the state, meaning all those small-pricetag cases—seeking no more than $10,000—[would now] be handled by justice of the 

peace courts, some of which already are buried under dockets teeming with minor 

civil matters.”17

2. Even for Larger Claims, the Court System Provides 

Significant Delays and High Costs. 

 Some claims are large enough to support contingency fees that would attract 

the interest of lawyers. But the complexity of the litigation system makes litigation 

costly and—as a result of budget cuts—many courts are simply unable to keep up 

with their caseloads, leading to extreme delays. Filing fees also have increased, placing 

further burdens on plaintiffs. 

 Forty states had to cut funding to their courts in 2010, according to a report by 

the American Bar Association’s “Task Force on the Preservation of the Justice 

System,” which was co-chaired by David Boies and Theodore B. Olson.18 The 

President of the ABA stated that “all over this country,” state “[c]hief justices are 

 

15 Emily Green, Budget Woes Mean Big Delays For Small Claims Courts, Nat. Pub. Radio, May 15, 2013, available at

http://www.npr.org/2013/05/17/182640434/budget-woes-mean-big-delays-for-small-claims-courts. 

16 Id.

17 Kiah Collier, Little-known state law doing away with small claims courts, Houston Chronicle, June 23, 2013, 

http://www.houstonchronicle.com/news/houston-texas/houston/article/Little-known-state-law-doing-away-withsmall-4616571.php; see also Adoption of Rules for Justice Court Cases, Misc. Docket No. 13-9023 (Tex. Feb. 12, 2013), 

http://supreme.courts.state.tx.us/MiscDocket/13/13902300.pdf.

18 Am. Bar. Ass’n (“ABA”), The Growing Crisis of Underfunding State Courts, Mar. 16, 2011 (“ABA Report”); see also G. Alan 

Tarr, No Exit: The Financial Crisis Facing State Courts, 100 Ky. L.J. 786, 787 (2011-2012). 
Consumer Financial Protection Bureau

December 11, 2013

Page 10

closing the courts one day a week” and “court personnel including judges [are] being 

furloughed without pay.”19 

 These funding problems have continued. Due to “los[ing] about 65% of their 

general fund support from the state during the last five years,” California’s court 

system is subject to even more lengthy delays.20 As the state’s Chief Justice noted in 

calling on the California Legislature to increase funding to the state judiciary, “[t]he 

cruel irony is that the economic forces that have led to budget reductions to the 

courts are the same ones that drive more of our residents to court.”21 And the San 

Diego County Bar Association warned that “local courts—long the shining example 

statewide of judicial efficiency—have now been hobbled to such an extent that 

extensive delays, the closure of courtrooms, the unavailability of essential court 

services, and long wait times now characterize those court systems instead.”22

These dramatic cutbacks have made it impossible for many courts to keep up with 

their caseload, leading to extended delays that leave “litigants with no expectation of 

relief or resolution of their cases for extended periods of time.”23 

 As the Los Angeles Times reported, “[a]t least 53 courthouses have closed,” and 

“[c]ourts in 20 counties are closed for at least one day a month.” These and other 

“court closures have forced some San Bernardino [county] residents to drive up to 

175 miles one way to attend to a legal matter.”24 In New York City, similarly, the wait 

for a court date is now four times as long as it was before recent budget cuts.25

 

 

19 Wm. T. (Bill) Robinson, ABA President Robinson Explains Nationwide Crisis in Dwindling Court Budgets, Aug. 4, 2011 

(video). 

20 Maura Dolan, Budget cuts force California courts to delay trials, ax services, L.A. Times, Apr. 9, 2013, 

http://articles.latimes.com/2013/apr/09/local/la-me-court-cutbacks-20130410. 

21 Erin Coe, California Justice Warns of Looming Case Delays, Law360, Mar. 9, 2012, available at

http://www.law360.com/legalindustry/articles/319086. 

22 San Diego County Bar Association, 2013 State of the Judiciary in San Diego County, 

https://www.sdcba.org/temp/ts_DAFFCDF9-BDB9-505B-DB71DEEC48C1B816DAFFCE09-BDB9-505BDF72E0368E012958/CFAC%20Annual%20Report-6-7-2013%5BRS%5D.pdf. 

23 Maura Dolan & Victoria Kim, Budget cuts to worsen California court delays, officials say, L.A. Times, July 20, 2011 (quoting 

Los Angeles County Superior Court Presiding Judge Lee Smalley Edmon), 

http://articles.latimes.com/2011/jul/20/local/la-me-0720-court-cuts-20110720.

24 Dolan, supra note 20. 

25 See Glaberson, supra note 14; see also Jennifer Golson, Budget Cuts have 'Widespread' Impact on NY State Courts-Report, 

Reuters, Aug. 16, 2011 (quoting Michael Miller of the New York County Lawyers’ Association).
Consumer Financial Protection Bureau

December 11, 2013

Page 11

Budget cuts led to “shortened hours” in the New York City courts that are a 

“hardship” for litigants—especially the “economically distressed and working poor 

people” who face “less flexibility in getting to the court.”26 

 In New Hampshire, all civil trials were delayed by a full year to “satisfy speedy 

trial concerns in criminal proceedings.”27 And the presiding judge of the San 

Francisco County Superior Court announced: “The civil justice system in San 

Francisco is collapsing. We will prioritize criminal, juvenile and other matters that 

must, by law, be adjudicated within time limits. Beyond that, justice will be neither 

swift nor accessible.”28 Indeed, even before recent budget cuts, the situation could be 

bleak for litigants. In 2003, for example, caseloads in Minnesota were so heavy that 

“judges had on average only 120 seconds of court time to spend on each case.”29

 Although the vast majority of civil claims are filed in state courts,30 the federal 

courts also have extraordinarily high caseloads, especially at the trial-court level, where 

the backlogs are particularly severe. 31 The Brennan Center for Justice has found that 

 

26 At a Standstill: Budget Cuts Have Brought New York’s Court System to a Crawl, NYPress.com, Dec. 5, 2012, 

http://nypress.com/at-a-standstill-budget-cuts-have-brought-new-yorks-court-system-to-a-crawl/. 

27 ABA Report, supra note 18; see also Karen Weise, U.S. Courts Face Backlogs and Layoffs, Bloomberg Businessweek, Apr. 

28, 2011, http://www.businessweek.com/magazine/content/11_19/b4227024878939.htm. 

28 See Dan Rivoli, California Trial Court To Lay Off 200, Close 25 Rooms, Law360.com, July 18, 2011 (quoting San Francisco 

County Superior Court Judge Katherine Feinstein), http://www.law360.com/legalindustry/articles/258746/calif-trialcourt-to-lay-off-200-close-25-rooms. 

29 Constitution Project, The Cost of Justice: Budgetary Threats to America’s Courts 6, 2006, 

http://www.constitutionproject.org/wp-content/uploads/2012/10/36.pdf (citing Minn. Sup. Ct. Chief Justice Kathleen 

A. Blatz, 2003 State of the Judiciary, Minn. State Bar Ass’n Annual Convention, June 20, 2003).

30 State courts reported around 19 million new civil cases filed in 2010, while federal courts reported over 280,000 new 

civil cases filed that same year. Compare National Center for State Courts, Court Statistics Project, Examining the Work of 

State Courts: An Analysis of 2010 State Court Caseloads 3, Dec. 2012, http://www.courtstatistics.org/Other-Pages/~/

media/Microsites/Files/CSP/DATA%20PDF/CSP_DEC.ashx (state courts in 2010), with Administrative Office of the 

U.S. Courts, Judicial Business of the U.S. Courts 2012, http://www.uscourts.gov/Statistics/JudicialBusiness/2012/usdistrict-courts.aspx (federal courts in 2010). 

31 Ruben Castillo, the Chief Judge of the Northern District of Illinois, said that budget constraints have created “a crisis” 

for U.S. district courts, and that he is essentially being asked: “Which limb do you want amputated?” Michael Tarm, New 

Hispanic Chief Judge: Need More Jury Diversity, Associated Press, July 2, 2013; see also Michelle R. Smith & Jesse J. Holland, 

Budget cuts cause delays, concern in federal court, Associated Press, April 25, 2013, http://bigstory.ap.org/article/budget-cutscause-delays-concern-federal-court (“Federal budget cuts have caused delays in at least one terror-related court case in 

New York and prompted a federal judge in Nebraska to say he is ‘seriously contemplating’ dismissing some criminal 

cases.”).
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“the number of pending cases per sitting judge reached an all-time high in 2009 and 

was higher in 2012 than at any point from 1992-2007. A judge in 1992 had an average 

of 388 pending cases on his or her docket. By 2012, the average caseload had jumped 

to 464 cases—a 20 percent increase.”32

 

A recent report by the New York County Lawyers’ Association noted that the 

two federal district courts covering New York City, the Southern and Eastern 

Districts of New York, “and other federal courts were hit with a 10% funding 

allocation below the Fiscal Year 2012 level.”33 Those constraints led to reductions in 

a wide range of court services, including staffing furloughs, “curtail[ing] [courts’] 

hours of operation,” and “slower processing of civil and bankruptcy cases.”34

Similarly, as a federal district judge in Massachusetts explained, “[n]ext year, with 

additional sequester cuts, I predict (but I’m not positive) that we will run out of 

money for civil juries before the end of the fiscal year. July, August, I’m not sure when 

but we will run out.”35 And just this year, the federal district court of the Central 

District of California “announced it [would] severely curtail services at its three 

courthouses on seven Fridays from April through [August 2013], accepting only 

mandatory and emergency filings.”36

 These delays can have serious consequences for plaintiffs. A lawyer in 

Washington state explained, for example, that his civil case was postponed for more 

than two years because criminal cases—which are subject to constitutional and 

statutory speedy-trial requirements—had priority. “During that period of time, the 

 

32 Alicia Bannon, Federal Judicial Vacancies: The Trial Courts 5, Brennan Ctr. for Justice, 2013, 

http://www.brennancenter.org/publication/federal-judicial-vacancies-trial-courts. 

33 New York County Lawyers’ Association, Report on the Continuing Effect of Judicial Budget Cuts on The U.S. District Courts for 

the Southern and Eastern Districts of New York 3, Sept. 4, 2013, 

http://www.nycla.org/siteFiles/Publications/Publications1637_0.pdf. 

34 Id. at 11. 

35 Andrew Cohen, How the Sequester is Holding Up Our Legal System, The Atlantic, July 12, 2013, http:// 

www.theatlantic.com/national/archive/2013/07/how-the-sequester-is-holding-up-our-legal-system/277704/. 

36 Budget Cuts Start to Hurt Courts, The BLT: The Blog of Legal Times, Mar. 29, 2013, 

http://legaltimes.typepad.com/blt/2013/03/budget-cuts-start-to-hurt-courts.html; see also Amended Notice Re Reduced 

Service Days, Central District of California, August 2013, http://www.cacd.uscourts.gov/news/amended-notice-rereduced-service-days. 
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defendant corporation ceased doing business and became insolvent; all assets were 

distributed to others and the judgment which was obtained became worthless.”37 

 Budget cuts have also forced courts to supplement their revenue by increasing 

fees. The Chief Justice of the Minnesota Supreme Court explained: “[A]s part of the 

effort to close the revenue gap, significantly increased fees were imposed on a wide 

variety of cases. As a result, it is going to cost more to go to court and to practice law 

in Minnesota. This is not what we wanted[.]”38

 Simply put, the situation for litigants in the underfunded and understaffed 

courts is grim; and because the trend is toward more cutbacks, the situation will likely 

get worse. 

B. Arbitration Provides A Fair And Effective Remedy For The Injured 

Consumers For Whom The Judicial System Is Not A Realistic 

Option. 

 Arbitration has a number of advantages over pursuing litigation in our 

overburdened court system. To begin with, arbitration offers flexible proceedings at 

lower cost. And arbitration proceedings are resolved more quickly than proceedings 

in court. 

 As we explain below, studies show that consumers who use this efficient 

dispute-resolution system prevail in arbitration at least as frequently as—and often 

more frequently than—they do in court. A wealth of scholarship comparing 

outcomes of consumers’ and employees’ claims in arbitration and in litigation reveals 

that arbitration provides a realistic and fair opportunity for individuals to seek justice 

before a neutral decisionmaker. “[F]rom the individual’s perspective, arbitration” has 

 

37 Constitution Project, supra note 29, at 8 (citing Washington Courts, Bd. for Judicial Admin., Court Funding Task 

Force, Justice in Jeopardy: The Court Funding Crisis in Washington State 36, 2004, 

http://www.courts.wa.gov/programs_orgs/pos_bja/wgFinal/wgFinal.pdf. 

38 Chief Justice Eric Magnuson, The State of the Judiciary: 2009 – Building a 21st Century Judiciary, Bench&Bar of Minn., Aug. 

1, 2009, http://mnbenchbar.com/2009/08/the-state-of-the-judiciary-building-a-21st-century-judiciary/. 
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the distinct advantage of “provid[ing] an affordable forum with superior chances for 

obtaining a favorable result.”39 

 Existing law, moreover, ensures the fairness and neutrality of arbitration 

proceedings. The Federal Arbitration Act allows states to regulate arbitration 

agreements under generally applicable state-law contract principles, including 

unconscionability. To that end, courts regularly refuse to enforce the small minority 

of arbitration agreements containing what they consider to be unfair provisions—

such as limitations on damages that would be available to individuals in court, 

inconvenient forum-selection rules, biased arbitrator-selection procedures, or 

prohibitively expensive costs of accessing an arbitral forum. 

In addition to courts’ oversight of arbitration provisions, the market has 

supplied arbitration procedures that are fair to all participants. The leading arbitration 

providers—such as the AAA and JAMS—have implemented rules and policies 

tailored for the resolution of consumers’ and employees’ disputes, which provide 

basic requirements of procedural fairness that provide strong protections for 

consumers and employers. And after the Supreme Court emphasized the fairness of 

the arbitration provision at issue in AT&T Mobility v. Concepcion,

40 many businesses 

have adopted similar pro-consumer provisions. 

1. Arbitration’s Flexibility and Lower Cost Makes it Much 

More Accessible than Courts. 

 Arbitration is much more user-friendly and inexpensive than litigating in court. 

“‘The advantages of arbitration are many: it is usually cheaper and faster than 

litigation; it can have simpler procedural and evidentiary rules; it normally minimizes 

hostility and is less disruptive of ongoing and future business dealings among the 

parties; it is often more flexible in regard to scheduling of times and places of hearings 

and discovery devices.’”41 

 

39 Peter B. Rutledge, Who Can Be Against Fairness? The Case Against the Arbitration Fairness Act, 9 Cardozo J. Conflict Resol. 

267, 279 (2008)

40 131 S. Ct. 1740 (2011). 

41 Allied-Bruce Terminix, 513 U.S. at 280 (quoting H.R. Rep. No.97-542, at 13 (1982), reprinted in 1982 U.S.C.C.A.N. 765, 

777); see also, e.g., AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1749 (2011) (“[T]he informality of arbitral 

proceedings is itself desirable, reducing the cost and increasing the speed of dispute resolution.”).
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 Under the consumer procedures of the American Arbitration Association, for 

example, consumers cannot be asked to pay more than $200 in total arbitration costs; 

businesses shoulder all remaining fees.42 By comparison, the cost of filing a civil suit 

in a federal district court has recently risen to $400 or more.43

 

 It is no wonder that Justice Ruth Bader Ginsburg has described the AAA’s and 

other providers’ consumer arbitration fee structures as “models for fair cost and fee 

allocation.”44 And studies have long found that in practice, a large percentage of 

individuals who bring claims in arbitration pay exactly nothing to pursue their claim—

no filing fees, no attorney fees.45 

 The costs of presenting a claim in arbitration, moreover, typically are far lower 

than litigating in court. Indeed, arbitration does not require a personal appearance to 

secure a judgment; claims can be adjudicated on the papers or on the basis of a 

telephone conference.46 Plaintiffs can submit the relevant documents and a commonsense statement of why they are entitled to relief, and can do so without a lawyer. 

There is no need to wait in line at night court or miss work, only to be forced to 

return another day if the court is unable to get through its docket. 

 Moreover, plaintiffs with more complicated claims may retain an attorney to 

assist them in presenting their case—but the cost is less because of the more informal 

nature of arbitration procedures. In addition, parties can (and often do) agree to 

include fee-shifting provisions in their arbitration agreements that make it less 

expensive to resolve disputes in arbitration. Consider the arbitration provision that 

 

42 Am. Arb. Ass’n (“AAA”), Costs of Arbitration (Including AAA Administrative Fees) 1, March 1, 2013, 

https://www.adr.org/cs/idcplg?IdcService=GET_FILE&dDocName=ADRSTAGE2009593&RevisionSelectionMetho

d=LatestReleased. 

43 Judicial Conference of the United States, District Courts Miscellaneous Fee Schedule (approving a $50 “administrative” filing 

fee on top of the previous $350 filing fee), available at http://www.uscourts.gov/FormsAndFees/Fees/District

CourtMiscellaneousFeeSchedule.aspx.

44 Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 95 (2000) (Ginsburg, J., concurring in part). 

45 Hill, 18 Ohio St. J. on Disp. Resol. at 802 (lower-income employees “paid no forum fees” in 61% of the cases studied; 

employees also paid no attorneys’ fees in 32% of the cases).

46 AAA, Consumer Related Disputes Supplementary Procedures 6, Mar. 1, 2013, 

https://www.adr.org/cs/idcplg?IdcService=GET_FILE&dDocName=ADRSTAGE2009997&RevisionSelectionMetho

d=LatestReleased. 
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the Supreme Court approved in Concepcion. As the Court then explained, the 

Concepcions’ claim was “most unlikely to go unresolved” because the arbitration 

provision at issue provided that AT&T would pay the Concepcions a minimum of 

$7,500 and twice their attorneys fees if they obtained an arbitration award “greater 

than AT&T’s last settlement offer.”47

 

 Finally, in contrast to the extreme delays that are typical of our overburdened 

state and federal courts, consumer arbitrations administered by the American 

Arbitration Association are typically resolved in four to six months—a huge 

improvement over the 25.7 months that pass before the average civil lawsuit in federal 

court first reaches trial (in those rare cases that make it to trial).48 (Even in 2001—

well before the recent rounds of cutbacks—a contract suit tried before a jury took 25 

months on average to reach judgment; but now that time frame won’t suffice even to 

begin a trial.49) Long delays are a sure-fire way of increasing the transaction costs of 

dispute resolution. 

 In short, arbitration gives consumers a practical and accessible way to pursue 

their disputes far more often than litigating in court would. 

 

47 AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1753 (2011) (noting that “aggrieved customers who filed claims 

would be ‘essentially guarantee[d] to be made whole,” and that “the District Court concluded that the Concepcions were 

better off under their arbitration agreement with AT&T than they would have been as participants in a class action”) 

(quoting Laster v. AT&T Mobility LLC, 584 F.3d 849, 856 n.9 (9th Cir. 2009)).

48 AAA, Analysis of the AAA’s Consumer Arbitration Caseload, 2007,

http://www.adr.org/aaa/ShowPDF?doc=ADRSTG_004325 (“AAA Caseload Analysis”); see also David Sherwyn et al., 

Assessing the Case for Employment Arbitration: A New Path for Empirical Research, 57 Stan. L. Rev. 1557, 1572-73 (2005) (“few 

dispute the assertion that arbitration is faster than litigation”); U.S. District Court—Judicial Caseload Profile (2012), 

http://www.uscourts.gov/Statistics/FederalCourtManagementStatistics.aspx. See also, e.g., Michael Delikat & Morris M. 

Kleiner, An Empirical Study of Dispute Resolution Mechanisms: Where do Plaintiffs Better Vindicate Their Rights?, 58 Disp. Resol. J. 

56, 58 (Nov. 2003 - Jan. 2004); reporting findings that arbitration was 33% faster than analogous litigation); see also 23-9 

Insurance Times, Apr. 29, 2003, http://www.insurancejournal.com/pdf/InsuranceTimes_20030429_39125.pdf; GAO 

Report to Congressional Requesters, Securities Arbitration: Actions Needed to Address Problem of Unpaid Awards 32 (June 

2000), http://www.gao.gov/archive/2000/gg00115.pdf (reporting that the few securities claims to reach a judgment in 

court took 1,151 days—or over 3 years—on average); FINRA, Dispute Resolution Statistics, Summary Arbitration Statistics 

October 2013 http://www.finra.org/arbitrationandmediation/finradisputeresolution/additionalresources/statistics/ 

(“FINRA Statistics”) (arbitration claims closed in 2013 through October were pending only 14.2 months on average).

49 Bureau of Justice Statistics, Contract Trials and Verdicts in Large Counties, 2001 2, Jan. 2005, 

http://www.bjs.gov/content/pub/pdf/ctvlc01.pdf. 
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Finally, arbitration is also attractive “from the company’s perspective” because 

it provides a process that is, on average, cheaper than litigation—resolving most 

consumer or employment complaints quickly and efficiently, to the consumers’ or 

employees’ satisfaction—while minimizing unnecessary transaction costs of in-court 

litigation.50

 

2. Consumers Prevail in Arbitration at Least as Frequently 

As—and Often More Frequently Than—They Do in Court. 

 The empirical research reveals that claimants who choose to arbitrate their 

claims against businesses are at least as likely—if not more likely—to prevail than 

those who proceed in court. 

 Data on win rates reveal that consumers and employees obtain relief to their 

satisfaction in a significant proportion of arbitrations. 

 A recent study by scholars Christopher Drahozal and Samantha Zyontz of 

claims filed with the American Arbitration Association found that consumers 

win relief 53.3% of the time.51 

○ Empirical studies that have sampled wide ranges of claims have similarly 

reported that plaintiffs win in state and federal court approximately 50% 

of the time.52

○ Drahozal and Zyontz also found that “[c]onsumer claimants who bring 

large claims tend to do better than consumers who bring smaller claims,” 

but that “[i]n both types of cases, the consumer claimant won some 

relief against the business more than half of the time.”53 

 

50 Maltby, 30 Wm. Mitchell L. Rev. at 317.

51 Drahozal & Zyontz, 25 Ohio St. J. on Disp. Resol. at 896-904. 

52 See, e.g., Theodore Eisenberg et al., Litigation Outcomes in State and Federal Courts: A Statistical Portrait, 19 Seattle U. L. 

Rev. 433, 437 (1996) (observing that in 1991-92, plaintiffs won 51% of jury trials in state court and 56% of jury trials in 

federal court, while in 1979-1993 plaintiffs won 50% of jury trials). 

53 Drahozal & Zyontz, 25 Ohio St. J. on Disp. Resol. at 898. 
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○ Prevailing consumer claimants were generally awarded between 42% and 

73% of the amount that they claimed—depending on whether they 

presented a large or small claim and on how the statistics were calculated 

(mean or median recovery). 

○ Claimants are able to win not only compensatory damages but also 

“other types of damages, including attorneys’ fees, punitive damages, and 

interest.”54 In particular, 63.1% of prevailing claimants who sought 

attorneys’ fees were awarded them.55

○ Moreover, although the study’s authors found a higher win rate (83.6%) 

for businesses that bring claims against consumers, they concluded that 

this result was attributed to the fact that “businesses tend to bring debt 

collection actions and other similar cases in which the likelihood of 

success [on the merits] for the business is high.”56 By contrast, 

consumers’ claims are “much less likely to involve liquidated amounts 

and more likely to be contested by businesses.”57

○ The study’s authors also examined the purported “repeat player” effect, 

in order to determine the effect on win rates for claimants who pursue 

arbitration against businesses that appeared in multiple arbitrations 

before the AAA. Significantly, the authors found that “consumer

claimants still recover some amount against both repeat[] and non-repeat 

businesses over half the time in the case file sample.”58 And when 

 

54 Id. at 902. 

55 This stands in marked distinction with the “American Rule” that governs attorney’s fees in court proceedings. Under 

that default rule—where not otherwise altered by statute or contract— “each side in civil litigation has ultimate 

responsibility for its own lawyer’s fees,” and the losing party does not “pay anything toward the winner’s 

representation.” Thomas D. Rowe, Jr., The Legal Theory of Attorney Fee Shifting: A Critical Overview, 1982 Duke L. J. 651, 

651. Although the American Rule is the norm in our courts, its effect on the parties’ incentives to litigate is distorted 

with respect to class actions, in which a court may award class counsel reasonable fees measured by the “lodestar” time 

cost of litigating the class action or by a percentage of the common fund or common benefits recovered for the class. See 

Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs’ Attorney’s Role in Class Action and Derivative Litigation: Economic 

Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1, 3-4 (1991). 

56 Drahozal & Zyontz, 25 Ohio St. J. on Disp. Resol. at 898. 

57 Id. at 901. 

58 Id. at 909. 
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consumer claimants “do prevail on their claim” against a repeat-player 

business, “they are awarded on average an almost identical percent of the 

amount claimed against repeat[] businesses (52.4%) as against non-repeat 

businesses (52.0%).”59 The authors concluded, too, that the minor 

discrepancy between those win rates “does not necessarily show 

arbitrator (or other) bias in favor of repeat businesses.” Rather, they 

explained, businesses that repeatedly arbitrate may be better at screening 

cases ahead of time, allowing them to “settle meritorious claims and 

arbitrate only weaker claims.”60 

 According to data released by the AAA about consumer claims resolved 

between January and August 2007, consumers obtained settlements (or 

otherwise withdrew their disputes from arbitration) in 60 percent of the cases 

that they brought against businesses and, in the remaining 40 percent, they 

prevailed roughly half (48 percent) of the time.61 

 Data released by the independent administrator of Kaiser Foundation Health 

Plan’s arbitration system revealed that nearly half of claimants obtained 

resolution to their satisfaction through settlement (44% of claimants in closed 

cases) or through an award to the claimant after a hearing (5%). “The average 

award was $362,161, the median was $258,913, and the range was from $8,550 

to $2,528,570.”62

 Critics of voluntary arbitration sometimes point to a report from the advocacy 

group Public Citizen as purported support for their assertions that arbitration is 

unfair. But the Public Citizen report shows the folly of examining outcomes in 

arbitration without comparing them to analogous outcomes in court. 

 

59 Id. at 912. 

60 Id. at 913.

61 See AAA Caseload Analysis, supra note 48. 

62 Office of the Independent Administrator of the Kaiser Foundation Health Plan Mandatory Arbitration System for 

Disputes with Health Plan Members, 2012 Annual Report ii-iii, 2013, http://www.oiakaiserarb.com/oia/Forms/2012%20Report.pdf. 
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○ Public Citizen examined data about claims in arbitration brought by 

creditors against consumer debtors, and concluded from a high win rate 

for creditors that arbitration is biased against consumers. But in creditor 

cases against consumer debtors, the consumer often does not appear and 

does not contest the claim, and is therefore liable either because he has 

defaulted or “because he owes the debt.”63

○ A more rigorous empirical study subsequently showed that “consumers 

fare better” in debt-collection arbitrations than in litigation in court.64 In 

particular, “creditors won some relief in 77.8 percent of the individual 

AAA debt collection arbitrations and either 64.1 percent or 85.2 percent 

of the AAA debt collection program arbitrations,” depending on how 

the research parameters were defined.65 By contrast, in contested court 

cases creditors won relief against consumers between 80% and 100% of 

the time, depending on the court. And consumers fared even worse in 

court when they did not contest the creditor’s claim—courts routinely 

award default judgments against consumers when they fail to show up. 66

 Professor Peter Rutledge of the University of Georgia has reviewed the 

empirical studies comparing arbitration and litigation, and concluded that “raw 

win rates, comparative win rates, comparative recoveries, and comparative 

recoveries relative to amounts claimed . . . do not support the claim that 

consumers and employees achieve inferior results in arbitration compared to 

litigation.”67 

 In short, consumers consistently achieve outcomes in arbitration that are 

comparable or superior to the outcomes in court. Although the Bureau is not directly 

 

63 Sarah Rudolph Cole & Theodore H. Frank, The Current State of Consumer Arbitration, 15 Disp. Resol. Mag. 30, 31 (Fall 

2008). 

64 Christopher R. Drahozal & Samantha Zyontz, Creditor Claims in Arbitration and in Court, 7 Hastings Bus. L.J. 77, 97 

(Winter 2011). 

65 Id. at 91.

66 Id. at 111-16 (Tables D.1-D.5) (comparing creditor claimant wins and consumer respondent wins, in cases without 

consumer responses). 

67 Peter B. Rutledge, Whither Arbitration?, 6 Geo. J.L. & Pub. Pol’y 549, 560 (Summer 2008). 
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concerned with the use of arbitration in the employment context, it is worth noting 

that studies of employment arbitration reach the same result: employees in arbitration 

do as well as, or better than, employees in court. For example: 

 A study of 186 plaintiffs who pursued employment arbitration in the securities 

industry concluded that employees who arbitrate were more likely to win their 

disputes than employees who litigate in federal court. The study compared the 

employees’ success rate in arbitration to that of 125 employees who litigated 

discrimination suits to a resolution in the Southern District of New York. The 

study found that 46% of those who arbitrated won, as compared to only 34% 

in litigation; the median monetary award in arbitration was higher; only 3.8% of 

the litigated cases studied ever reached a jury trial; and the arbitrations were 

resolved 33% faster than in court.68

 One study of 200 AAA employment awards concluded that low-income 

employees brought 43.5% of arbitration claims, most of which were low-value 

enough that the employees would not have been able to find an attorney willing 

to bring litigation on their behalf. These employees were often able to pursue 

their arbitrations without an attorney, and they won their arbitrations at the 

same rate as individuals with representation.69

 A later study of 261 AAA employment awards from the same period found 

that for higher-income employees, win rates in like cases in arbitration and 

litigation were essentially equal, as were median damages.70 The study 

attempted to compare “apples” to “apples” by considering separately cases that 

involved and those that did not involve discrimination claims. 71 With respect to 

 

68 Delikat & Kleiner, 58 Disp. Resol. J. at 58. 

69 Hill, 18 Ohio St. J. on Disp. Resol. at 785-88 (summarizing results of past studies by Lisa Bingham that lacked 

empirical evidence proving the existence of an alleged “repeat player” and “repeat arbitrator” effect). 

70 Theodore Eisenberg & Elizabeth Hill, Arbitration and Litigation of Employment Claims: An Empirical Comparison, 58 Disp. 

Resol. J. 44, 48, 50 (Nov. 2003-Jan. 2004). 

71 See id. at 49. Because prior research had shown that discrimination claimants “fare noticeably worse in litigation [in 

court] than other claimants” (id. at 48), and “civil-rights claims predominat[ed] in the trial group” sample of court cases 

(id. at 49), the study controlled for the makeup of the data set in court cases in order to draw meaningful comparisons. 

This control was aimed at ensuring that arbitration outcomes would not “look more pro-employee than they should 

simply based on the makeup of the sample.” Id. at 49. 
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discrimination and non-discrimination claims alike, the study found no 

statistically significant difference in the success rates of higher-income 

employees in arbitration and in litigation. For lower-income employees, the 

study did not attempt to draw comparisons between results in arbitration and 

in litigation, because lower-income employees appeared to lack meaningful 

access to the courts—and therefore could not bring a sufficient volume of 

court cases to provide a baseline for comparison.72

 Another separate study of the arbitration of employment-discrimination claims 

concluded that arbitration is “substantially fair to employees, including those 

employees at the lower end of the income scale,” with employees enjoying a 

win rate comparable to the win rate for employees proceeding in federal court.

73

 In 2004, the National Workrights Institute compiled all available employmentarbitration studies, and concluded that employees were almost 20% more likely 

to win in arbitration than in litigated employment cases. It also concluded that 

in almost half of employment arbitrations, employees were seeking redress for 

claims too small to support cost-effective litigation. Median awards received by 

plaintiffs were the same as in court, although the distorting effect of occasional 

large jury awards resulted in higher average recoveries in litigation.74

 

 Lewis Maltby, a noted employee advocate and current president of the National 

Workrights Institute, examined a variety of studies and statistics in 1998 and 

concluded that the litigation system was far less employee-friendly than 

commonly believed, and that the arbitration system is far more employeefriendly. Employees in arbitration in the 1993-1995 period won over 63% of 

their arbitrations, as compared to 14.9% of federal-district-court cases; as a 

group, employees also fared better in arbitration than in court in terms of 

 

72 Id. at 45, 47-48. 

73 See Elizabeth Hill, AAA Employment Arbitration: A Fair Forum at Low Cost, 58 Disp. Resol. J. 9, 13 (May/July 2003) 

(reporting employee win rate in arbitration of 43 percent); see also Eisenberg & Hill, 58 Disp. Resol. J. at 48 tbl. 1 

(reporting employee win rate in federal district court during the same time period was 36.4 percent). 

74 National Workrights Institute, Employment Arbitration: What Does the Data Show? (2004), 

https://web.archive.org/web/20090423052708/http://www.workrights.org/current/cd_arbitration.html. 
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damages received, compared to initial demands.75 In short, employees who 

arbitrate prevailed more often that employees who litigate. 

 As one study published in the Stanford Law Review explained in surveying the 

empirical research, “[w]hat seems clear from the results of these studies is that the 

assertions of many arbitration critics were either overstated or simply wrong.”76

There simply is no empirical support for the contention that arbitration leads to unfair 

or subpar outcomes when compared with litigation in our overcrowded court system. 

Rather, the overwhelming weight of the available evidence establishes reflects that 

arbitration allows consumers and employees to obtain redress faster, cheaper, and 

more effectively than they could in court. 

3. Existing Law Protects Consumers Against Unfair 

Arbitration Procedures and Biased Arbitrators. 

 Critics of arbitration sometimes claim that consumers are subjected to unfair 

arbitration procedures. But current law already contains clear and effective 

protections against unfair arbitration clauses, and state and federal courts consistently 

strike down those arbitration clauses that transgress those limits. 

State contract law has long recognized that “contracts of adhesion”—take-itor-leave it standard-form agreements that are essential to the efficient operation of 

our mass-market economy—can be unfair to consumers or employees in some 

circumstances. The unconscionability doctrine addresses this concern by empowering 

courts to invalidate contract provisions that are unfair to consumers or employees. 

Unconscionability standards apply to arbitration contracts. Section 2 of the 

Federal Arbitration Act empowers courts to exercise their authority to review 

arbitration agreements for compliance with generally-applicable state-law contract 

principles, including unconscionability. 

 Indeed, just last year in Marmet Health Care Center, Inc. v. Brown, the Court 

recognized that arbitration agreements may be invalidated under unconscionability 

 

75 Lewis Maltby, Private Justice: Employment Arbitration and Civil Rights, 30 Colum. Hum. Rts. L. Rev. 29 (Fall 1998). 

76 Sherwyn et al., 57 Stan. L. Rev. at 1567 (emphasis added).
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standards “that are not specific to arbitration.”77 (Of course, states cannot 

discriminate against arbitration contracts by subjecting them to different and harsher 

standards.) 

 Courts inquire into the fairness of arbitration provisions in the context of 

particular clauses and cases, but one thing is clear: when courts find arbitration 

provisions unfair to consumers or employees under generally applicable 

principles, they do not hesitate to invalidate the agreements. For example: 

 Courts invalidate contractual limits on damages that can be awarded by 

an arbitrator: Courts police arbitration agreements to ensure that consumers 

and employees retain their substantive rights in arbitration and can seek 

individual remedies in arbitration to the same extent as they could in court. 

o Thus, a Texas court struck down an arbitration provision that barred the 

consumers from recovering damages or attorneys’ fees under that state’s 

Deceptive Trade Practices—Consumer Protection Act.78 Another court 

refused to enforce an arbitration agreement that purported to limit 

damages to “actual and direct” damages, which would have had the 

effect of limiting individual remedies under the Home Ownership Equity 

Protection Act, 15 U.S.C. § 1639.79 Courts regularly refuse to enforce 

other damages limitations.80 

o Numerous courts have refused to enforce arbitration agreements that 

prevent an individual from recovering punitive damages. 81

 

77 132 S. Ct. 1201, 1204 (2012). 

78 Venture Cotton Coop. v. Freeman, 395 S.W.3d 272 (Tex. Ct. App. 2013). 

79 Mortg. Elec. Registration Sys., Inc. v. Abner, 260 S.W.3d 351, 352, 355 (Ky. Ct. App. 2008). 

80 See also Carll v. Terminix Int’l Co., 793 A.2d 921 (Pa. Super. Ct. 2002) (striking provision that barred consumers from 

recovering damages for personal injury); Stirlen v. Supercuts, Inc., 60 Cal. Rptr. 2d 138 (Ct. App. 1997) (striking arbitration 

agreement that barred all relief other than actual damages for breach-of-contract claims).

81 See, e.g., Alexander v. Anthony Int’l, L.P., 341 F.3d 256 (3d Cir. 2003); Woebse v. Health Care & Retirement Corp. of Am., 977 

So. 2d 630 (Fla. Dist. Ct. App. 2008). 
Consumer Financial Protection Bureau

December 11, 2013

Page 25

o In addition to these decisions, the Supreme Court recently explained that 

federal law would likely require invalidating “a provision in an arbitration 

agreement forbidding the assertion of certain [federal] statutory rights.”82 

 Courts reject requirements that arbitration take place in inconvenient 

locations: Courts carefully and closely scrutinize provisions that require 

consumers to arbitrate in a particular location. 

o A federal court in Oregon refused to enforce an agreement that would 

have required an Oregon consumer to travel to California to arbitrate a 

dispute concerning a debt-relief agreement, and a Virginia trial court 

struck down an arbitration provision as unconscionable in part because 

it required consumers who had bought used cars in Virginia to arbitrate 

their claims in Los Angeles.83 Many other courts have reached similar 

conclusions. 84 

 Courts strike down agreements with biased procedures for selecting the 

arbitrator: Courts invalidate arbitration provisions found to deprive 

consumers or employees of a fair opportunity to participate in the selection of 

an arbitrator. 

o The U.S. Court of Appeals for the Ninth Circuit recently held that an 

arbitration agreement was unconscionable and unenforceable when it 

“would always produce an arbitrator proposed by [the company] in 

employee-initiated arbitration[s],” and barred selection of “institutional 

arbitration administrators.”85

 

82 Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2310 (2013). 

83 See Willis v. Nationwide Debt Settlement Grp., 878 F. Supp. 2d 1208 (D. Or. 2012); Philyaw v. Platinum Enters., Inc., 54 Va. 

Cir. 364 (Va. Cir. Ct. Spotsylvania Cnty. 2001). 

84 See, e.g., College Park Pentecostal Holiness Church v. Gen. Steel Corp., 847 F. Supp. 2d 807 (D. Md. 2012) (travel from 

Maryland to Colorado); Hollins v. Debt Relief of Am., 479 F. Supp. 2d 1099 (D. Neb. 2007) (travel from Nebraska to 

Texas); Dominguez v. Finish Line, Inc., 439 F. Supp. 2d 688 (W.D. Tex. 2006) (severing provision that would have required 

Texas retail store manager to arbitrate in Indianapolis, Indiana); Swain v. Auto Servs., Inc., 128 S.W.3d 103, 108 (Mo. Ct. 

App. 2003) (severing provision that would have required Missouri consumer to arbitrate in Arkansas); Pinedo v. Premium 

Tobacco Stores, Inc., 102 Cal. Rptr. 2d 435 (Ct. App. 2000) (refusing to enforce agreement that would have required Los 

Angeles employee to travel to Oakland for arbitration). 

85 Chavarria v. Ralphs Grocery Co., 733 F.3d 916, 923-25 (9th Cir. 2013).
Consumer Financial Protection Bureau

December 11, 2013

Page 26

o The U.S. Court of Appeals for the Fourth Circuit struck down an 

arbitration agreement that gave the employer the sole right to create a list 

of arbitrators from whom the employee could then pick.86 And a federal 

district judge in California refused to enforce a provision that would 

have granted a company sole discretion to choose an “independent and 

qualified” arbitrator for its consumer disputes because (under the 

circumstances) there was no guarantee that the arbitrator would be 

neutral.87

 

 Contracts imposing excessive costs to access arbitration are struck 

down: The Supreme Court explained in Green-Tree Fin. Corp.-Ala. v. Randolph

that a party to an arbitration agreement may challenge enforcement of the 

agreement if the claimant would be required to pay excessive filing fees or 

arbitrator fees in order to arbitrate a claim.88 

o Since Randolph, courts have aggressively protected consumers and 

employees who show that they would be forced to bear excessive costs 

to access the arbitral forum.89 The Ninth Circuit, for example, recently 

refused to enforce an arbitration agreement that required the employee 

to pay an unrecoverable portion of the arbitrator’s fees “regardless of the 

merits of the claim.”90 And the Supreme Court reaffirmed in American 

Express v. Italian Colors that a challenge to an arbitration agreement might 

be successful if “filing and administrative fees attached to arbitration . . . 

 

86 Murray v. United Food & Commercial Workers Int’l Union, 289 F.3d 297 (4th Cir. 2002); see also Hooters of Am., Inc. v. Phillips, 

173 F.3d 933 (4th Cir. 1999). 

87 Newton v. American Debt Services, Inc., 854 F. Supp. 2d 712, 726 (N.D. Cal. 2012); see also Roberts v. Time Plus Payroll Servs., 

Inc., 2008 WL 376288 (E.D. Pa. Feb. 7, 2008) (refusing to enforce provision that would have given employer sole 

discretion to select arbitrator, and instead requiring parties to select arbitrator jointly); see also Missouri ex rel. Vincent v. 

Schneider, 194 S.W.3d 853 (Mo. 2006) (invalidating provision giving president of a local home-builder association sole 

discretion to pick arbitrator for disputes between local home-builders and home buyers). 

88 Randolph, 531 U.S. at 90-92.

89 See, e.g., Phillips v. Assocs. Home Equity Servs., Inc., 179 F. Supp. 2d 840 (N.D. Ill. 2001); Camacho v. Holiday Homes, Inc., 167 

F. Supp. 2d 892 (W.D. Va. 2001). 

90 Chavarria, 733 F.3d at 923-25.
Consumer Financial Protection Bureau

December 11, 2013

Page 27

are so high as to make access to the forum impracticable” for a 

plaintiff.91 

o Other courts have reached the same result under state unconscionability 

law.92

 Arbitration agreements subjecting consumers or employees to 

unreasonably shortened statutes of limitations are not enforced: For 

example, courts have rejected provisions in arbitration agreements that would 

have required employees to bring claims within six months.93

 

 Courts invalidate arbitration agreements with “loser pays” provisions: 

Courts also protect individuals against arbitration provisions requiring the 

“loser” of an arbitration to pay the full costs of the arbitration.94 And courts do 

not hesitate to invalidate provisions of arbitration agreements that purport to 

require the consumer to pay for all costs and expenses of the drafting party 

regardless of who wins.95 

 The vast majority of arbitration provisions do not exhibit these sorts of defects; 

and the clear trend has been for companies to make arbitration provisions ever more 

favorable to their customers and employees. But when courts find overreaching 

occurs—in the areas discussed above and many others as well—they have not 

hesitated to strike down the arbitration provisions. 

 

91 Am. Express Co., 133 S. Ct. at 2310-11.

92 See, e.g., Brunke v. Ohio State Home Servs., Inc., 2008 WL 4615578 (Ohio Ct. App. Oct. 20, 2008); Liebrand v. Brinker Rest. 

Corp., 2008 WL 2445544 (Cal. Ct. App. June 18, 2008); Murphy v. Mid-West Nat’l Life Ins. Co. of Tenn., 78 P.3d 766 (Idaho 

2003); 

93 See, e.g., Zaborowski v. MHN Gov’t Servs., Inc., 2013 WL 1363568 (N.D. Cal. Apr. 3, 2013); Adler v. Fred Lind Manor, 103 

P.3d 773 (Wash. 2004) (180 days); see also Gandee v. LDL Freedom Enters., Inc., 293 P.3d 1197 (Wash. 2013) (refusing to 

enforce arbitration agreement in debt-collection contract that required debtor to present claim within 30 days after 

dispute arose); Alexander, 341 F.3d at 256 (same, for an employee); Stirlen, 60 Cal. Rptr. 2d at 138 (rejecting provision 

that imposed shortened one-year statute of limitations). 

94 See Gandee, 293 P.3d at 1197; Alexander, 341 F.3d at 256; Sosa v. Paulos, 924 P.2d 357 (Utah 1996). 

95 See, e.g., In re Checking Account Overdraft Litig. MDL No. 2036, 485 F. App’x 403 (11th Cir. 2012); see also Samaniego v. 

Empire Today LLC, 140 Cal. Rptr. 3d 492 (Cal. Ct. App. 2012) (attorneys’ fees).
Consumer Financial Protection Bureau

December 11, 2013

Page 28

4. The Leading Arbitration Forums Provide Additional 

Fairness Protections. 

 The American Arbitration Association (AAA) and JAMS—the nation’s leading 

arbitration service providers—recognize that independence, due process, and 

reasonable costs to consumers are vital elements of a fair and accessible arbitration 

system. They therefore adhere to standards that establish basic requirements of 

procedural fairness that provide strong protections for consumers and employees. 

Those providers will not administer an arbitration unless the operative clause is 

consistent with standards for procedural fairness. 

 The not-for-profit AAA has served the public since 1926. With offices 

throughout the United States and around the world, it is among the largest providers 

of alternative dispute resolution.96 The AAA maintains a roster of over 7,500 

impartial arbitrators and mediators with differing areas of expertise and vast 

experience.97 Similarly, JAMS is another leading provider of alternative dispute –

resolution.98 JAMS resolves over 10,000 cases each year and maintains hearing 

locations worldwide.99 JAMS employs over 300 full-time exclusive neutrals, many of 

whom are retired judges and attorneys.100 

 Claim Initiation Is Simple and the Rules Are Fair. In order to initiate a 

claim under the AAA’s rules, a claimant must: (1) briefly explain the dispute; (2) 

list the names and addresses of the consumer and the business; (3) specify the 

amount of money involved; and (4) state what relief the claimant wants.101

 

96 AAA, Statement of Ethical Principles for the American Arbitration Association, an ADR Provider Organization, 

http://www.adr.org/aaa/faces/s/about/mission/ethicalprinciples?_afrLoop=224757641544354&_afrWindowMode=0

&_afrWindowId=null#%40%3F_afrWindowId%3Dnull%26_afrLoop%3D224757641544354%26_afrWindowMode%3

D0%26_adf.ctrl-state%3D1c22qa5a7n_18. 

97 Id.

98 JAMS, About JAMS, http://www.jamsadr.com/aboutus_overview/. 

99 Id. 

100 Id. 

101 AAA, Consumer Related Disputes, Supplementary Procedures, supra note 46. 
Consumer Financial Protection Bureau

December 11, 2013

Page 29

JAMS similarly requires simple, straightforward information from consumers 

who initiate disputes, and provides an easy-to-complete online form.102

 Financial Burden Largely Falls on Businesses, Not Consumers or 

Employees. Through its rules and fee schedules, AAA shifts most of the 

financial burden of arbitration to businesses and provides refunds of unused 

fees and unused other services to ease consumers’ financial burdens even 

further. For example, “[i]n cases before a single arbitrator, a nonrefundable 

filing fee capped in the amount of $200 is payable in full by the consumer when 

a claim is filed . . . [a] partially refundable fee in the amount of $1,500 is payable 

in full by the business . . .”103 Similarly, under JAMS rules, when a consumer 

initiates arbitration against the company, the consumer is required to pay only 

$250, and all other costs are left to the company.104 In other words, both 

organizations require companies to bear most of the burdens of consumer 

claims—without regard to who initiated the arbitration. 

 Consumers Play a Key Role in Selecting the Arbitrator. Arbitration 

providers screen and help appoint arbitrators, providing the parties with an 

equal role in selecting the arbitrators in individual proceedings. For example, 

the AAA provides parties seven days to submit any objections to the 

appointment of an arbitrator from a list provided by the AAA.105 Likewise, 

JAMS rules reaffirm that “consumer[s] must have a reasonable opportunity to 

participate in the process of choosing the arbitrator(s).”106

 Easy-to-Attend Hearings. For those individuals who want a hearing, the 

AAA gives the parties an opportunity to have an in-person hearing or, to make 

 

102 JAMS, Arbitration Forms, http://www.jamsadr.com/arbitration-forms/. 

103 AAA, Costs of Arbitration (Including AAA Administration Fees), 

https://www.adr.org/cs/idcplg?IdcService=GET_FILE&dDocName=ADRSTAGE2009593&RevisionSelectionMetho

d=LatestReleased. 

104 JAMS, JAMS Policy on Consumer Arbitrations Pursuant to Pre-Dispute Clauses Minimum Standards of Procedural Fairness, 

http://www.jamsadr.com/consumer-arbitration/. 

105 AAA, Consumer Related Disputes, Supplementary Procedures C-4, supra note 46. 

106 JAMS, supra note 104.
Consumer Financial Protection Bureau

December 11, 2013

Page 30

things easier and cheaper, parties may choose to participate by telephone.107

The JAMS rules also seek to provide individuals with easy service when it 

comes to hearings. Under the JAMS policy, “consumer[s] must have a right to 

an in-person hearing in his or her hometown area.”108

 Governed by Due Process Protocols. All the consumer protections in place 

at the AAA are driven by standards that set out basic requirements for 

procedural fairness. The AAA’s Consumer Due Process Protocol requires 

independent and impartial arbitrators, reasonable costs, convenient hearing 

locations, and remedies comparable to those available in court.109 The AAA will 

not administer a consumer arbitration unless the arbitration is consistent with 

the Due Process Protocol. 

 Likewise, JAMS will administer a pre-dispute arbitration clause between a 

company and a consumer only if the contract clause complies with “minimum 

standards of fairness.”110

5. Companies Increasingly Are Adopting Consumer-Friendly 

Arbitration Agreements. 

In the wake of the Supreme Court’s decision in Concepcion, an increasing 

number of arbitration agreements include consumer-friendly provisions modeled on 

the elements of the arbitration agreement upheld in that case.111

 Companies Shoulder the Costs Of Arbitration. These agreements include 

provisions making arbitration cost-free to consumers. For example: 

 

107 AAA, Consumer Related Disputes, Supplementary Procedures C-6, supra note 46.

108 JAMS, supra note 104.

109 AAA, Consumer Due Process Protocol, 

https://www.adr.org/cs/idcplg?IdcService=GET_FILE&dDocName=ADRSTG_005014&RevisionSelectionMethod=

LatestReleased. 

110 JAMS, supra note 104. 

111 Some of these examples were reported in Myriam Gilles, Killing Them With Kindness: Examining “Consumer-Friendly” 

Arbitration Agreements After AT&T Mobility v. Concepcion, 88 Notre Dame L. Rev. 825 (2012). The author of this study 

is an academic who has been largely critical of consumer arbitration.
Consumer Financial Protection Bureau

December 11, 2013

Page 31

Company Cost-Sharing Provision Website 

(last visited Dec. 10, 

2013)

Amazon.com “Payment of all filing, administration and 

arbitrator fees will be governed by the 

AAA’s rules. We will reimburse those fees 

for claims totaling less than $10,000 unless 

the arbitrator determines the claims are 

frivolous. Likewise, Amazon will not seek 

attorneys’ fees and costs in arbitration 

unless the arbitrator determines the claims 

are frivolous.”

http://www.amazon.c

om/gp/help/custome

r/display.html/?nodeI

d=508088

AT&T “For any non-frivolous claim that does not 

exceed $75,000, AT&T will pay all costs of 

arbitration.”

http://www.att.com/

disputeresolution

BMO Harris 

Bank

“For any non-frivolous Claim with a value 

of $75,000 or less, we will pay the filing, 

administration and arbitrator fees charged 

by the American Arbitration Association 

(also referred to in this provision as the 

‘AAA’) in connection with the arbitration.”

http://www.bmoharri

s.com/pdf/global/de

posit-agreement.pdf

Dell “Dell will be responsible for paying any 

individual consumer’s arbitration fees.”

http://www.dell.com/

learn/us/en/19/terms

-of-saleconsumer?c=us&l=en

&s=dhs&cs=19

Match.com “If your claim against Match.com is for less 

than $1,000, we will pay all fees.”

http://www.match.co

m/registration/arbitra

tionProcedures.aspx

Microsoft 

(Office 2013)

“Disputes Involving $75,000 or Less. 

Microsoft will promptly reimburse your 

filing fees and pay the AAA’s and 

arbitrator’s fees and expenses. If you reject 

Microsoft’s last written settlement offer 

made before the arbitrator was appointed . 

http://www.microsoft

.com/enus/legal/arbitration/o

ffice2013.aspx
Consumer Financial Protection Bureau

December 11, 2013

Page 32

Company Cost-Sharing Provision Website 

(last visited Dec. 10, 

2013)

. . , your dispute goes all the way to an 

arbitrator’s decision . . ., and the arbitrator 

awards you more than Microsoft’s last 

written offer, Microsoft will give you three 

incentives: (i) pay the greater of the award 

or $1,000; (ii) pay twice your reasonable 

attorney’s fees, if any; and (iii) reimburse 

any expenses (including expert witness 

fees and costs) that your attorney 

reasonably accrues for investigating, 

preparing, and pursuing your claim in 

arbitration. The arbitrator will determine 

the amount of fees, costs, and expenses 

unless you and Microsoft agree on them.”

Sprint “Sprint will pay for any filing or case 

management fees associated with the 

arbitration and the professional fees for the 

arbitrator’s services.”

http://shop2.sprint.co

m/en/legal/legal ter

ms privacy popup.sht

ml

 Expert and Other Costs of Proving Claims In Arbitration Can Be Shifted 

To Companies. In some very complex cases, it is possible that a consumer or 

employee might require an expert witness or even complex discovery in order to 

pursue a claim against a company. Many companies have adopted arbitration 

provisions that allow for such costs to be shifted to companies if the claimant 

prevails—even when the underlying law does not provide for such cost-shifting 

and cost-shifting therefore would not be available in a judicial lawsuit: 
Consumer Financial Protection Bureau

December 11, 2013

Page 33

Company Bounty Provision Website 

(last visited Dec. 10, 

2013)

American 

Express (e.g., 

Green Card)

“If the arbitrator rules in your favor for an 

amount greater than any final offer we 

made before arbitration, the arbitrator’s 

award will include: (1) any money to which 

you are entitled, but in no case less than 

$5,000; and (2) any reasonable attorney’s 

fees, costs and expert and other witness 

fees.”

https://web.aexpstatic.com/us/content

/pdf/cardmemberagreements/green/A

mericanExpressGreen

Card.pdf

AT&T “If, after finding in your favor in any 

respect on the merits of your claim, the 

arbitrator issues you an award that is 

greater than the value of AT&T’s last 

written settlement offer made before an 

arbitrator was selected, then AT&T will: 

 pay you the amount of the award or 

$10,000 . . . , whichever is greater; 

and

 pay your attorney, if any, twice the 

amount of attorneys’ fees, and 

reimburse any expenses (including 

expert witness fees and costs), that 

your attorney reasonably accrues for 

investigating, preparing, and 

pursuing your claim in arbitration....”

http://www.att.com/

disputeresolution

BMO Harris 

Bank

“If, after finding in your favor on the 

merits of your Claim(s), the arbitrator 

issues you an award that is greater than the 

value of our last written settlement offer 

made before an arbitrator was selected, 

then we will . . . pay you the amount of the 

award or $5,000, whichever is greater (the 

http://www.bmoharri

s.com/pdf/global/de

posit-agreement.pdf
Consumer Financial Protection Bureau

December 11, 2013

Page 34

Company Bounty Provision Website 

(last visited Dec. 10, 

2013)

“alternative payment”); and . . . pay your 

attorney, if any, the amount of attorney’s 

fees, and reimburse any expenses 

(including expert witness fees and costs 

reasonably necessary to prove your Claim), 

that your attorney reasonably incurs for 

investigating, preparing, and pursuing your 

Claim in arbitration (the ‘attorney 

payment’).” (Emphasis added).

Electronic 

Arts

“[I]f we cannot resolve our disputes 

informally and you are awarded a sum at 

arbitration greater than EA’s last settlement 

offer to you (if any), EA will pay you 150% 

of your arbitration award, up to $5000 over 

and above your arbitration award.”

http://tos.ea.com/leg

alapp/WEBTERMS/

US/en/PC/

Microsoft 

Xbox

“[If y]our dispute goes all the way to an 

arbitrator’s decision (called an ‘award’), and 

the arbitrator awards You more than 

Microsoft’s last written offer, Microsoft 

will give You three incentives: (i) pay the 

greater of the award or $1,000; (ii) pay 

twice Your reasonable attorney’s fees, if 

any; and (iii) reimburse any expenses 

(including expert witness fees and 

costs) that Your attorney reasonably 

accrues for investigating, preparing, and 

pursuing Your claim in arbitration.”

http://www.xb

ox.com/enUS/Legal/xbox

-live-contractterms
Consumer Financial Protection Bureau

December 11, 2013

Page 35

Company Bounty Provision Website 

(last visited Dec. 10, 

2013)

Sallie Mae 

(Bar Study 

Loan)

If: (i) I submit a Claim Notice in 

accordance with this paragraph on my own 

behalf (and not on behalf of any other 

party); (ii) you refuse to provide the relief I 

request; and (iii) an arbitrator subsequently 

determines that I was entitled to such relief 

(or greater relief), the arbitrator shall award 

me at least $5,100 (not including any 

arbitration fees and attorneys’ fees and 

costs to which I may be entitled under this 

Arbitration Agreement or applicable law).”

https://www.salliema

e.com/assets/product

s/library/app barstud

ystudentloancoborrow

er.pdf

Santander 

Bank

“If: (i) you submit a Claim Notice on your 

own behalf (and not on behalf of any other 

party) in accordance with subsection n, and 

you otherwise comply with subsection n 

(including its resolution and cooperation 

provisions); (ii) we refuse to provide you 

with the relief you request; and (iii) an 

arbitrator subsequently determines that you 

were entitled to such relief (or greater 

relief), the arbitrator shall award you at 

least $7,500 and will also require us to pay 

any other fees and costs to which you are 

entitled.”

https://dmob.santand

erbank.com/csdlv/Sat

ellite?blobcol=urldata

&blobheader=applicat

ion%2Fpdf&blobhead

ername1=ContentDisposition&blobhead

ervalue1=inline%3Bfil

ename%3DN3353 M

K0034 Sept2013 PD

AA+Agreement r4.pd

f&blobkey=id&blobta

ble=MungoBlobs&blo

bwhere=13549234093

19&ssbinary=true
Consumer Financial Protection Bureau

December 11, 2013

Page 36

Company Bounty Provision Website 

(last visited Dec. 10, 

2013)

Verizon “WE MAY . . . MAKE A WRITTEN 

SETTLEMENT OFFER ANYTIME 

BEFORE ARBITRATION BEGINS. . . . 

IF YOU DON’T ACCEPT THE OFFER 

AND THE ARBITRATOR AWARDS 

YOU AN AMOUNT OF MONEY 

THAT’S MORE THAN OUR OFFER 

BUT LESS THAN $5000, OR IF WE 

DON’T MAKE YOU AN OFFER, AND 

THE ARBITRATOR AWARDS YOU 

ANY AMOUNT OF MONEY BUT 

LESS THAN $5,000, THEN WE AGREE 

TO PAY YOU $5,000 INSTEAD OF 

THE AMOUNT AWARDED. IN THAT 

CASE WE ALSO AGREE TO PAY ANY 

REASONABLE ATTORNEYS’ FEES 

AND EXPENSES, REGARDLESS OF 

WHETHER THE LAW REQUIRES IT 

FOR YOUR CASE. IF THE 

ARBITRATOR AWARDS YOU MORE 

THAN $5000, THEN WE WILL PAY 

YOU THAT AMOUNT.”

http://www.verizonwi

reless.com/b2c/suppo

rt/customeragreement

 Arbitration Agreements Adopt Informal Procedures That Make It Easy 

For Claimants To Pursue Their Disputes. These agreements include provisions 

enabling consumers to choose whether the dispute should be resolved on the basis of 

a written submission, a telephonic hearing, or in-person proceedings. For example: 
Consumer Financial Protection Bureau

December 11, 2013

Page 37

Company Cost-Sharing Provision Website 

(last visited Dec. 10, 

2013)

AT&T “If your claim is for $10,000 or less, we 

agree that you may choose whether the 

arbitration will be conducted solely on the 

basis of documents submitted to the 

arbitrator, through a telephonic hearing, or 

by an in-person hearing as established by 

the AAA Rules.”

http://www.att.com/

disputeresolution

Match.com “If you are seeking less than $10,000, the 

arbitrator will decide the dispute based only 

upon the parties’ written submissions and, 

if requested by either party, a telephonic 

hearing. The parties may submit to the 

arbitrator written statements setting forth 

their positions no later than 30 days after 

the arbitrator’s appointment. Each party 

may also submit a rebuttal or supplemental 

statement within 10 days after initial 

statements are due. If a telephonic hearing 

is requested, it will occur within 45 days 

after the arbitrator’s appointment.”

http://www.match.co

m/registration/arbitra

tionProcedures.aspx

Netflix “If your claim is for US$10,000 or less, we 

agree that you may choose whether the 

arbitration will be conducted solely on the 

basis of documents submitted to the 

arbitrator, through a telephonic hearing, or 

by an in-person hearing as established by 

the AAA Rules..”

https://signup.netflix.

com/TermsOfUse
Consumer Financial Protection Bureau

December 11, 2013

Page 38

Company Cost-Sharing Provision Website 

(last visited Dec. 10, 

2013)

Skype “You may request a telephonic or inperson hearing by following the American 

Arbitration Association (“AAA”) rules. In 

a dispute involving $10,000 or less, any 

hearing will be telephonic unless the 

arbitrator finds good cause to hold an inperson hearing instead.”

http://download.micr

osoft.com/download/

6/6/5/6653B3EABD4F-4E48-900D4995146615B4/MoreArbitration-Termsfor-Skype.pdf

Ticketmaster “If your claim is for $10,000 or less, we 

agree that you may choose whether the 

arbitration will be conducted solely on the 

basis of documents submitted to the 

arbitrator, through a telephonic hearing, or 

by an in-person hearing as established by 

the JAMS Rules.”

https://m.concerts.liv

enation.com/ticket/p

ortal/article.do?offset

=27&site=tmus&page

=tmustandc&article=t

erms and conditions

1&type=BLOGENT

RY

6. Arbitration’s Transaction Cost Savings Lead to Lower Prices 

That Benefit Consumers. 

 In addition to these direct benefits from arbitration, consumers also benefit 

through the systematic reduction of litigation-related transaction costs, which lead to 

lower prices for products and services. 

 Businesses face a number of costs in bringing their products and services to 

market. In addition to labor, materials, infrastructure, and other costs of running a 

business, they must absorb the cost of litigating claims related to those products and 

services. Critically, the costs associated with litigation include not only settlements 

and judgments resolving meritorious claims brought by plaintiffs, but also the 

transaction costs of defending against all lawsuits, whether or not the plaintiff 

ultimately prevails on the claim. 
Consumer Financial Protection Bureau

December 11, 2013

Page 39

 The transaction costs associated with judicial litigation are much higher than 

those incurred in connection with arbitration, for the reasons already discussed. 

Although arbitration requires businesses to shoulder the costs related to payments to 

claimants—as shown above, claimants obtain the same or more in arbitration as in 

litigation—businesses can avoid the higher litigation costs associated with defending

claims in court. 

 That enables them to eliminate costs that otherwise would inflate the prices of 

their products or services. As scholars have noted, “companies . . . include arbitration 

clauses in their contracts to cut dispute resolution costs and produce savings that they 

may pass on to consumers through lower prices.”112

II. The Arguments Advanced By Those Seeking To Prohibit Or Regulate 

 Arbitration Agreements Are Meritless. 

 Notwithstanding the significant benefits that consumers obtain through 

arbitration, and the substantial protections in current law and practice against unfair 

arbitration procedures, some argue that arbitration should be prohibited or restricted 

in various ways. But the reasons they advance for prohibition or regulation simply do 

not hold up; and the consequence of their preferred approaches would be the 

elimination of arbitration agreements, which would deprive consumers of the very 

significant benefits of arbitration discussed above. 

 

A. Prohibiting Pre-Dispute Arbitration Agreements Would Eliminate 

Arbitration. 

 Some critics of arbitration recognize that a generalized attack on alternative 

dispute resolution flies in the face of ADR’s widespread acceptance, especially in light 

of our overcrowded and overwhelmed court system. To avoid a charge of overt 

hostility toward alternative dispute resolution, these opponents of arbitration instead 

frame their attack on “pre-dispute” arbitration agreements—that is, agreements to 

arbitrate any future disputes that might arise between the parties. 

 

112 Amy J. Schmitz, Building Bridges To Remedies For Consumers In International Econflicts, 34 U. Ark. Little Rock L. Rev. 779, 

779–80 (2012); accord, e.g., Bennett, 67 Disp. Resol. J. at 38 n.55; Stephen J. Ware, The Case for Enforcing Adhesive Arbitration 

Agreements—With Particular Consideration of Class Actions and Arbitration Fees, 5 J. Am. Arb. 251, 254–55 (2006). 
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 They assert that post-dispute arbitration agreements—reached after the dispute 

has already arisen113—will provide “a means of correcting the problems” they perceive 

to exist with arbitration.114 They assert that “if arbitration is indeed . . . desirable, it will 

readily be accepted by claimants in the post-dispute setting.”115

 But both the empirical research and leading scholarship on dispute resolution 

demonstrate that this argument is completely false. Notwithstanding the clear 

evidence that arbitration is fair, efficient, inexpensive, and good for consumers, 

business, and employees, the empirical evidence and academic consensus is that once 

a particular dispute arises, the opposing parties will rarely if ever agree to 

arbitration. Their unwillingness to do so has nothing whatsoever to do with 

the relative benefits or burdens of arbitration or litigation in court, and instead 

has everything to do with the practical burdens of administering dual systems 

and the tactical choices of lawyers in the context of particular cases. 

 The post-dispute arbitration agreement is thus an illusion in the consumer and 

employment contexts. Permitting only post-dispute arbitration agreements therefore 

would have the real-world consequence of banning arbitration, and depriving 

consumers of the benefits of arbitration discussed above. 

 First, “[p]ost-dispute agreements to arbitrate are extremely uncommon.”116 

One study found, for instance, that far less than 1% of employment disputes are 

resolved by post-dispute arbitration even when a responsible state agency organizes an 

arbitration program and routinely makes that program available to parties.

117 A second study 

found that at most “6% of all employment arbitration[s]” initiated before the 

 

113 Although post-dispute agreements to arbitration are often referred to simply as “post-dispute arbitration,” that label 

is obviously a misnomer. All arbitration is necessarily “post dispute”; otherwise, there would be nothing to arbitrate. For 

that reason, we avoid the term “post-dispute arbitration” except when quoting materials that use it. 

114 David Sherwyn, Because It Takes Two: Why Post-Dispute Voluntary Arbitration Programs Will Fail to Fix the Problems 

Associated with Employment Discrimination Law Adjudication, 24 Berkeley J. Emp. & Lab. L. 1, 30 (2003). 

115 Samuel Estreicher, Saturns for Rickshaws: The Stakes in the Debate over Predispute Employment Arbitration Agreements, 16 

Ohio St. J. on Disp. Resol. 559, 567 (2001) (describing detractors’ position and then explaining why it is wrong). 

Although Estreicher and several of the other authors cited below discuss arbitration in the employment context rather 

than in the consumer context, their conclusions apply equally to consumer claims.

116 Hamid & Mathieu, 74 Alb. L. Rev. at 785. 

117 See Sherwyn, 24 Berkeley J. Emp. & Lab. L. at 61-62.
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American Arbitration Association resulted “from post-dispute agreements,”118

notwithstanding that a substantial percentage of consumers—60 percent in 2012—

settle their claims in arbitration, and that over 45 percent of the consumers who 

proceed to an arbitral award receive damages.119

 

“[I]n all but the rarest cases,” therefore, post-dispute arbitration agreements 

“will not be offered by one party [and] accepted by the other.”120 Indeed, many 

employment and consumer contracts do not include pre-dispute arbitration clauses, 

yet parties to those contracts almost never agree to post-dispute arbitration.121 

 Second, a company that sets up an arbitration program incurs significant 

administrative costs in connection with carrying out arbitrations—costs that the 

company does not incur in connection with judicial litigation. For example, under the 

AAA’s Supplementary Procedures for consumer dispute resolution, filing fees are 

capped at $200 for consumer arbitration—the company must pay up to $1,500.122

And a company that promises to shift attorneys’ or even experts’ fees is likely to take 

on an uncertain but possibly enormous amount of transaction costs. 

 Companies are willing to incur these costs because, on average, the aggregate 

costs of resolving disputes in arbitration are lower than the aggregate costs of 

resolving disputes in litigation in court. And because the company does not know 

which consumers “will be claimants,” it is “likely to offer the [arbitration] program to 

broad categories of” consumers.123 

 

118 Maltby, 30 Wm. Mitchell L. Rev. at 314. 

119 See, e.g., FINRA Statistics, supra note 48 (50% of FINRA arbitrations closed in 2012 were resolved by direct 

settlement by the parties, another 10% were resolved by settlement via mediation, and 45% of cases decided by the 

arbitrator involved an award to the consumer); Cole & Frank, 15 Disp. Resol. Mag. at 32 (finding that consumers 

“obtained ‘favorable results’” in 80% of “consumer-initiated arbitration[s]”); see also supra note 51and accompanying text 

(consumers win relief in 53.3% of the cases they file in arbitrations before the American Arbitration Association). 

120 Estreicher, 16 Ohio St. J. on Disp. Resol. at 567; see also Peter B. Rutledge, Who Can Be Against Fairness? The Case 

Against the Arbitration Fairness Act, 9 Cardozo J. Conflict Resol. 267, 279 (2008). 

121 See Maltby, 30 Wm. Mitchell L. Rev. at 321 (employment contracts); Peter B. Rutledge & Christopher R. Drahozal, 

Contract and Choice, 2013 B.Y.U. L. Rev. 1, 16-18 & table 1 (2013) (credit card agreements); see also, e.g., Rutledge, 9 

Cardozo J. Conflict Resol. at 280 (noting that “an overwhelming majority of [lawyers] would advise their clients not to 

agree to postdispute arbitration”).

122 See supra note 103.

123 Estreicher, 16 Ohio St. J. on Disp. Resol. at 568. 
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 Well-run arbitration programs are expensive to develop and maintain, meaning 

that companies will offer them only if they cover most or all possible claims, because 

only then do they both afford economies of scale and meaningfully manage risk 

across the set of all potential claimants and claims (both of which are required in 

order to make consumer-friendly arbitration economically rational for companies). 

 For that reason, companies will be unwilling to adopt a two-track system of 

dispute resolution. Faced with the prospect of incurring significant incremental 

transaction costs in connection with setting up an effective, consumer-friendly 

arbitration system on one hand, and simultaneously dealing with the risk of the costs 

of litigating in court, any rational company will choose to minimize those transaction 

costs. And the only way to do that is to decide not to incur the voluntary incremental 

costs associated with maintaining an arbitration system, and simply relegate all 

disputes to the judicial system. 

 Third, less rational factors contribute to the unwillingness of parties to enter 

into even mutually beneficial post-dispute agreements to arbitrate. “Disputing parties 

often have an emotional investment in their respective positions,” meaning that “the 

calculus of litigation (higher cost, but with greater procedural protection) versus 

arbitration (generally lower cost, but more informal) may” shift after a dispute.124 One 

or both parties often feel certain—passionately so—that they are correct and have 

right, justice, and the law on their side; otherwise, the parties would likely have already 

settled the case. But that (irrational) certainty causes parties to hold out for multitiered court proceedings with layers of appellate review in the (usually vain) hope that, 

sooner or later, a court will come to see that they are right. Visceral dislike for the 

opposing side in a dispute—exacerbated by the adversarial nature of court 

proceedings—also plays a role, as “parties are loathe to agree to anything post-dispute 

when relationships sour.”125

 So, too, do the “falsely negative assumptions about 

arbitration” held by some consumers,126 not to mention by many lawyers whose 

default instincts are to trust the court system, no matter how slow, inefficient, and 

expensive it might be. 

 

124 Bennett, 67-Jul. Disp. Resol. J. at 37. 

125 Schmitz, 34 U. Ark. Little Rock L. Rev. at 785.

126 Id. Schmitz notes that despite this erroneous general perception, consumers who actually participate in arbitrations 

were “generally satisfied with [those] proceedings.” Id.
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 In addition, the lawyers for one or both sides may also be enticed by the feegenerating possibilities of prolonged in-court litigation and may therefore advise 

clients to choose a forum that is really in the lawyers’ own best interest rather than in 

that of the clients—especially in putative class actions, where named plaintiffs assert 

little control over the litigation and absent class members have no control 

whatsoever.127

 

 All relevant facts therefore point to only one conclusion: post-dispute 

arbitration agreements “amount to nothing more than a beguiling mirage.”128 They 

simply do not—and would not—happen. 

 A very significant reduction in access to justice would accordingly result from 

any attempt to foreclose pre-dispute arbitration agreements and to force consumers 

and companies into only a post-dispute choice between arbitration and litigation. 

Eliminating the option of pre-dispute arbitration agreements, and thereby eliminating 

any real possibility of arbitration of consumer claims, would “den[y]” most consumers 

“access to” any means of pursuing their claims.129 “[P]re-dispute agreements to 

arbitrate,” which preserve the consumer’s right to an affordable forum, accordingly 

represent the only real-world option for addressing this very significant gap in access 

to justice provided to consumers by the court system.130

B. Class Actions Provide Little Benefit To Consumers And Are Not 

Needed To Enable Consumers To Vindicate Their Rights 

Effectively; Requiring Class Procedures Would Harm Consumers 

By Depriving Them Of The Benefits Of Arbitration. 

 

127 See, e.g., Eric Goldman, The Irony of Class Action Litigation, 10 J. ON TELECOMM. & HIGH TECH. L. 309, 314 (2012) 

(“[C]lass action lawyers often advance their own financial interests at the expense of the class members’ interests.”).

128 St. Antoine, 41 U. Mich. J.L. Reform at 790; see also Hamid & Mathieu, 74 Alb. L. Rev. at 785; see also Rutledge, 9 

Cardozo J. Conflict Resol. at 280 (“[T]he infrequency of postdispute arbitration is . . . attributable to its structural 

defects.”).

129 Maltby, 30 Wm. Mitchell L. Rev. at 318; see also pages 5-12, supra. 

130 Theodore J. St. Antoine, Mandatory Employment Arbitration: Keeping It Fair, Keeping it Lawful, 60 Case W. Res. L. Rev. 

629, 636 (2010).
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 The principal attack on arbitration stems from the fact that virtually all 

arbitration agreements require that arbitration proceed on an individual basis and bar 

class procedures in arbitration and in court.131 The elimination of class actions, the 

argument goes, deprives consumers of a procedural mechanism that supposedly 

provides enormous benefits by allowing the vindication of small claims that 

(according to the argument) would be too expensive for plaintiffs to arbitrate 

individually. Therefore, the critics contend, arbitration should be prohibited or, at a 

minimum, waivers of class procedure should be banned. 

 In fact, the claims of class action proponents do not match the reality of class 

actions. A new empirical study of class actions that were filed in 2009 reveals that the 

overwhelming majority of class actions result in no recovery at all for members of 

the putative class. None of the class actions studied went to trial or otherwise 

resulted in a judgment on the merits for the class. The named plaintiff voluntarily 

dismissed about one-third of the cases studied, either because the plaintiff chose not 

to continue with the lawsuit or because he settled his own claim on an individual 

basis. Another third of the cases were dismissed by a court on the merits. And 

among the remaining consumer class actions that settle, most offer recoveries to class 

members that are so small in value—if they offer any monetary recovery at all—that 

few class members find it worth the effort to submit claims for payment. While 

information about claims rates are scarce, the evidence that does exist makes it clear 

that it is commonplace for fewer than 10 percent of consumers—and frequently one 

percent or less—to realize any tangible benefit from class actions in which their claims 

are released. 

 It would be irrational for any policymaker to rest a decision on the theoretical 

benefits of class actions when the real-world evidence shows that class actions 

provide little or no benefit, particularly in the consumer context. 

 Moreover, claimants can effectively vindicate in individual arbitration any 

claims that might be asserted through class actions. Many arbitration provisions 

require businesses to pay costs of filing claims, to pay incentive or bonus payments to 

encourage arbitration of small claims, or to shift the costs associated with proving 

 

131 In Concepcion, the Supreme Court concluded that the Federal Arbitration Act requires the enforcement of agreements 

to arbitrate on an individual rather than class-wide basis. 131 S. Ct. 1740 (2011). 
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claims. And a number of other means for obtaining economies of scale—such as 

sharing the costs of proof across a set of individual arbitrations—are not only 

authorized by most arbitration agreements, but provide a fully viable model of 

effective dispute resolution. 

 The alternatives—prohibiting arbitration altogether or requiring class 

procedures—would have the same result: elimination of arbitration, because 

companies would not be willing to incur both the incremental costs associated with 

an arbitration system and the very high litigation costs associated with class 

procedures. That will leave consumers without any means for vindicating the 

majority of injuries that they suffer—relatively small, individualized claims that 

cannot practically be asserted in court. Requiring that result to preserve the 

negligible benefits that class actions actually provide would be a very bad deal 

for consumers, and for our economy as a whole. 

1. Class Actions Provide Little or No Real Benefit to 

Consumers. 

 Proponents of class-action litigation argue that the class device is an effective 

way for injured individuals to seek recoveries because (in theory) it allows for lawyers 

to take advantage of economies of scale in representing large numbers of claimants. 

The reality of class actions falls far short of this promise—these actions actually 

deliver little or no relief to consumers. Lawyers, both plaintiff’s lawyers and 

defense lawyers, are the principal beneficiaries of these claims. 

 Although the debate about class action has relied on competing anecdotes, we 

commissioned an empirical analysis of class actions by Mayer Brown LLP. That 

study, which examined a sample set of putative consumer and employee class action 

lawsuits filed in or removed to federal court in 2009, is attached to this letter.132 The 

study revealed: 

 In the entire data set, not one of the class actions ended in a final 

judgment on the merits for the plaintiffs. And none of the class actions 

went to trial, either before a judge or a jury. 

 

132 For information about the methodology, see Appendix C to the study. 
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 The vast majority of cases produced no benefits to most members of the 

putative class—class—even though in a number of those cases the 

lawyers who sought to represent the class often enriched themselves in the 

process (and the lawyers representing the defendants always did). 

o Approximately 14 percent of all class action cases remained 

pending four years after they were filed, without resolution or 

even a determination of whether the case could go forward on a 

class-wide basis. In these cases, class members have not yet received 

any benefits—and likely will never receive any, based on the 

disposition of the other cases we studied. 

o Over one-third (35%) of the class actions that have been 

resolved were dismissed voluntarily by the plaintiff. Many of 

these cases settled on an individual basis, meaning a payout to the 

individual named plaintiff and the lawyers who brought the suit—

even though the class members receive nothing. Information 

about who receives what in such settlements typically isn’t publicly 

available. 

o Just under one-third (31%) of the class actions that have been 

resolved were dismissed by a court on the merits—again, 

meaning that class members received nothing. 

 One-third (33%) of resolved cases were settled on a class basis. 

o This settlement rate is half the average for federal court 

litigation, meaning that a class member is far less likely to have even 

a chance of obtaining relief than the average party suing individually. 

o For those cases that do settle, there is often little or no benefit 

for class members. 

o What is more, few class members ever even see those paltry 

benefits—particularly in consumer class actions. Unfortunately, 
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because information regarding the distribution of class action 

settlements is rarely available, the public almost never learns what 

percentage of a settlement is actually paid to class members. But of 

the six cases in our data set for which settlement distribution data 

was public, five delivered funds to only miniscule percentages of 

the class: 0.000006%, 0.33%, 1.5%, 9.66%, and 12%. Those results 

are consistent with other available information about settlement 

distribution in consumer class actions. 

o Although some cases provide for automatic distribution of benefits 

to class members, automatic distribution almost never is used in 

consumer class actions—only one of the 40 settled cases fell into this 

category. 

o Some class actions are settled without even the potential for a 

monetary payment to class members, with the settlement agreement 

providing for payment to a charity or injunctive relief that, in 

virtually every case, provides no real benefit to class members. 

 In short, class actions do not provide class members with anything close 

to the benefits claimed by their proponents, although they can (and do) enrich 

attorneys—both on the plaintiffs’ and defense side. 

 The lesson that should be taken from this study: Policymakers who are 

considering the efficacy of class actions cannot simply rest on a theoretical assessment 

of class actions or on a handful of favorable anecdotes to justify the value of class 

actions. Any decision-maker who assumes that class actions are valuable to 

consumers would have to engage in significant additional empirical research to 

conclude—contrary to what this study indicates—that class actions actually do 

provide significant benefits to consumers. 

2. Consumers Can Effectively Vindicate Even Small Claims In 

Arbitration Without Class Procedures. 
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The contention that class procedures are essential to permit vindication of 

small claims was specifically rejected by both the majority and the dissent in 

the Supreme Court’s recent decision in American Express Co. v. Italian Colors 

Restaurant.

133

 The dissenting opinion, joined by Justices who also dissented in the 

Concepcion case, specifically identified several different ways in which consumers could 

effectively vindicate even small claims in arbitration without the use of class action 

procedures: 

In this case, . . . the [arbitration] agreement could have 

prohibited class arbitration without offending the effectivevindication rule if it had provided an alternative mechanism 

to share, shift or reduce the necessary costs. The 

agreement’s problem is that it bars not just class actions, 

but also all mechanisms . . . for joinder or consolidation of 

claims, informal coordination among individual claimants, 

or amelioration of arbitral expenses.134 

 In enforcing the arbitration agreement in Concepcion, the Supreme Court 

referenced the lower courts’ finding that consumers would be better off in an 

individual arbitration under the agreement’s provisions than in a class action.135 The 

American Express dissent also identified that procedure as one that permitted the 

effective vindication of small claims through individual arbitration. 

 The arbitration provision that the Supreme Court viewed favorably in Concepcion

contains both (i) incentive/bonus payments designed to encourage the pursuit of 

small claims, and (ii) the shifting of expert witness costs and attorneys’ fees to 

defendants when the consumer or employee prevails on his or her claim. If a 

consumer obtains an arbitral award that is greater than the company’s last settlement 

offer, he or she will receive a minimum recovery of $10,000 plus twice the amount of 

attorneys’ fees that his or her counsel incurred for bringing the arbitration. In 

 

133 133 S. Ct. 2304 (2013). 

134 Id. at 2318 (Kagan, J., dissenting). The majority disagreed with the dissent’s claim that the agreement at issue in that 

case barred informal coordination among individual claimants. Id. at 2311 n.4. 

135 Concepcion, 131 S. Ct. at 1753. 
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addition, the company is required to reimburse such a customer for reasonable expert 

witness fees. 

 As the dissenters in American Express explained, any concerns about whether 

individuals can vindicate their small claims in arbitration without the class-device are 

eliminated when an arbitration provision “provide[s] an alternative mechanism to . . . 

shift . . . the necessary costs.”136 A significant number of companies have adopted 

bonus/cost-shifting approaches similar to the one approved by the Court in 

Concepcion. The tables at pages 28-34 reflect only a sampling of these arbitration 

provisions. 

 The American Express dissenters further stated that the concern about cost 

could be addressed through “informal coordination among individual claimants” 

to share the same lawyer, expert, and other elements required to prove the claim.137

For example, an entrepreneurial plaintiffs’ lawyer can recruit large numbers of clients 

(via the internet, social media, or other similar means), file thousands of individual 

arbitration demands on behalf of those clients, and distribute common costs over all 

those claimants, making the costs for expert witnesses and fact development 

negligible on a per-claimant basis. 

 Given the low cost, efficiency, and fairness of arbitration, it is no surprise that 

some plaintiffs’ lawyers are already beginning to recognize that pursuing multiple 

individual arbitrations (or small-claims actions) is an economically viable business 

model—especially in view of the ability to reach multiple, similarly situated individuals 

using websites and social media.138 Indeed, this strategy for spreading fixed litigation 

costs is an increasingly common means of pursuing disputes in arbitration. 

 Counsel for the plaintiffs in American Express indicated at a Practicing Law 

Institute program that if the Supreme Court compelled arbitration the plaintiffs 

 

136 Am. Express, 133 S. Ct. at 2318 (Kagan, J., dissenting). 

137 Id. (emphasis added). The dissent concluded that the American Express arbitration agreement prohibited such costsharing, but the majority disagreed, and American Express specifically conceded before the Supreme Court that costs 

could be shared in this manner. See id. at 2311 n.4 (majority).

138 See Carolyn Whetzel & Jessie Kokrda Kamens, Opt Out’s Use of Social Media Against Honda in Small Claims Win Possible 

“Game Changer,” Bloomberg BNA Class Action Litig. Rep. (Feb. 10, 2012). 
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could, and would, pursue their claims through individual arbitrations by using 

this cost-spreading approach.139

 A plaintiff filed a putative class action alleging that AT&T improperly measures 

the amount of data used by so-called smart devices such as iPhones and iPads, 

thereby supposedly causing customers to pay more for data usage than they 

otherwise would. The district court, following the Supreme Court’s holding in 

Concepcion, compelled the plaintiff to arbitrate in accordance with his arbitration 

agreement.140 Subsequently, counsel for that plaintiff filed separate demands 

for arbitration on behalf of more than 1,000 claimants—each making virtually 

identical allegations and relying on the same expert witness whom the original 

plaintiff had proffered in support of a class-action lawsuit. 

 The Internet and social media have made it easier than ever for aggrieved 

consumers to find each other. One lawyer “set up a website to recruit 

plaintiffs” to bring multiple small-claims cases alleging marketing of credit 

information.141 Similarly, a former lawyer who sued an automaker in smallclaims court after opting out of a class action set up a website along with 

profiles on Twitter and Facebook and a video on YouTube to publicize her 

case. She was as a result “contacted by hundreds of other car owners seeking 

guidance in how to file small claims suits if they opted out of” the class 

action.142

 Following the American Express ruling, a member of a leading plaintiffs’ firm 

recognized this new approach: “I think you’ll continue to see firms like mine 

move into arbitration. If what large corporations want is to have thousands or 

 

139 See Gary B. Friedman & Andrew J. Pincus, “Arbitration,” Consumer Financial Services Institute 2013, Practicing Law 

Institute (Apr. 23, 2013), available at

http://www.pli.edu/Content/OnDemand/Consumer_Financial_Services_Institute_2013/_/N4nZ1z12p2h?fromsearch=false&ID=158662 (video). 

140 See Hendricks v. AT&T Mobility LLC, 823 F. Supp. 2d 1015 (N.D. Cal. 2011). 

141 See Sara Foley & Jessica Savage, Court Filings Boost Revenue, Corpus Christi Caller Times, Nov. 27, 2010, 

http://www.caller.com/news/2010/nov/27/court-filings-boost-revenue/

142 See Linda Deutsch, Honda Loses Small-Claims Suit Over Hybrid MPG, Associated Press, Feb. 1, 2012, 

http://www.msnbc.msn.com/id/46228337.ns/business-autos/t/honda-loses-small-claims-suit-over-hybrid-mpg/ 
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tens of thousands of individual arbitrations as opposed to class actions ... then 

that’s the direction we’ll go in. It’s a bit of ‘be careful what you ask for.’”143

 At oral argument in American Express, Chief Justice John Roberts suggested that 

plaintiffs could use the resources of a common interest group, such as a smallmerchant trade organization, to “get together and say we want to prepare an 

antitrust expert report” that could be used in each of the subsequent 

arbitrations.144

 In other contexts, the pooling approach has helped plaintiffs lower their 

individual costs. As one study noted, “[a]n example of how such coordination 

can work is the large number of individual actions filed in litigation by common 

counsel for alleged violations of the Fair Debt Collection Practices Act, often 

against the same defendant.”145 In no small part because the fixed costs of 

proving a claim against the same defendant may be spread across many 

plaintiffs—and because attorneys’ fees are provided by statute146—one 

newspaper reported that “[h]igh-volume consumer law firms are churning out 

[FDCPA] lawsuits as efficiently as the collectors they battle.”147

 In short, consumers, employees, and other potential plaintiffs have a wide array 

of tools for developing litigation resources and strategy that can be leveraged across a 

number of individual arbitrations. Social media and other technological innovations 

make it easier than ever for people who have common grievances to find each other 

and utilize common resources. 

 

143 Melissa Lipman, Plaintiff’s Lawyers Still Hopeful After AmEx Ruling, LAW360 (June 21, 2013), online at 

http://www.law360.com/articles/452294/plaintiffs-lawyers-still-hopeful-after-amex-ruling (quoting Jonathan Selbin). 

144 Oral Argument at 20-21, Am. Express v. Italian Colors Restaurant, 133 S. Ct. 2304 (No. 12-133), 

http://www.supremecourt.gov/oral_arguments/argument_transcripts/12-133.pdf. 

145 Gregory C. Cook, Why American Express v. Italian Colors Does Not Matter and Coordinated Pursuit of Aggregate Claims 

May Be a Viable Option After Concepcion, 2 Mich. J. L. Reform Online, Apr. 14, 2013, 

http://www.mjlr.org/2013/04/why-american-express-v-italian-colors-does-not-matter-and-coordinated-pursuit-ofaggregate-claims-may-be-a-viable-option-after-concepcion/#fnref-2132-14 (footnote omitted). 

146 Id. (citing 15 U.S.C. § 1692k).

147 Chris Serres, Debtors in Court—Suing Collectors, Minn. Star-Trib., Mar. 17, 2011, 

http://www.startribune.com/investigators/99676349.html?refer=y. 
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What is more, there are other ways in which consumers’ rights can be 

vindicated. The Bureau itself can “commence a civil action . . . to impose a civil 

penalty or to seek all appropriate legal and equitable relief” with respect to a 

“violat[ion of] a Federal consumer financial law,”148 which will allow the agency to 

pursue claims that are properly within the reach of its enforcement authority. And the 

Bureau has recently issued notice of a proposed Final Rule for its Civil Penalty Fund, 

which collects penalties imposed in enforcement actions, designating “the conditions 

under which victims” of Federal consumer financial law violations “will be eligible for 

payment . . . and the amounts of payments that the Bureau may make to them.”149

The Bureau could use its enforcement authority to seek to vindicate consumers’ 

rights, and the Civil Penalty Fund could be used to augment the opportunity that 

arbitration provides for consumers to pursue relief. Other federal and state agencies 

similarly possess a wide range of enforcement authority that can be brought to bear in 

appropriate circumstances.. 

 In short, there are multiple alternatives to private class action lawsuits in court 

brought by entrepreneurial plaintiffs’ attorneys; these alternatives afford individual 

consumers actual opportunities to pursue their disputes or otherwise vindicate their 

rights—in sharp contrast to the false promise of private class actions. 

3. Consumer Class Actions Do Not Deter Future 

Wrongdoing—Deterrence Comes From the Threat of 

Government Enforcement. 

 Deterrence theory holds that a party will not engage in wrongdoing if the party 

believes that it will incur costs for acting wrongfully that it will not incur if it complies 

with the law. If those costs are incurred without regard to the wrongfulness of the 

underlying conduct, there is no such deterrent effect.150 That is the precise flaw in the 

private class action system. 

 

148 12 U.S.C. § 5564(a). 

149 Consumer Financial Civil Penalty Fund, 78 Fed. Reg. 26545, 26546 (2013).

150 For an analogous discussion of how a failure to distinguish adequately between the culpable and the innocent dilutes 

the deterrent effect of sanctions in the criminal-law context, see A. Mitchell Polinsky & Steven Shavell, The Theory of 

Public Enforcement of Law, in 1 Handbook of Law and Economics 403, 427-29 (A. Mitchell Polinsky & Steven Shavell eds., 

2007). 
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Plaintiffs’ attorneys have little incentive to choose cases based on the merits of 

the underlying claims—the merits question will never be reached, as the empirical data 

demonstrates. The plaintiffs’ lawyer’s goal, rather, is to find a claim for which the 

complaint can withstand a motion to dismiss and that can satisfy the (legitimately) 

high hurdles for class certification—standards that do not embody an assessment of 

the underlying merit of the claim. 

 Once a class is certified, settlement virtually always follows, driven by the 

transaction costs (including e-discovery) that such actions impose—which again have 

little or no correlation to the underlying merits of the case. The class action thus does 

not impose burdens only on businesses that engage in wrongful conduct. Instead, the 

burdens of class actions are chiefly a function of who plaintiffs’ lawyers choose to sue 

rather than who has engaged in actual wrongdoing. The threat of a class action 

therefore cannot—and does not—generally deter wrongful conduct.151

 Businesses are far more likely to be deterred from wrongdoing by the 

reputational consequences of engaging in improper behavior, especially because 

reputational harm is often directly correlated to a business’s success or failure. 

Especially in an age of social media, consumer complaints can quickly go viral, 

impacting companies immediately and directly leading to changes in practices that 

garner consumer opposition. Class actions, by contrast, do nothing of the sort. 

 In sum, deterrence concerns provide no justification for maintaining the 

availability of private class actions.152 

 

151 Indeed, to the extent there is any effect associated with class actions, it is likely to deter both lawful and unlawful 

actions equally—requiring companies to take into account the risk of litigation costs without regard to the legality of the 

underlying action. 

152 Nor should arbitration be restricted or prohibited because—as some critics of arbitration sometimes contend—

arbitration reduces publicly-available precedent. Most court cases are resolved by settlement, and virtually all class 

actions are settled; these cases offer no real guidance to other parties about what conduct will subject them to or insulate 

them from a future lawsuit. And most individual consumer cases brought in arbitration could not practically be litigated 

in court—and therefore would not produce precedent if arbitration did not exist. 

Consumer arbitration does not permit companies to conceal their wrongdoing, however. California, the District of 

Columbia, and several other states have required arbitration providers to publish information about the disposition of 

arbitration cases. And we are not aware of any arbitration agreement that prohibits a consumer from disclosing the 

substance of a claim asserted in arbitration and the disposition of that claim. (Arbitration proceedings themselves—the 

filings of the parties and any oral presentations—are confidential, but that restriction does not preclude parties from 

publicly discussing the nature of the claims and how they were decided.) 
Consumer Financial Protection Bureau

December 11, 2013

Page 54

4. Requiring Class Procedures Would Eliminate Arbitration 

and Deprive Consumers of Arbitration’s Significant Benefits.

 Based on the erroneous assumption that class-wide procedures are necessary to 

vindicate small-value claims, some critics of arbitration have urged that arbitration 

agreements should be required to permit either class-wide arbitration or the filing of 

class actions in court. Like the argument in favor of permitting only “post-dispute 

arbitration agreements,” however, this contention—if accepted—would eliminate 

consumer arbitration. 

 As explained above,153 a company that sets up an arbitration program incurs 

significant administrative costs—which they are willing to absorb because, on average, 

the aggregate costs of resolving disputes in arbitration are lower than the aggregate 

costs of resolving disputes in litigation in court. 

 If faced with the prospect of incurring significant incremental transaction costs 

in connection with setting up an effective, consumer-friendly arbitration system on 

one hand, and simultaneously dealing with the huge costs of litigating class actions in 

court, all rational companies will choose to minimize those transaction costs.154 And 

the only way to do that is to decide not to incur the voluntary incremental costs 

 

153 See supra pages 37-38. 

154 Indeed, class actions impose particularly large litigation costs unrelated to the merits of the underlying claims. 

According to a survey of general counsel or senior litigation officers of over 300 companies conducted by Carlton Fields, 

corporations spend more than $2 billion annually on class action lawsuits. Carlton Fields, The 2013 Carlton Fields Class 

Action Survey: Best Practices in Reducing Cost and Managing Risk in Class Action Litigation 37 (2013), 

http://www.carltonfields.com/files/uploads/Carlton-Fields-Class-Action-Report-2013-electronic.pdf (compiling 368 

“in-depth interviews with general counsel, chief legal officers, and direct reports to general counsel”). In the modern 

business world, many class actions that are litigated past the pleading stage impose extraordinarily burdensome ediscovery costs, as plaintiffs’ lawyers demand e-mails and other electronic files from dozens, if not more, company 

employees. In fact, a defendant business generally bears the brunt of discovery costs, which can amount to many 

millions of dollars. 

Thus, a recent study by the RAND Institute for Civil Justice of discovery costs in a representative sample of cases found 

the cost-per-case for producing electronically-stored information ranged from $17,000 to $27 million, with a median cost of 

$1.8 million per case. Nicholas M. Pace & Laura Zakaras, Where the Money Goes: Understanding Litigant Expenditures for 

Producing Electronic Discovery at 17 (RAND Institute for Civil Justice 2012). Class actions obviously would fall at the upper 

end of that range. 

Requiring companies to continue to face these costs would eliminate the transaction cost savings produced by 

arbitration—with “arbitration plus class actions” a much more costly system than “court litigation alone,” companies 

would chose court litigation. Ware, 5 J. Am. Arb. at 291. 
Consumer Financial Protection Bureau

December 11, 2013

Page 55

associated with maintaining an arbitration system, and simply relegate all disputes to 

the judicial system.155 Indeed, many companies have publicly stated that they would 

abandon arbitration entirely if the class-action waivers contained in their arbitration 

agreements are rendered unenforceable. 

* * * * *

 Although the proponents of class actions argue that these lawsuits provide a 

practical mechanism for vindication of consumers’ small-value claims, the real-world 

evidence demonstrates that they do not. As the study of class actions filed in 2009 

reveals, few members of putative classes ever see any recovery in a class action; even 

in those cases that settle, individuals are usually offered small recoveries, and evidently 

few class members find it worth their while to submit claims for such paltry payouts. 

Other settlements offer “benefits”—such as injunctive relief or donations to 

charities—that in fact have little value to individuals. 

 Although the value of class actions is premised on the economies of scale that 

may be reached by aggregating low-value claims, achieving those economies does not 

require slow and costly class-wide proceedings in court. Rather, there are a number of 

ways for individual claimants to economize on the costs of proving their claims in 

individual arbitration proceedings. And individual arbitration proceedings are 

consistent with the deterrent purposes of litigation and the need for fairness to all 

parties. 

 In sum, class-wide proceedings do not deliver on the promises that their 

proponents have made. Conditioning the enforcement of arbitration proceedings on 

requiring class proceedings will harm consumers by eliminating arbitration and 

relegating them to a judicial system that completely precludes litigation of the 

 

155 Class arbitration is an irrational choice for both businesses and consumers. First, class arbitration, by contrast, is every 

bit as burdensome, expensive, and time-consuming as class-action litigation, if not more so. Thus, as of September 2009 

the AAA had opened 283 class arbitrations, none of which had resulted in a final award on the merits. See Brief of AAA 

as Amicus Curiae at 22-23, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) (No. 08-1198), 2009 WL 

2896309. For those class arbitrations that were no longer active, the median time from filing to settlement, withdrawal, 

or dismissal—not judgment on the merits—was 583 days (1.6 years), and the mean was 630 days (1.7 years). Id. at 24. 

Second, class arbitration may not provide all of the procedural protections for absent class members that are present in 

judicial class actions. Class arbitration therefore could lead to outcomes that are quite unfair to members of the class. 
Consumer Financial Protection Bureau

December 11, 2013

Page 56

relatively small individualized claims that make up the majority of consumer injuries 

and provides no real-world benefit to consumers through the mechanism of class 

actions. 

III. The Bureau Should Not Even Consider Regulations Overturning The 

 Federal Arbitration Act Without Clear Empirical Evidence Of Consumer 

 Harm—And That Evidence Does Not Exist. 

 Arbitration of consumer disputes has been common practice for over two 

decades. There are perhaps hundreds of millions of consumer contracts currently in 

force that include arbitration agreements—many of them relating to consumer 

financial products or services. 

 The system we have today of resolving disputes fairly and efficiently in 

arbitration stands in stark contrast to the court-centric views of earlier times. “Until 

the early twentieth century, courts in the United States displayed a marked hostility to 

predispute arbitration agreements,” which they considered “illegal attempts to oust 

courts of their jurisdiction.”156 But Congress concluded that arbitration was beneficial 

for individuals and businesses alike, and therefore enacted the Federal Arbitration Act 

(9 U.S.C. §§ 1-16) to ensure that arbitration agreements were enforceable. As Justice 

Stephen Breyer has observed, “Congress, when enacting th[e FAA], had the needs of 

consumers, as well as others, in mind.”157 

 The criticisms of arbitration being made today resemble those that were 

rampant at the time Congress enacted the FAA—they are based on false stereotypes 

rather than reality. Claims about the benefits of the judicial system are based on 

similar illusions, grounded in the hyper-idealized theory learned in law school rather 

than the stark reality of what actually happens today in our nation’s courts. 

 And these unsupported, and unsupportable, arguments are being promoted by 

well-funded interest groups pursuing their own interests, and not the interests of 

 

156 Rutledge, 6 Geo. J.L. Pub. Pol’y at 552 (citing 1 Ian R. Macneil et al., Federal Arbitration Law: Agreements, Awards, and 

Remedies under the Federal Arbitration Act § 4.3.2.2 (1996)). 

157 Allied-Bruce Terminix, 513 U.S. at 280. See also S. Rep. No. 68-536, at 3 (1924) (“The settlement of disputes by 

arbitration appeals to big business and little business alike, to corporate interests as well as to individuals.”) (emphasis 

added).
Consumer Financial Protection Bureau

December 11, 2013

Page 57

consumers. According to the Associated Press, for example, one of the “[t]op 

lobbying goals” of the American Association for Justice (formerly the Association of 

Trial Lawyers of America, or “ATLA”) has been to convince “Congress and 

[President] Obama to outlaw mandatory binding arbitration in consumer 

contracts.”158 As we have discussed, the individuals who benefit most from 

arbitration—the majority of consumers and employees whose individualized 

claims are too small to be of interest to contingency-fee-driven plaintiffs’ 

lawyers, and too fact-specific to be included in class actions—would be left with 

no recourse. Yet plaintiffs’ lawyers are willing to trade those individual consumers’ 

claims away so that they may continue to pursue class actions that allow them to reap 

large fee awards while leaving class members with pennies on the dollar—if anything 

at all. 

 In carrying out the Dodd-Frank Act’s mandate to study arbitration, the Bureau 

must ignore false stereotypes, caricatures, and selective anecdotes and focus instead 

on the realities of arbitration and the realities of the judicial system. Any regulation 

the Bureau may adopt must be based on a conclusion that “such a prohibition or 

imposition of conditions or limitations is in the public interest and for the protection of 

consumers. The findings of such a rule shall be consistent with the study conducted under 

subsection (a).”159

 Because the Bureau’s rulemaking authority requires it to consider 

“the potential benefits and costs to consumers and [regulated businesses],”160 the 

study must do so as well.161

 As we have explained, the relevant evidence demonstrates overwhelmingly that 

arbitration serves the interests of individuals and businesses alike by providing access 

to justice quickly, fairly, and at low cost. Eliminating arbitration, or imposing 

regulations that would have that effect, will harm consumers by eliminating this 

critically important method of adjudicating disputes that simply cannot be resolved 

practically in court. 

 

158 Sharon Theimer & Pete Yost, The Influence Game: Lobbyists adapt to power shift, USA Today, Nov. 14, 2008, 

http://usatoday30.usatoday.com/news/washington/2008-11-14-567071791_x.htm?csp=34.

159 12 U.S.C. § 5518(b) (emphasis added). 

160 Id. § 5512(b)(2)(A)(i). 

161 Courts rigorously oversee an agency’s assessment of costs and benefits. See, e.g., Bus. Roundtable v. SEC, 647 F.3d 1144 

(D.C. Cir. 2011). 
Consumer Financial Protection Bureau

December 11, 2013

Page 58

* * * * * 

 We thank you for your consideration of these comments and would be happy 

to discuss these issues further with the Bureau’s staff. 

Sincerely, 

 

David Hirschmann Lisa A. Rickard 

President and Chief Executive Officer President 

Center for Capital Markets Competitiveness U.S. Chamber Institute for Legal 

U.S. Chamber of Commerce Reform 

Attachment 
Do Class Actions Benefit Class Members?

An Empirical Analysis of Class Actions

By Mayer Brown LLP

Executive Summary

This empirical study of class action litigation—one of the few to examine

class action resolutions in any rigorous way—provides strong evidence that class

actions provide far less benefit to individual class members than proponents of class

actions assert.

The debate thus far has consisted of competing anecdotes. Proponents of class

action litigation contend that the class device effectively compensates large

numbers of injured individuals. They point to cases in which class members

supposedly have obtained benefits. Skeptics respond that individuals obtain little or

no compensation and that class actions are most effective at generating large

transaction costs—in the form of legal fees—that benefit both plaintiff and defense

lawyers. They point to cases in which class members received little or nothing.

Rather than simply relying on anecdotes, this study undertakes an empirical

analysis of a neutrally-selected sample set of putative consumer and employee class

action lawsuits filed in or removed to federal court in 2009.1

Here’s what we learned:

 In our entire data set, not one of the class actions ended in a final

judgment on the merits for the plaintiffs. And none of the class

actions went to trial, either before a judge or a jury.

 The vast majority of cases produced no benefits to most members of the

putative class—even though in a number of those cases the lawyers who

sought to represent the class often enriched themselves in the process

(and the lawyers representing the defendants always did).

o Approximately 14 percent of all class action cases remained

pending four years after they were filed, without resolution or

even a determination of whether the case could go forward on a

class-wide basis. In these cases, class members have not yet

received any benefits—and likely will never receive any, based on

the disposition of the other cases we studied.

o Over one-third (35%) of the class actions that have been

resolved were dismissed voluntarily by the plaintiff. Many of

these cases settled on an individual basis, meaning a payout to the

1 For information about our methodology, see Appendix C.
2

individual named plaintiff and the lawyers who brought the suit—

even though the class members receive nothing. Information

about who receives what in such settlements typically isn’t publicly

available.

o Just under one-third (31%) of the class actions that have

been resolved were dismissed by a court on the merits—again,

meaning that class members received nothing.

 One-third (33%) of resolved cases were settled on a class basis.

o This settlement rate is half the average for federal court

litigation, meaning that a class member is far less likely to have

even a chance of obtaining relief than the average party suing

individually.

o For those cases that do settle, there is often little or no benefit

for class members.

o What is more, few class members ever even see those paltry

benefits—particularly in consumer class actions.

Unfortunately, because information regarding the distribution

of class action settlements is rarely available, the public

almost never learns what percentage of a settlement is actually

paid to class members. But of the six cases in our data set for which

settlement distribution data was public, five delivered funds to

only miniscule percentages of the class: 0.000006%, 0.33%,

1.5%, 9.66%, and 12%. Those results are consistent with other

available information about settlement distribution in consumer

class actions.

o Although some cases provide for automatic distribution of benefits

to class members, automatic distribution almost never is used in

consumer class actions—only one of the 40 settled cases fell into

this category.

o Some class actions are settled without even the potential for a

monetary payment to class members, with the settlement

agreement providing for payment to a charity or injunctive

relief that, in virtually every case, provides no real benefit to

class members.

The bottom line: The hard evidence shows that class actions do not

provide class members with anything close to the benefits claimed by their

proponents, although they can (and do) enrich attorneys. Policymakers who

are considering the efficacy of class actions cannot simply rest on a theoretical

assessment of class actions’ benefits or on favorable anecdotes to justify the value of

class actions. Any decision-maker wishing to rest a policy determination on the


5

actions reported that “[e]very case in which a motion to certify was granted,

unconditionally or for settlement purposes, resulted in a class settlement.”5

Fourteen percent of the class actions filed remain unresolved. Even though

our study period encompassed more than 44 months since the filing of the last case

in our sample (and 55 months from the filing of the first case), a significant number

of cases—21 of the 148 in our sample, or 14%—remained pending with no

resolution, let alone final judgment on the merits.6

And there is no reason to believe that these cases are more likely to yield a

benefit for class members than the cases that have been resolved thus far. In 15 of

these cases either no motion for class certification has been filed or the court has not

yet ruled on the motion, and in another 2 the court denied certification. In a

significant proportion of these pending cases, it seems likely that class certification

will be denied or never ruled upon before the case is ultimately dismissed. After all,

prior studies indicate that nearly 4 out of every 5 lawsuits pleaded as class actions

are not certified.7

Over one-third of the class actions that have been resolved were dismissed

voluntarily by the named plaintiff and produced no relief at all for the

class. Forty-five cases were voluntarily dismissed by the named plaintiff who had

sought to serve as a class representative or were otherwise resolved on an

individual basis. That means either that the plaintiff (and his or her counsel) simply

decided not to pursue the class action lawsuit, or that the case was settled on an

individual basis, without any benefit to the rest of the class. These voluntary

dismissals represent 30 percent of all cases studied, or 35 percent of cases that

reached a resolution by the beginning of September 2013.8

5 Emery G. Lee III et al., Impact of the Class Action Fairness Act on the Federal

Courts: Preliminary Findings from Phase Two’s Pre-CAFA Sample of Diversity

Class Actions at 11 (Federal Judicial Center 2008),

http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/Preliminary%20Findings

%20from%20Phase%20Two%20Class%20Action%20Fairness%20Study%20%282008

%29.pdf (discussing 30 such cases).

6 These results are broadly consistent with other studies of class actions. See,

e.g., id. at 6 (noting that 9% of cases remained pending after at least 3.5 years).

7 See Thomas E. Willging & Shannon R. Wheatman, Attorney Choice of Forum

in Class Action Litigation: What Difference Does it Make?, 81 Notre Dame L. Rev.

591, 635-36, 638 (2006).

8 In one of the cases we studied, the court compelled arbitration of the named

plaintiff’s claims—a determination that almost always precludes class treatment of

the case.
6

In fourteen of the cases that were voluntarily dismissed—approximately onethird of all voluntary dismissals in the data set—the dismissal papers, other docket

entries, or contemporaneous news reports made clear that the parties were settling

the claim on an individual basis, although the terms of those settlements were not

available. Many of the remaining voluntary dismissals also may have resulted from

individual settlements.

These settlements often provide that the plaintiff—and his or her attorney—

receive recoveries themselves, even though the rest of the class that they sought to

represent receive nothing. When parties settle cases on an individual basis, those

settlements often are confidential, and the settlement agreements therefore are not

included on the court’s public docket.9

Just under one-third of the class actions that have been resolved were

dismissed on the merits. In addition to the 45 cases dismissed voluntarily by

plaintiffs, 41 cases were dismissed outright by federal courts, through a dismissal

on the pleadings or a grant of summary judgment for the defendant. The courts in

these cases concluded that the lawsuits were meritless before even considering

whether the case should be treated as a class action. These represented 27 percent

of all cases studied, and 31 percent of resolved cases.

In other words, in over half of all putative class actions studied—and

nearly two-thirds of all resolved cases studied—members of the putative

class received zero relief. These results are depicted in Figures 1 and 2, which

appear below. And these results are broadly consistent with other empirical studies

of class actions. If anything, for reasons explained in Appendix C, abusive,

illegitimate class actions are probably under-represented in our sample, and the

sample therefore probably significantly overstates the extent to which class

9 Unlike class settlements under Federal Rule of Civil Procedure 23, which

must be publicly disclosed and approved by the court, individual settlements of

lawsuits in federal court need not be disclosed publicly, nor is court approval

required. Typically, parties that agree to settle claims on an individual basis in a

lawsuit pending in federal court—whether or not those claims are part of a class

action—enter into confidential settlement agreements, a condition of which is that

the named plaintiff will voluntarily dismiss his or her individual claims with

prejudice; remaining claims that were purported to have been brought on behalf of a

class may be dismissed without prejudice with respect to other class members, who

may or may not assert the claim in subsequent litigation.
7

members benefit from the class action. For comparison, another study found that

84% of class actions ended without any benefit to the class.

10

Fewer than thirty percent of the cases filed were settled. All of the

remaining class actions that have been concluded were settled on a class-wide basis:

The parties reached settlements in 40 cases—28% of all cases studied, or 33% of all

resolved cases.11

This subset of class actions is the only one in our study in which it is possible

that absent class members could possibly receive any benefit at all. As we next

discuss, however, the benefits claimed to be associated with such settlements are

largely illusory.

Class Settlements

Class actions have a significantly lower settlement rate than other federal

cases. The settlement rate for our sample of cases—33% of resolved cases—is much

lower than for federal court litigation as a whole. One study of federal litigation

estimated that “the aggregate settlement rate across case categories” for two

districts studied was “66.9 percent in 2001-2002.”12 Even the least frequently

settled case category in that study—constitutional litigation—had a higher

settlement rate (39%) than the 33% for the class action cases we studied.13

Thus, class actions are significantly less likely to produce settlements,

and therefore significantly less likely to produce any benefit to class

members, than other forms of litigation. Settlement is the only resolution that

produces even the possibility of a benefit to class members, because class actions

are virtually never resolved though judgments on the merits, a fact that our study

corroborates. And the settlement rate in our sample set is not an outlier: a study of

10 See, e.g., Lee et al., supra note 5, at 6 (noting that in cases not remanded,

55% of cases were voluntarily dismissed without class certification or class

settlement, and another 29% were dismissed by the court).

11 This category includes one case in which the parties have announced a class

settlement and sought preliminary approval; five cases in which the court has

granted preliminary approval (but has not yet finally approved it); one case that

resulted in a settlement to fewer than all plaintiff class members; and two cases in

which appeals are pending.

12 Theodore Eisenberg and Charlotte Lanvers, What is the Settlement Rate and

Why Should We Care?, 6 J. Empir. Leg. Stud. 111, 115 (2009).

13 Id. at 133.
8

class actions brought in California state court in 2009 reported a similarly low

settlement rate of 31.9%.14

Moreover, the fact that 40 of our sample cases were settled says nothing

about the extent of the benefit, if any, that those settlements conferred on class

members.

Many class settlements—and virtually all settlements of consumer class

actions—produce negligible benefits for class members. It is a notoriously

difficult exercise to assess empirically how class members benefit from class action

settlements. These settlements fall generally into three basic categories:

 “Claims-made” settlements, under which class members are bound by

a class settlement—and thereby release all of their claims—but only

obtain recoveries if they affirmatively request to do so, usually through

use of a claims form.15 Funds not distributed to claimants are returned

to the defendant or, in some cases, distributed to a charity via the cy

pres process (which creates significant additional problems, as we

discuss below). They are not given to class members. Most settlements

fall into this category.

 Injunctive relief/cy pres settlements, in which the relief provided to

settling class members involves only injunctive relief (which may

provide little or no benefit to class members) or cy pres distributions (in

which money is paid to charitable organizations rather than class

members).

 “Automatic distribution” settlements, in which each class member’s

settlement is distributed automatically to class members whose

14 Hilary Hehman, Class Certification in California: Second Interim Report

from the Study of California Class Action Litigation, Judicial Council of California:

Administrative Office of the Courts, at Tables D1-D2 (Feb. 2010),

http://www.courts.ca.gov/documents/classaction-certification.pdf (observing that 410

of 1294 resolved cases were settled); see also Patricia Hatamyar Moore, Confronting

the Myth of “State Court Class Action Abuses” Through an Understanding of

Heuristics and a Plea for More Statistics, 82 UMKC L. Rev. 133, at 165 & n.192

(2013).

15 See 4 Newberg on Class Actions § 12:35 (4th ed. 2013) (“[A] common formula

in class actions for damages is to distribute the net settlement fund after payment

of counsel fees and expenses, ratably among class claimants according to the

amount of their recognized transactions during the relevant time period. A typical

requirement is for recognized loss to be established by the filing of proofs of

claim. . . .”).
9

eligibility and alleged damages could be ascertained and calculated—

such as retirement-plan participants in ERISA class actions.

The parties typically have no meaningful choice among these methods

of structuring a settlement. Automatic distribution settlements are feasible only

if the parties have the names and current addresses of class members as well as the

ability to calculate each class member’s alleged damages. But companies typically

lack the information needed to settle cases using an automatic distribution

mechanism—especially in consumer cases, where purchase records may be

incomplete or unavailable, and/or class members’ claimed injuries may vary widely

and unpredictably.

Thus, consumer class actions are almost always resolved on a claimsmade basis, and the actual amount of money delivered to class members in

such cases almost always is a miniscule percentage of the stated value of

the settlement. That is because, in practice, relatively few class members actually

make claims in response to class settlements: many class members may not believe

it is not worth their while to request the (usually very modest) awards to which they

might be entitled under a settlement. And the claim-filing process is often

burdensome, requiring production of years-old bills or other data to corroborate

entitlement to recovery.

The class members’ actual benefit from a settlement—if any—is almost

never revealed. Remarkably, the public almost never has access to settlement

distribution data. One study found that settlement distribution data were available

in “fewer than one in five class actions in [the] sample.”16 Companies and their

defense lawyers are hesitant to reveal how much a company has been required to

pay out to class members, and plaintiffs’ counsel have strong incentives to conceal

the information because requests for attorneys’ fees based on a settlement’s face

value will appear overstated when compared to the actual value. Judges are often

happy to have the case resolved, and therefore have little to no interest in requiring

transparency in the settlement distribution process.

While third-party claims administrators often possess direct information

about claims rates, they are routinely bound by contract to maintain the

confidentiality of that information in the absence of party permission, a court order,

or other legal authority.17 This may be a function of the incentive shared by class

16 Nicholas M. Pace & William B. Rubenstein, How Transparent are Class

Action Outcomes? Empirical Research on the Availability of Class Action Claims

Data at 3, RAND Institute for Civil Justice Working Paper (July 2008),

billrubenstein.com/Downloads/RAND%20Working%20Paper.pdf.

17 Id. at 31-32 (explaining that in a survey of class action participants, only 25%

of “chief executive officers” at settlement administrators responded to the survey,

and even those only “did so solely to inform [the researchers] that the information
10

counsel and defense counsel to avoid facilitating grounds for a class member to

object that a settlement was unfair because it provided too little tangible benefit to

the class.18 Indeed, “[h]ow many people were actually members of this class, how

many of these class members actually submitted a claim form, and how much they

were actually paid appear to be closely held secrets between the class counsel and

the defendant.”19

In rare cases in which class-settlement distribution data was available,

few class members received any benefit at all. In our data set, 18 cases were

resolved by claims-made settlements—44% of the total. We were able to obtain

meaningful data regarding the distribution of settlement proceeds in only

six of the 18 cases, which is not surprising given the well-established and

widespread lack of publically available information regarding the extent to which

class members actually benefit from settlements. Five of the six cases resulted in

minuscule claims rates: 0.000006%, 0.33%, 1.5%, 9.66%, and 12%.20 These

that they held was ‘proprietary’ to their clients, namely the attorneys that had hired

them to oversee the class action claiming process”); cf. Deborah R. Hensler, et al.,

Class Action Dilemmas: Pursuing Public Goals for Private Gain 163-64 (2000)

(noting difficulty in obtaining “information about the claiming process and

distribution” from a “settlement administrator,” who “declined to share distribution

figures, suggesting that we talk to the attorneys involved with the case,” and noting

further that the plaintiffs’ and defense attorneys had agreed between themselves

“not to discuss or divulge matters related to . . . the actual distribution to the

class”).

18 See Christopher R. Leslie, The Significance of Silence: Collective Action

Problems and Class Action Settlements, 59 Fla. L. Rev. 71, 93 (2007) (explaining

that when a “notice do[es] not estimate the size of the class, . . . class members are

unable to calculate their own individual recoveries” and therefore lack “sufficient

bases for objecting to the proposed settlement”); see also Thorogood v. Sears,

Roebuck & Co., 547 F.3d 742, 744-45 (7th Cir. 2008) (Posner, J.) (“The defendants in

class actions are interested in minimizing the sum of the damages they pay the

class and the fees they pay the class counsel, and so they are willing to trade small

damages for high attorneys’ fees. . . . The result of these incentives is to forge a

community of interest between class counsel, who control the plaintiff's side of the

case, and the defendants. . . . The judge . . . is charged with responsibility for

preventing the class lawyers from selling out the class, but it is a responsibility

difficult to discharge when the judge confronts a phalanx of colluding counsel.”)

(citations omitted).

19 Hensler, supra note 17, at 165.

20 The lone outlier—a case with a 98.72% claims rate—involved the settlement

of an ERISA case involving claims about the Bernie Madoff Ponzi scheme for which

potentially enormous claims could be made. The math explains why an “astonishing
11

extremely small claim-filing rates are consistent with the few other reports of claim

rates in class action settlements that have come to light.

As one federal court observed, “‘claims made’ settlements regularly yield

response rates of 10 percent or less.”21 In fact, the claims rate frequently is much

lower—in the single digits. Appendix A contains a list of more than 20 additional

cases for which information about distributions is available, all of which involved

distributions to less than seven percent of the class and many of which involved

distributions to less than one percent of the class.

There is thus ample evidence to infer that the extremely small claims

rates for cases in our sample is representative of what happens in class

actions generally, and particularly in consumer class actions.

22 And

although documents filed in the remaining 12 of the 18 claims-made settlements

lacked information about claims rates, there is every reason to believe that class

members made claims at the small rates ordinarily observed in such cases. While

some may argue that parties should use automatic distribution mechanisms instead

98.72%” of the 470 members of the damages class filed claims in this $1.2165 billion

settlement. Final Order at 11, In re Beacon Assoc. Litig., No. 09-cv-777 (S.D.N.Y.

May 9, 2013), PACER No. 77-2. Because each class member’s individual claim was

worth, on average, over $2.5 million, it is unsurprising that over 460 of the class

members decided to submit a claim. Needless to say, virtually no consumer or

employment class actions settle for anything approaching such a large amount per

class member.

21 Sylvester v. CIGNA Corp., 369 F. Supp. 2d 34, 52 (D. Me. 2005).

22 Some earlier studies purported to assess the benefits received by class

members, but they examined “only what defendants agreed to pay” in settlements,

rather than “the amounts that defendants actually paid after the claims

administration process concluded.” Brian Fitzpatrick, An Empirical Study of Class

Action Settlements and Their Fee Awards, 7 J. Empirical Legal Stud. 811, 826

(2010) (emphasis added); see also Theodore Eisenberg & Geoffrey Miller, Attorney’s

Fees and Expenses in Class Action Settlements: 1993-2008, 7 J. Empirical Legal

Stud. 248, 258-59 (2010) (using same approach).

Moreover, because Fitzpatrick studied only settlements (see 7 J. Empircial Legal

Stud. at 812), his study failed to take into account that most putative class actions

are dismissed or otherwise terminated without any benefits for class members. And

Eisenberg and Miller ignored settlements that promised only nonpecuniary relief

(such as coupons or injunctive relief) to class members. An earlier version of their

study—which laid the methodological groundwork for the later expanded study in

2010 (see id. at 252)—appears to have counted cases involving such “soft relief” only

when it was “included” along with pecuniary relief. Theodore Eisenberg & Geoffrey

Miller, Attorney Fees in Class Action Settlements: An Empirical Study, 1 J.

Empirical Legal Stud. 27, 40 (2004).
12

of “claims-made” settlements to resolve class actions, the reality is that automatic

distribution is difficult, if not impossible, to achieve in many (perhaps most)

consumer class actions.

Only one consumer class action settlement was resolved through

automatic distribution. Of the remaining 22 settled cases in our sample, 13

involved settlements with automatic distribution of settlement proceeds. Ten

of these 13 involved claims by retirement plan participants in ERISA class actions,

in which the class members’ eligibility and alleged damages could be easily

ascertained and calculated based on their investment positions. The plans of

distribution in these 10 cases generally involved lump-sum payments to the plan,

which would then be allocated directly to plan members’ accounts.

The other three automatic-distribution settlements were reached in consumer

and employment class actions. In each case—atypical of most class actions—the

defendant was in a position to ascertain and calculate class members’ eligibility and

alleged damages:

 In one, an employer settled claims that it conspired with health care

providers and insurers to dictate medical treatment provided to about

13,764 employees injured on the job, whose identities were readily

known to the defendant employer; employees who were treated by one

health-care provider received a check for $520, while injured

employees treated by another provider received a check for $50.23

 In a second settlement, a credit-card issuer settled claims that it

improperly raised the minimum monthly payment and added new fees

in connection with promotional loan offers. The defendant issued class

members a flat-rate payment of $25, plus (for certain customers) a

share of the remaining settlement fund calculated by taking into

account the ways the class member had used the promotional loan and

had been charged fees.24

 Finally, as we explain in more detail below, a third settlement resolved

privacy claims against a mobile-phone gaming app developer in

23 Plaintiffs’ Unopposed Motion for Order Preliminarily Approving Class Action

Settlement at 8, Gianzero v. Wal-Mart Stores, Inc., No. 09-cv-00656 (D. Colo. Nov.

21, 2011), PACER No. 464 (“Gianzero Preliminary Approval Motion”).

24 Plaintiffs’ Motion for Preliminary Approval of Class Settlement at 5-7, In re

Chase Bank USA, N.A. “Check Loan” Contract Litigation, No. 09-md-2032 (N.D.

Cal. July 23, 2012), PACER No. 338.
13

exchange for 45 in-game “points” that were automatically distributed

to users so they could advance through the game’s levels.25

Thus, only two consumer cases involved automatic distributions, and in one the

distribution involved “game points.” Only a single settled consumer class

action—one of 127 class actions resolved—conveyed real benefits to

anything more than a small percentage of the class.

Cy pres awards and injunctive relief serve primarily to inflate attorney’s

fee awards—and benefit third parties with little or no ties to the putative

class. The final group of 9 settled cases largely involved injunctive relief or cy

pres distributions. Because these cases involve no monetary compensation to class

members, it is difficult for outsiders to assess the claimed benefit. Certainly, in

many cases “injunctive relief” has little or no real-world impact on class

members, but is used to provide a basis for claiming a “benefit” to class

members justifying an award of attorneys’ fees to class counsel (as we detail

below). The injunctive-relief-only settlements we reviewed included the following:

 Plaintiff subscribers of America Online (“AOL”) claimed that it

embedded advertisements at the bottom of the subscribers’ email

messages without their permission. After an early settlement was

vacated on appeal for improper cy pres awards to unrelated charities,

the parties again settled the claims, with AOL promising to tell

subscribers how to opt out of email advertisements if it restarted the

challenged practice.26

 In a class action involving claims that a social-networking app

developer failed to protect properly the personally identifiable

information of 32 million customers from a data security breach, the

settlement provided that the defendant will undergo two audits of its

information security policies with regard to maintenance of consumer

records, to be made by an independent third party. The settlement

explicitly reserves the rights of the plaintiff class to sue for monetary

relief.27

 Plaintiffs brought false advertising claims against Unilever,

contending that it had misrepresented the health or nutritional

characteristics of “I Can’t Believe It’s Not Butter.” As part of the

25 See notes 44–46 and accompanying text.

26 Revised Class Action Settlement Agreement ¶¶ 20-22, Bronster v. AOL, LLC,

No. 09-cv-3568 (C.D. Cal. July 31, 2013), PACER No. 66-10. The settlement also

proposes a cy pres award to a more related charitable organization. Id. ¶ 23.

27 Settlement Agreement and Release at 4, Claridge v. RockYou, Inc., No. 09-cv6032 (N.D. Cal. Dec. 15, 2011), PACER No. 55-1.
14

settlement, Unilever was to remove all partially hydrogenated

vegetable oils from its soft spreads by December 31, 2011, and from its

stick products by December 31, 2012, and keep those ingredients out of

those products for 10 years. Although they did not receive monetary

compensation, class members released all monetary and equitable

claims other than claims for personal injury.28

 Finally, in a class action alleging the violation of consumer protection

laws arising out of the marketing of Zicam supplements (sold as a way

of combating the common cold), the parties provided for a number of

non-pecuniary “benefits”—all in the form of labeling changes. These

include: (1) indicating that the FDA has not approved the supplements;

(2) disclosing that customers with zinc allergies or sensitivities should

consult a doctor; (3) informing customers that the products are not

intended to be effective for the flu or for allergies; and (4) removing

language recommending that customers continue to use the products

for 48 hours after cold symptoms subside. If the court approves the

settlement and requested attorneys’ fees, the defendant will pay

plaintiff’s counsel up to $1.75 million in fees in one case, and another

$150,000 in a related MDL proceeding.29

Like injunctive relief settlements, the cy pres doctrine is being used by

plaintiffs’ lawyers to inflate artificially the purported size of the benefit to

the class in order to justify higher awards of attorney’s fees to the plaintiffs’

lawyers. In four of the cases we examined, the settlement provided that one or

more charitable organizations would receive either all monetary relief, or any

remaining monetary relief after claims made were paid out.

Courts often assess the propriety of an attorneys’ fee award in the settlement

context by comparing the percentage of the settlement paid to class members or

charities with the percentage of the settlement allocated to class counsel.30 That

28 Notice of Joint Motion for Final Approval of Class Settlement and

Memorandum of Points and Authorities in Support Thereof at 4, Red v. Unilever

United States, Inc., No. 10-cv-387 (N.D. Cal. June 6, 2011), PACER No. 153.

29 Plaintiffs’ Memorandum in Support of Motion for Final Approval of Class

Action Settlement at 4-5, Hohman v. Matrixx Initiatives, Inc., No. 09-cv-3693 (N.D.

Ill. May 26, 2011), PACER No. 81.

30 See, e.g., Strong v. BellSouth Telecommunications, Inc., 137 F.3d 844, 851

(5th Cir. 1998) (affirming the district court’s decision to compare the “actual

distribution of class benefits” against the potential recovery, and adjusting the

requested fees to account for the fact that a “drastically” small 2.7 percent of the

fund was distributed); see also Int’l Precious Metals Corp. v. Waters, 530 U.S. 1223,

1223 (2000) (O’Connor, J., respecting the denial of certiorari) (noting that fee
15

approach has been endorsed by the Manual for Complex Litigation.31 If no funds are

allocated to the class, or a small portion of the amount ostensibly allocated to the

class is actually distributed and the remainder of the funds returned to the

defendants, the relative percentages could be disturbing to a court reviewing the

fairness of the settlement. But if the amount not collected by class members is

contributed to a charity that can be claimed to have some tenuous relationship to

the class, then the percentage allocated to attorneys’ fees may appear more

acceptable.

The result, as one district court has warned, is that attorney fee awards

“determined using the percentage of recovery” will be “exaggerated by cy pres

distributions that do not truly benefit the plaintiff class.”32 As Professor Martin

Redish has noted, the cy pres form confirms that “[t]he real parties in interest in . . .

class actions are . . . the plaintiffs’ lawyers, who are the ones primarily responsible

for bringing th[e] proceeding.”33 One district court has noted that when a consumer

class action results in a cy pres award that “provide[s] those with individual claims

no redress,” where there are other “incentives” for bringing individual suits, the

class action fails the requirement that the class action be “superior to other

available methods” of dispute resolution.34

Lawyers (as opposed to class members) were the principal beneficiaries of

the remaining settlements in our study. For the “cy pres” settlements in our

data set, and the “claims made” settlements for which there is no distribution data,

awards disconnected from actual recovery “decouple class counsel’s financial

incentives from those of the class,” and “encourage the filing of needless lawsuits

where, because the value of each class member’s individual claim is small compared

to the transaction costs in obtaining recovery, the actual distribution to the class

will inevitably be small”).

31 See Federal Judicial Center, Manual for Complex Litigation (Fourth) § 27.71

(2004).

32 SEC v. Bear Stearns & Co., 626 F. Supp. 2d 402, 415 (S.D.N.Y. 2009).

33 Testimony of Martin H. Redish at 7, U.S. House of Representatives,

Committee on the Judiciary, Subcommittee on the Constitution, Hearing: Class

Actions Seven Years After the Class Action Fairness Act (June 1, 2012), available at

http://judiciary.house.gov/hearings/Hearings%202012/Redish%2006012012.pdf.

34 Hoffer v. Landmark Chevrolet Ltd., 245 F.R.D. 588, 601-04 (S.D. Tex. 2007)

(Rosenthal, J.). In one of the cases in our sample, the same district judge cautioned

that cy pres awards “‘violat[e] the ideal that litigation is meant to compensate

individuals who were harmed,’” but ultimately approved the award because prior

court precedents had authorized the use of cy pres. In re Heartland Payment Sys.,

Inc. Customer Data Sec. Breach Litig., 851 F. Supp. 2d 1040, 1076 (S.D. Tex. 2012)

(Rosenthal, J.).
16

publicly available information provides further support for the conclusion that little

in the way of benefit flows to class members. Examples from our data set include:

 Disproportionate allocation of settlement funds to attorneys’

fees. Plaintiffs brought a class action alleging that the defendants

improperly interfered with the medical care of injured employees in

violation of Colorado law.35 Under the settlement agreement, the

defendants (who denied wrongdoing) were required to make an $8

million fund available to compensate more than 13,500 class members.

But class counsel received over $4.5 million out of the $8 million—

more than 55 percent of the fund.36

 Named plaintiffs object to the settlement. In a class action against

the National Football League, retired players alleged that the league

was using their names and likenesses without compensation to

promote the league. The NFL and some players settled the class-wide

claims under federal competition law and state right of publicity laws.

But the original named plaintiffs who spearheaded the litigation

objected to the settlement, arguing that it provided no direct payout

to the retired players.

37 Rather, it created an independent

organization that would fund charitable initiatives related to the

health and welfare of NFL players—and would create a licensing

organization that would help fund the independent organization.

Meanwhile, “[p]laintiffs’ lawyers would receive a total of $7.7 million

under the proposed agreement.”38

 Low recovery for class members. Plaintiffs alleged in eight

consolidated class actions that their employer, a bank, violated the

federal Employee Retirement Income Security Act (ERISA) by offering

its own stock as a retirement plan investment option while hiding the

true extent of the bank’s losses in the mortgage crisis.39 The class

35 Gianzero Preliminary Approval Motion at 4.

36 Id. at 10.

37 The Dryer Plaintiffs’ Opposition to Preliminary Approval of the Proposed

Settlement Class, Dryer v. Nat’l Football League, No. 09-cv-2182 (D. Minn. Mar. 20,

2013), PACER No. 264.

38 Alison Frankel, Retired NFL stars reject settlement of their own licensing

class action, REUTERS (Mar. 25, 2013), available at http://blogs.reuters.com/alisonfrankel/2013/03/25/retired-nfl-stars-reject-settlement-of-their-own-licensing-classaction/.

39 Class Action Complaint at 2, 24-25, In re Colonial Bancgroup, Inc. ERISA

Litig., No. 2:09-cv-792 (M.D. Ala. Aug. 20, 2009), PACER No. 1.
17

settlement established a $2.5 million common fund that was ostensibly

designed to compensate the employees for their losses arising from the

bank’s alleged breach of fiduciary duty.40 But commentators note that,

when all of the allegations in the various complaints were taken into

account, plaintiffs had alleged more than $50 million in losses,

meaning that class members would recover no more than five cents on

the dollar.41 And according to the plan of allocation, members of the

settlement class who were calculated to have suffered damages less

than $25 would receive nothing42—meaning that their claims were

released without even the opportunity to receive something in

exchange. Meanwhile, the plaintiffs’ attorneys received a fee award

amounting to 26% of the common fund ($645,595.78), plus $104,404.22

in expenses.43

 Settlement requires further use of defendant’s services. A

plaintiff filed a class action alleging that certain mobile-phone gaming

apps were improperly collecting and disseminating users’ mobile phone

numbers.44 Under the terms of the settlement agreement, class

members were not entitled to any monetary payment. Instead, they

were slated to receive 45 in-game “points” (with an approximate cash

value of $3.75) per mobile device owned; the points could be used to

advance through the gaming apps’ levels.45 These points could be

redeemed or used only within the defendant’s apps.46 Unsurprisingly,

the plaintiffs’ counsel were not paid in points, but instead were

awarded $125,000 in attorneys’ fees.

40 See, e.g., Final Judgment at 2-3, In re Colonial Bancgroup, Inc. ERISA Litig.,

No. 2:09-cv-792 (M.D. Ala. Oct. 12, 2012), PACER No. 207 (“Colonial Bancgroup

Final Judgment”).

41 Bill Donahue, Colonial Bank Execs Pay $2.5m to Dodge ERISA Claims,

Law360 (June 18, 2012), available at http://www.law360.com/articles/350930

42 Plan of Allocation at 3, In re Colonial Bancgroup, Inc. ERISA Litig., No. 2:09-

cv-792 (M.D. Ala. Sept. 14, 2012), PACER No. 192-1.

43 Colonial Bancgroup Final Judgment at 8.

44 First Amended Complaint at 2, Turner v. Storm8, LLC, No. 4:09-cv-05234

(N.D. Cal. June 22, 2010), PACER No. 27.

45 Motion for Final Approval of Class Action Settlement Agreement at 3, Turner

v. Storm8, LLC, No. 4:09-cv-05234 (N.D. Cal. Nov. 11, 2010), PACER No. 32.

46 Settlement Agreement at 8, Turner v. Storm8, LLC, No. 4:09-cv-05234 (N.D.

Cal. June 22, 2010), PACER No. 26-1.
18

 Attorneys seek fees far exceeding class recovery. Class counsel in a

case involving allegedly faulty laptops found their fee request chopped

down from $2.5 million to $943,000.47 The settlement resulted in a

recovery of $889,000 to claimants, plus $500,000 in additional costs for

administering the settlement—meaning that the attorneys were

seeking just under three times the amount that would have gone

directly to the class—and even after the fees were cut down, they still

represented 106 percent of the class’s direct recovery.

These characteristics are not unique to the sample cases. To the contrary,

results are consistent with a significant number of class action settlements that

produce minimal benefits for the class members themselves. We summarize

additional examples of such settlements—taken from outside our data set—in

Appendix B.

Other studies of class settlements and attorneys’ fees confirm that these

examples are not outliers: Such settlements commonly produce insignificant

benefits to class members and outsize benefits to class counsel. A RAND study of

insurance class actions found that attorneys’ fees amounted to an average of 47%

of total class-action payouts, taking into account benefits actually claimed and

distributed, rather than theoretical benefits measured by the estimated size of the

class. “In a quarter of these cases, the effective fee and cost percentages were 75

percent or higher and, in 14 percent (five cases), the effective percentages were over

90 percent.”48

In other words, for practical purposes, counsel for plaintiffs (and for

defendants) are frequently the only real beneficiaries of the class actions.

47 Attorney’s Fees Slashed in Faulty Laptop Class Action, BNA Class Action

Litigation Report, 14 Class 1497 (Oct. 25, 2013), available at

http://news.bna.com/clsn/CLSNWB/split_display.adp?fedfid=37476946&vname=clas

notallissues&jd=a0e2t3w1f0&split=0. This case was among the ones we studied, but

the court’s decision awarding a reduced amount of attorneys’ fees was issued after

the closing date of our study.

48 Nicholas M. Pace et al., Insurance Class Actions in the United States, Rand

Inst. for Civil Just., xxiv (2007), http://www.rand.org/pubs/monographs/MG587-

1.html. Another RAND study similarly found that in three of ten class actions, class

counsel received more than the class. See Deborah R. Hensler et al., Class Action

Dilemmas: Pursuing Public Goals for Private Gain (Executive Summary), Rand

Inst. for Civil Just., 21 (1999), http://www.rand.org/pubs/monograph_reports/MR969

.html.
19

Conclusion

This study confirms that class actions rarely benefit absent class members in

whose interest class actions are supposedly initiated. The overwhelming majority of

class actions are dismissed or dropped with no recovery for class members. And

those recoveries that class settlements achieve are typically minimal—and obtained

only after long delays. To be sure, not every class action is subject to these

criticisms: a few class actions do achieve laudable results. But virtually none of

those were consumer class actions. Certainly our analysis demonstrates—at a bare

minimum—that the vast majority of class actions in our sample set cannot be

viewed as efficient, effective, or beneficial to class members.
20

Appendix A: Additional Examples of Settlements

With Payments to a Very Small Percentage of Class Members

 The Seventh Circuit vacated an order approving a class action settlement so that

the district court could “evaluate whether the settlement is fair to class

members,” where (among other problems with the settlement) only “a paltry

three percent” of the quarter-million-wide proposed class “had filed proofs of

claim.”49 And the Third Circuit recently noted that “consumer claim filing rates

rarely exceed seven percent, even with the most extensive notice campaigns.”50

 One affidavit analyzed 13 cases for which data had been disclosed (and in which

the settlement was approved). The median claims rate was 4.70%. The highest

claims rate in those cases was 5.98%, and the lowest non-zero claims rate was

0.67%. In two cases, the claims rate was 0%—reflecting that not a single class

member obtained the agreed-on recovery.51

 A class action alleging antitrust claims in connection with compact disc “music

club” marketing settled, with only 2% of the class making claims for vouchers

(valued at $4.28) for CDs.52

 Indeed, in many cases, the claims rate may be well under 1 percent.

o Fair Credit Reporting Act case: court noted that “less than one percent of

the class chose to participate in the settlement.”53

o Case alleging that a software manufacturer sold its customers

unnecessary diagnostic tools: court approved settlement despite the fact

that only 0.17% of customers made claims for a $10 payment, because “the

settlement amount is commensurate with the strength of the class’ claims

and their likelihood of success absent the settlement.”54

49 Synfuel Techs., Inc. v. DHL Express (USA), Inc., 463 F.3d 646, 648, 650 (7th

Cir. 2006) (emphasis added).

50 Sullivan v. DB Investments, Inc., 667 F.3d 273, 329 n. 60 (3d Cir. 2011) (en

banc) (emphasis added; quotation marks omitted).

51 Declaration of Kevin Ranlett in Support of Defendants’ Amended Motion to

Compel Arbitration at 8, Coneff v. AT&T Corp., No. 2:06-cv-00944 (W.D. Wash. May

27, 2009), PACER No. 199. Mr. Ranlett is a Mayer Brown lawyer.

52 In re Compact Disc Minimum Advertised Price Antitrust Litig., 370 F. Supp.

2d 320, 321 (D. Me. 2005).

53 Yeagley v. Wells Fargo & Co., 2008 WL 171083, at *2 (N.D. Cal. Jan. 18,

2008), rev’d, 365 F. App’x 886 (9th Cir. 2010).

54 LaGarde v. Support.com, Inc., 2013 WL 1283325, at *6 (N.D. Cal. Mar. 26,

2013). The court approved a proposed modified settlement under which the class
21

o Case involving product liability claims related to alleged antenna

problems with Apple’s iPhone 4: court approved settlement noting that

the “number of claims represents somewhere between 0.16% and 0.28% of

the total class.”55

o Class action alleging fraud in the procurement of credit-life insurance:

Supreme Court of Alabama noted that “only 113 claims” had been made in

a class of approximately 104,000—or a response rate of 0.1%.56

o Action alleging that restaurant chain had printed credit-card expiration

dates on customers’ receipts: “approximately 165 class members” out of

291,000—or fewer than 0.06% of the class—“had obtained a voucher” for

one of four types of menu items worth no more than $4.78.57

o Class action alleging that Sears had deceptively marketed automobilewheel alignments: “only 337 valid claims were filed out of a possible class

of 1,500,000”—a take rate of just over 0.02%.58

o Class action alleging that video game manufacturer had improperly

included explicit sexual content in the game: one fortieth of one percent

of the potential class (2,676 of 10 million) made claims.59

o Class action involving allegations that a Ford Explorer was prone to

dangerous rollovers: only 75 out of “1 million” class members—or less

than one hundredth of one percent—participated in the class

settlement.60

members “who made a claim” after having been “offered a $10 cash payment * * *

will now receive a $25 cash payment, rather than $10.” Id. at *4.

55 In re Apple iPhone 4 Prods. Liab. Litig., 2012 WL 3283432, at *1 (N.D. Cal.

Aug. 10, 2012).

56 Union Fid. Life Ins. Co. v. McCurdy, 781 So. 2d 186, 188 (Ala. 2000).

57 Palamara v. Kings Family Rests., 2008 WL 1818453, at *2 (W.D. Pa. Apr. 22,

2008).

58 Moody v. Sears, Roebuck & Co., 2007 WL 2582193, at *5 (N.C. Super. Ct.

May 7, 2007), rev’d, 664 S.E.2d 569 (N.C. Ct. App. 2008).

59 In re Grand Theft Auto Video Game Consumer Litig., 251 F.R.D. 139

(S.D.N.Y. 2008).

60 Cheryl Miller, “Ford Explorer Settlement Called a Flop,” The Recorder (July

13, 2009), http://www.law.com/jsp/article.jsp?id=1202432211252.
22

Appendix B: Additional Examples of Settlements

Providing Negligible Benefits to Class Members

 Class members receive extended membership in buying club. In a class

action against DirectBuy—a club for which customers pay a membership fee to

purchase goods at lower prices—the plaintiffs alleged that the defendant had

misrepresented the nature of the discounts that were available through the

club.61 The settlement afforded class members nothing other than discounts for

renewal or extension of their memberships in the very club that was alleged to

have tricked them into joining in the first place. Meanwhile, the attorneys for

the class “could receive between $350,000 and $1 million.”62

 $21 million for the lawyers, pennies and coupons for the class members.

One Missouri class settlement in a case against a brokerage house alleging

breaches of fiduciary duties provided $21 million to class counsel, but only

$20.42 to each of the brokerage’s former customers and three $8.22 coupons to

each current customer. And most of the coupons are unlikely to be redeemed.63

 Class members receive right to request $5 refund, lawyers take (and fail

to disclose sufficiently) $1.3 million in fees. Under the settlement of a class

action in which the plaintiffs alleged that Kellogg’s had misrepresented that Rice

Krispies are fortified with antioxidants, class members could request $5 refunds

for up to three boxes of cereal purchased between June 1, 2009, and March 1,

2010.64 Class counsel sought $1.3 million in attorneys’ fees on a claim fund

valued at $2.5 million to be paid out to class members.65

61 Michelle Singletary, Class-action Coupon Settlements are a No-Win for

Consumers, Wash. Post, Apr. 28, 2011 at A14.

62 Id.

63 See Stipulation of Settlement of Class Action, Bachman v. A.G. Edwards,

Inc., No. 22052-01266-03 (Mo. Cir. Ct. St. Louis Feb. 18, 2010),

http://www.agedwardsclassactionsettlement.com/bach_20100219094521.pdf; see

also Daniel Fisher, Lawyer Appeals Judge’s Award of $21 Million in Fees, $8

Coupons for Clients, FORBES.COM (Jan. 10, 2011), http://blogs.forbes.com/

danielfisher/2011/01/10/lawyer-appeals-judges-award-of-21-million-in-fees-8-

coupons-for-clients (“The judge didn’t even see fit to inquire into the lawyers’

valuation of the coupon portion of the settlement, despite strong evidence that less

than 10% of coupons in such cases are ever redeemed”).

64 Stipulation of Settlement at 2-8, Weeks v. Kellogg, No. 2:09-cv-8102 (C.D. Cal.

Jan. 10, 2011), PACER No. 121.

65 Memorandum of Law in Support of Plaintiffs’ Motion for Award of Attorneys’

Fees, Expenses, and Plaintiff Service Awards at 4, Weeks v. Kellogg, No. 2:09-cv8102 (C.D. Cal. July 18, 2011), PACER No. 135-1.
23

 Class receives opportunity to attend future conferences. In a 2009

settlement in the District of Columbia, a court approved a settlement against a

conference organizer that failed to deliver promised services to those who had

paid to attend. The settlement provides class members with nothing other than

coupons to attend future events put on by the same company alleged to have

bilked them in the first place; class counsel will take $1.4 million in fees.66

 Class members receive nothing, class counsel take $2.3 million. In a $9.5

million settlement of a class action against Facebook over the disclosure to other

Facebook users of personal information about on-line purchases through

Facebook’s “Beacon” program, the class members received no remedy whatever

for the invasions of their privacy and were barred from making future claims for

any remedy. Instead, approximately $6.5 million went to create and fund a new

organization that would give grants to support projects on internet privacy; a

few thousand dollars went to each of the named plaintiffs as “incentive

payments”; and class counsel received more than $2.3 million.67 Meanwhile,

although Facebook agreed to end the Beacon program—which it had actually

already ended months before—it remained free to reinstitute the program as

long as it didn’t use the name “Beacon.”68 As one federal appellate judge put it

(in a dissent from a decision upholding the settlement):

The majority approves ratification of a class action

settlement in which class members get no compensation at

all. They do not get one cent. They do not get even an

injunction against Facebook doing exactly the same thing to

them again. Their purported lawyers get millions of

dollars. Facebook gets a bar against any claims any of them

might make for breach of their privacy rights. The most we

could say . . . is that in exchange for giving up any claims

they may have, the exposed Facebook users get the

satisfaction of contributing to a charity to be funded by

Facebook, partially controlled by Facebook, and advised by a

legal team consisting of Facebook’s counsel and their own

66 See Memorandum Opinion at 3-5, 8, Radosti v. Envision EMI, LLC, No. 1:09-

cv-887 (D.D.C. June 8, 2010), PACER No. 40; Order at 1-2, Radosti v. Envision EMI,

LLC, No. 1:09-cv-887 (D.D.C. Jan. 19, 2011), PACER No. 45.

67 Lane v. Facebook, Inc., 696 F.3d 811 (9th Cir.), reh’g en banc den. 709 F.3d

791 (9th Cir. 2013), cert. denied, 134 S. Ct. 8 (2013).

68 Petition for Certiorari at 11-13, Marek v. Lane, No. 13-136 (filed July 26,

2013), 2013 WL 3944136.
24

purported counsel whom they did not hire and have never

met.69

The Supreme Court ultimately declined to review the Ninth Circuit’s decision

approving the settlement. As Chief Justice Roberts explained in a rare

statement addressing the court’s denial of certiorari, the objectors had

challenged “the particular features of the specific cy pres settlement at issue,”

but in his view had not addressed “more fundamental concerns surrounding the

use of such remedies” and the standards that should govern their use. Such

concerns, he pointed out, would have to await a future case.70

 Court reduced attorneys’ fees because of lack of benefit to class members.

The Sixth Circuit upheld a district court’s decision to reduce class counsel’s

requested fees from $5.9 million to $3.2 million in a settlement of a class action

involving auto-insurance benefits.71 In affirming the decision, the Sixth Circuit

pointed out that the district court “did not believe that the class members

received an especially good benefit [because] Class Counsel chose to pursue a

relatively insignificant claim” as opposed to “other potential claims, . . . and

[they] agreed to a settlement mechanism which yielded a low claims rate[.]”72

Although the court noted that “the settlement makes available a common fund of

$27,651,288.83 less any attorney fee award, costs, and administrative expenses,”

for individual class member benefits up to a maximum of $199.44, “only a small

percent of eligible class members have made claims” totaling approximately $4

million—or 14% of the total common fund available.73 What is more, class

counsel represented in their fee motion that they provided notice to 189,305

class members and received “well over 12,000” claims—in other words, a claimsmade rate of just over six percent.74

69 Lane, 696 F.3d at 835 (Kleinfeld, J., dissenting) (emphasis added).

70 Marek, 134 S. Ct. at 9 (Roberts, C.J., respecting the denial of certiorari).

71 Van Horn v. Nationwide Prop. & Cas. Ins. Co., 436 F. App’x 496 (6th Cir.

Aug. 26, 2011).

72 Id. at 500.

73 Opinion and Order at 10-11, Van Horn v. Nationwide Prop. & Cas. Ins. Co.,

No. 1:08-cv-605 (N.D. Ohio, Apr. 30, 2010), PACER No. 308.

74 Class Counsel’s Supplemental Memorandum in Support of Class Counsel’s

Motion for Award of Attorney’s Fees and Reimbursement of Litigation Expenses at

3-4, 7, Van Horn v. Nationwide Prop. & Cas. Ins. Co., No. 1:08-cv-605 (N.D. Ohio

Mar. 19, 2010), PACER No. 296
25

Appendix C: Study Design and Methodology

Identifying the Study Sample

The first step in studying putative class actions was to select a suitable pool

of cases. Identifying every putative class action filed during 2009 would be

impracticable—not least without extensive resources and staff support.75 We

instead used two commercial publications—the BNA Class Action Litigation

Reporter and the Mealey’s Litigation Class Action Reporter—to identify cases for

inclusion in the study. These publications cover a wide array of developments in

class action litigation, and therefore provide a diverse sample of filed class action

complaints. The publications have an incentive to report comparatively more

significant class actions out of all class actions filed, without wasting readers’ time

and attention on minor or obviously meritless suits. If anything, the sample would

be skewed in favor of more significant class actions filed by prominent plaintiffs’

attorneys—which should be more meritorious on average than a sample generated

randomly from all class actions filed.

We reviewed issues of BNA and Mealey’s published between December 2008

and February 2010 in order to identify cases filed in 2009. The reason for that

limitation was the importance of analyzing “modern” cases that were filed after the

passage of the Class Action Fairness Act of 2005, but long enough ago to track how

the cases have actually progressed and whether they have been resolved. From

those publications, we identified a pool of putative class actions brought by private

plaintiffs that were either filed in federal court or were removed to federal court

from state court in 2009. To begin with, because data about state court cases is

much more difficult to obtain, we excluded a number of cases, such as those brought

in state court initially (where the BNA or Mealey’s report did not mention that the

case was removed). We also excluded one case that was removed to federal court

and then remanded to state court. This left us with 188 cases.

Nineteen of these eventually became part of eleven other consolidated cases

that were also part of our data set—whether under the multidistrict litigation

75 See, e.g., Deborah Hensler, et al., Class Action Dilemmas: Pursuing Public

Goals for Private Gain § 4.60 (RAND Institute for Civil Justice, Monograph MR969/1-ICJ) (1999) (“Enormous methodological obstacles confront anyone conducting

research on class action litigation. The first obstacle is a dearth of statistical

information. No national register of lawsuits filed with class action claims exists.

Until recently, data on the number of federal class actions were substantially

incomplete, and data on the number and types of state class actions are still

virtually nonexistent. Consequently, no one can reliably estimate how much class

action litigation exists or how the number of lawsuits has changed over time.

Incomplete reporting of cases also means that it is impossible to select a random

sample of all class action lawsuits for quantitative analysis.”).
26

(“MDL”) procedure, 28 U.S.C. § 1407, or otherwise (for example, cases are often

consolidated when they are pending in the same federal district court). When

multiple putative class actions appearing in our data set were consolidated, we

treated the consolidated case as a single action to avoid the risk of “overcounting”

lawsuits.76 And when a case in our data set was consolidated with other cases not in

our data set, we considered activity reflected on the docket of the “lead” consolidated

case that was attributable to the individual case as filed. If after consolidation the

case was resolved together with the “lead” case—such that we could not trace

outcomes for the individual case separate from the “lead” case—we considered

activity attributable to the “lead” case. This approach dovetails with the practical

mechanics of consolidation: After cases are consolidated into an MDL, for example,

the judge to whom the MDL proceeding is assigned will resolve pretrial motions

presented in all the consolidated cases. And more generally, to the extent that

courts treat a number of separately filed cases together as a single unit for purposes

of adjudication, we have followed the courts’ lead.77 Excluding the cases that became

part of other consolidated cases in our data set left us with 169 cases.

76 By way of example, four cases—Sansom v. Heartland Payment Sys., Inc. No.

09-cv-335 (D.N.J.); Lone Summit Bank v. Heartland Payment Sys., Inc. No. 09-cv581 (D.N.J.); Tricentury Bank v. Heartland Payment Sys., Inc. No. 09-cv-697

(D.N.J.), and Kaissi v. Heartland Payment Sys., Inc. No. 09-cv-540 (D.N.J.)—

eventually were consolidated into In re: Heartland Payment Sys., Inc., Customer

Data Security Breach Litigation, No. 4:09-md-02046 (S.D. Tex.).

77 The decision to treat these consolidated cases along with the lead case had

little effect on our data. A comparison of statistics on outcomes reveals that, if

anything, treating consolidated class actions as a single action rather than

separately tended to overstate the benefits of class actions.

In our full 188-case sample set (including the consolidated cases), 99 cases

(54%) were dismissed, whether on the merits by the court, by the plaintiff

voluntarily, or as an inferred settlement on an individual basis; 31 cases (16%)

remain pending; 55 cases (29%) were settled on a class-wide basis; and 3 cases (2%)

were dismissed after the court granted a motion to compel arbitration. By

comparison, in the 169-case sample set (excluding the consolidated cases), 99 cases

(57%) were dismissed, whether on the merits by the court, by the plaintiff

voluntarily, or as an inferred settlement on an individual basis; 23 cases (14%)

remained pending; 47 cases (28%) were settled on a class-wide basis; and 1 (1%) was

dismissed after the court granted a motion to compel arbitration.

Similarly, this methodology ensures that me-too actions—cases filed by other

attorneys after a complaint in a different case, raising materially identical claims—

that are routinely dismissed after consolidation without any award or settlement

will instead be treated as sharing in any benefits to class members that were

actually obtained.
27

Our next goal was to identify a set of class actions consisting of claims

resembling those asserted by consumers—because that is the area under study by

the CFPB. We therefore excluded three non-Rule-23 putative class actions brought

by the Equal Employment Opportunity Commission.78 We also excluded nine Fair

Labor Standards Act cases.79 Finally, we excluded nine securities cases, because the

stakes and nature of those claims are very different from the claims asserted in

consumer class actions, and because they are litigated in a different manner

because of the procedural checks imposed by federal laws governing securities

litigation.80 Excluding these 21 EEOC, securities, and FLSA cases had next to no

effect on the statistical results of our study.81

Accordingly, the statistics about the total number of class actions filed in

2009 are based on a set of 148 putative class actions.

78 The Supreme Court has held that the EEOC may pursue enforcement actions

under Title VII § 706 without being certified as a class representative under

Federal Rule of Civil Procedure 23. See Gen. Tel. Co. of Nw., Inc. v. EEOC, 446 US.

318 (1980). The Supreme Court’s reasoning would appear to apply equally outside

the context of Title VII. Because the EEOC does not need to pursue a Rule 23 class,

the dynamics of EEOC class-wide enforcement actions differ markedly from those in

Rule 23 actions.

79 Class actions under the FLSA are certified conditionally as “opt-in” classes.

Section 216(b) of the FLSA permits a right of action against an employer by an

employee on behalf of “other employees similarly situated,” who must have opted in

by providing and filing with the court “consent in writing” to become a plaintiff. 29

U.S.C. § 216(b). These cases present different incentives for plaintiffs’ counsel than

consumer class actions, because they typically involve statutory attorneys’ fees to

prevailing plaintiffs and may involve large backpay and overtime pay awards.

80 As one academic study explained, securities class actions “are managed

under a set of class action rules distinct from those used for other Rule 23(b)(3)

classes—and . . . the plaintiffs with the largest losses have a significant role in the

litigation (including choosing class counsel and defining the terms of the settlement)

and can hardly be thought of [as] an ‘absent’ class member.” Pace & Rubenstein,

supra note 16, at 20; see, e.g., Private Securities Litigation Reform Act of 1995, Pub.

L. No. 104-76, 109 Stat. 737 (1995); Securities Litigation Uniform Standards Act of

1998, Pub. L. No. 105-353, 112 Stat. 3227 (1998).

81 Recall that our 169-case sample set, which included these cases, resulted in

57% of cases dismissed, 14% pending, 28% settled on a class-wide basis, and 1%

dismissed after an order compelling arbitration. See supra note 77. After excluding

them, our 148-case sample set resulted in 57% of cases dismissed, 14% pending,

28% settled on a class-wide basis, and 1% dismissed after an order compelling

arbitration. See Figure 1.
28

Constructing the Data Set

We identified and coded a number of variables about each case. Using the

federal courts’ Public Access to Court Electronic Records (“PACER”) system, we

evaluated the filings on each case’s docket. Where criteria for a case could be coded

in more than one way, we scrutinized the underlying filings and rulings to

determine whether the criteria better fit one or another category. For

administrative purposes, we treated September 1, 2013, as the date on which our

study period closed. We did not code filings and events that were entered onto the

docket after that date.

Among the data collected for each case were: jurisdiction; date filed;

plaintiffs’ firm; assigned judge; cause of action (as reported by PACER); nature of

suit (as reported by PACER); whether the case was a lead or related case (if it was

in a consolidated action);82 whether the court granted class certification; whether

the case was voluntarily dismissed,83 settled, settled but on appeal, dismissed,

otherwise disposed of, or still pending; the current posture of the case;84 and the

date of the last action on the case.

82 If a case was a related case in a consolidated action, we collected information

based on what happened in the lead case.

83 If a case was voluntarily dismissed, we attempted to discern from filings (and

from sources external to the docket) whether the dismissal should be attributed to a

settlement on an individual basis—such as when the filings refer to a settlement, or

when the named plaintiff sought to dismiss her own claims with prejudice but

without prejudice to absent members of the putative class. On one hand, this is

likely to understate the rate at which individual plaintiffs settle their claims

individually, which in any event results in no recovery to other absent members of

the putative class unless another lawsuit moves forward. On the other hand, we

were often not able to discern whether the claims in a lawsuit dismissed voluntarily

would continue to be litigated (or settled) by another named plaintiff under a

different case caption. Thus our decision to select a readily accessible sample of

class actions may understate the extent to which members of a putative class may

have their claims dismissed on the merits, or alternatively settled, in a class action

under a different docket.

84 The data set includes two certified class actions in which motions for

summary judgment are pending. The data set also includes an additional certified

class action in which the court granted summary judgment to the plaintiffs on their

claim for injunctive relief, and granted summary judgment to the defendants on all

remaining claims. At the time our study closed, on September 1, 2013, the parties

proposed text for an injunctive order that would resolve the parties’ remaining

claims on a class-wide basis.
29

For cases involving settlements, we also collected information about the date

of dismissal or final settlement approval; the terms of the settlement agreement;

any attorneys’ fees, expenses, and incentive payments to lead plaintiffs; and the

presence of any cy pres provision in the settlement agreement.

There are, of course, limitations to the data we collected. First, our

conclusions are based on the cases that we reviewed. While there is good reason to

believe that generalizations can be made to all class actions, the sample is

undoubtedly smaller than the total number of class actions filed in 2009.

Attempting to estimate that number reliably—let alone to examine those cases—

would have exceeded the scope of our review. On the other hand, the sample

includes cases from across the country and is drawn from sources that are likely to

report on significant class actions—those that are of comparatively greater

importance or quality than those actions that neither BNA nor Mealey’s considered

worth reporting. Because the BNA and Mealey’s reporters do not present a random

sample of all class actions filed in 2009, it would not be useful to calculate a margin

of error or otherwise attempt to quantify the extent to which the sample differs

randomly from the population of all class actions filed in 2009.
Attachment B 

 
- 1 -

APPENDIX

Arbitration is an important means of resolving disputes that provides extremely

significant benefits to consumers and businesses. As the U.S. Chamber of Commerce Center for

Capital Markets Competitiveness (“CCMC”) and the U.S. Chamber Institute for Legal Reform

(“ILR”) have explained in detail,1 arbitration of consumer disputes has been common practice

for decades; there are perhaps hundreds of millions of consumer contracts currently in force

that include arbitration agreements—many of them relating to consumer financial products or

services.

The Bureau’s study is deeply flawed in multiple respects: ignoring the practical benefits

of arbitration as compared to the court system for vindicating the types of injuries that

consumers most often suffer; exaggerating the supposed benefits of class actions; failing to

consider the benefits that arbitration provides to injured parties in a variety of contexts—

benefits that plainly accrue to consumers as well if they were not discouraged by plaintiffs’

lawyers and others from invoking arbitration; the reduced transaction costs resulting from

arbitration, which produce lower prices to consumers; and failing to account for the significant

role of government enforcement—particularly the CFPB’s own enforcement and supervision

processes—in protecting consumers.

A. The Bureau’s study of individual lawsuits confirms that, for most injured consumers, the

judicial system is not a realistic means for obtaining redress.

Arbitration provides consumers, employees, and other injured parties with accessible

and fair procedures for obtaining redress for claims that cannot be vindicated in court.

Many criticisms of arbitration are based on a flawed premise that the alternative

system—litigation in court—gives individuals a meaningful and realistic option for resolving

their disputes. That premise would makes sense only if the judicial system were free of

transaction costs, if every legitimate claimant could obtain legal representation, and if lawsuits

were resolved expeditiously. But as the Chamber demonstrated in its December 2013 comment

letter to the Bureau,2 these prerequisites are lacking, and today’s judicial system falls far short of

the ideal.

Most wrongs suffered by consumers are relatively small and individualized—excess

charges on a bill, a defective piece of merchandise, and the like—and are simply too small to

justify paying a lawyer to handle the matter. Such claims do not—and could not—attract

lawyers willing to work on a contingency fee basis, because the claim promises no substantial

1 Letter from David Hirschmann & Lisa Rickard to Monica Jackson, Re: Request for Information

Regarding Scope, Methods, and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements,

Docket No. CFPB-2012-0017, Supplemental Submission (Dec. 11, 2013), available at

http://www.instituteforlegalreform.com/uploads/sites/1/2013_12.11_CFPB_-_arbitration_cover

_letter.pdf (“Chamber Comment II”); Letter from David Hirschmann & Lisa Rickard to Monica Jackson, Re:

Request for Information Regarding Scope, Methods, and Data Sources for Conducting Study of Pre-Dispute

Arbitration Agreements, Docket No. CFPB-2012-0017 (June 12, 2012), available at

http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0017-0051 (“Chamber Comment I”).

2 See Chamber Comment II at 6-9.
- 2 -

recovery (and therefore no substantial legal fee). And because these claims are individualized,

they do not share the common factual basis required for a class action to be certified.

Even when a claim is large enough to justify paying an attorney’s fees—or to attract a

contingency-fee lawyer—the complexity of the litigation system makes litigation costly. In

addition, every participant in the legal system faces a significant access-to-justice problem in

our overcrowded and underfunded courts: docket backlogs have skyrocketed, courthouses

have been closed due to budget cuts, and trials are delayed.

These structural problems have practical real-world consequences that make it

extremely difficult for individual consumers to litigate their claims in court. Indeed, the

Bureau’s study results confirm that litigation in court on an individual basis is not a realistic

prospect for most people.

The Bureau examined individual (i.e., non-class) cases brought in federal court by

individual plaintiffs. Only in a miniscule percentage of the cases studied—5.6%—did plaintiffs

pursue their claims pro se, confirming that litigation in court without the assistance of an

attorney is impractical for most consumers. The vast majority—90%—of federal-court

individual cases the Bureau studied resulted in a known or potential settlement of the

individual’s claims. But the Bureau found very little data about the settlements; in the few cases

where it did, the “amounts of the settlements ranged from $250 to $15,000.” Individual

arbitration settlements and awards reflect similar or better successes: where data was available

“the average and median [debt] forbearance amounts were $ 6,968 and $4,900.”

Consumers obtained judgments in only 6.8% of the court cases studied, but most of

those judgments involved a default judgment against the company. And for all the emphasis

that critics of arbitration place on the importance of a jury trial, only one judgment for a

consumer “was the result of a trial.”3

The Bureau’s review of small claims courts—and “what use parties made of” these

courts “with respect to consumer financial disputes”4—provides little reason to believe that

consumers can effectively pursue relief in those forums. The Bureau undertook a limited

examination of small claims court, cabining its review to “potential credit card cases involving a

set of ten large credit card issuers.”5 It appears that the Bureau simply counted the number of

consumer credit card disputes, and did not address other categories of disputes that consumers

may have. The report does not make a qualitative assessment of how small claims court

operates in practice.

In fact, while small-claims courts were developed to make it easier for individuals to

proceed without representation, they do not provide a realistic alternative because those courts

are overcrowded and underfunded—as numerous newspaper investigations have

3 Consumer Financial Protection Bureau, Arbitration Study: Report to Congress, pursuant to DoddFrank Wall Street Reform and Consumer Protection Act § 1028(a) at section 6, page 48-49 (Mar. 1, 2015)

(“CFPB Study”).

4

Id. at section 7, pages 2-3.

5

Id. at section 7, page 6.
- 3 -

demonstrated.6 For individuals unable to pursue their claims in arbitration, the outlook in

small claims court is grim. Again, the Bureau failed to assess the practical reality for consumers.

B. The Bureau’s study paints an unjustifiably positive and one-sided picture of class

actions, which provide virtually no benefits to the vast majority of consumers.

The principal attack on arbitration—encouraged by the plaintiffs’ bar—stems from the

fact that arbitration agreements typically require that arbitration proceed on an individual

basis—and bar class procedures in arbitration and in court. This argument rests on an incorrect

assumption: that the elimination of class actions deprives consumers of a procedural

mechanism that supposedly provides enormous benefits by allowing the vindication of small

claims that (according to the argument) would be too expensive for plaintiffs to arbitrate

individually. The Bureau’s study purports to provide empirical evidence addressing that

argument.

But even the Bureau’s own study does not support that idealized view of the class action

system. Indeed, although the language of the study report is carefully crafted to avoid

criticizing class actions, the study’s underlying data actually establish that class actions are, on

the whole, not effective for the kinds of claims that most individuals are likely to have. As

explained further below, these details—buried in the Bureau’s study among the more

conspicuous statements implying that class actions are beneficial—in fact offer further proof

that most class actions provide no benefit to consumers.

That conclusion is consistent with an empirical study of class actions filed in 2009,

conducted by Mayer Brown LLP on behalf of the Chamber.7 The study found that the

overwhelming majority of class actions result in no recovery at all for members of the putative

class.8 Although the Bureau’s study characterized the Chamber study as “not . . .

comprehensive,”9 the Bureau study’s own data are consistent with the Chamber study in

showing that class actions most frequently do not provide significant benefits to class members.

Most cases filed as purported class actions are not resolved in a manner that provides

any benefit to absent class members. According to the Bureau’s data, 87% of resolved class

actions (excluding claims affected by arbitration agreements) resulted in no benefit to absent

class members. Instead, most are dismissed by or settled with the named plaintiff only. The

Bureau found that only 12% of putative class actions were finally approved for settlement

during the study period.10 That is even smaller than the proportion observed in the Chamber

study, in which 28% of class actions studied had settled by the end of the study period.

Although the Bureau’s report fails to acknowledge it, the plain fact is that absent class members

receive nothing unless a class action is settled on a class-wide basis or there is a class-wide

judgment for plaintiffs (something that almost never happens).

6 Chamber Comment II at 9-13.

7 Mayer Brown LLP, Do Class Actions Benefit Class Members? An Empirical Analysis of Class Actions

(Dec. 11, 2013) (“Chamber Study”), available at http://www.mayerbrown.com/files/uploads/-

Documents/PDFs/2013/December/DoClassActionsBenefitClassMembers.pdf.

8 See generally Chamber Study.

9 CFPB Study at section 8, page 6.

10 Id. at section 6, page 37.
- 4 -

Even in those cases that do settle, most class members still receive nothing. The

Bureau’s report attempts to tout the purportedly large number of class members “eligible for

relief,” but the only relevant metric is the rates at which “eligible” class members actually

received relief, typically after submitting claims. In sharp contrast with the flood of statistics

provided on other topics—including the numbers of class members eligible for relief when

cases settle—the Bureau’s report seemed designed to obscure the proportion of eligible class

members who submitted claims. Where statistics were available, the Bureau’s study reported a

“weighted average claims rate” of 4%.11

That comports with the Chamber’s study, which found that (in the handful of cases

where statistics were available, and excluding one outlier case involving individual claims

worth, on average, over $2.5 million) the claims rates were miniscule: 0.000006%, 0.33%, 1.5%,

9.66%, and 12%.12 The Bureau’s own study thus shows that even in the 13% of class actions that

did settle on a classwide basis, approximately 96% of class members received no benefit. The

Bureau could have—and should have—provided a precise calculation of the likelihood that a

class member would receive a benefit in a class action, but even a back-of-the-envelope estimate

suggests that claims-made settlements provide very little to the broader set of individuals on

whose behalf seek to bring class actions. If an average of 4 percent of class members (weighted

by size of the class) made claims and only 13 percent of class actions result in settlements, then

only a very, very tiny percentage of the members of potential classes ever receive any recovery.

Why do claims rates matter? In determining who benefits, it makes no difference how

many people are “eligible” to make claims; all that matters is who follows through. As the

Chamber’s study explained, there are many reasons why a class member might not submit a

claim, such as because he or she believes the modest award is not worth their while, or the

process is burdensome, or they do not believe they have been injured in the first place.13

The Bureau’s study revealed other data about how class actions provide little value to

individuals (although, again, one has to dig beneath the surface). For example, the study

carefully avoids any mention of the average amount of payments to class members, instead

trumpeting “a total of $1.1 billion in 251 settlements.” It elsewhere says that 236 settlements

involved 34 million class members “who received, or will receive, a cash payment.” Assuming

that the 15 cases included in the first number and not in the second had classes that were equal

in size to the average class size for the 236, the average settlement payment was $30.38.14

What is more, claimants had to wait significantly longer in class actions than in

arbitration to obtain relief. According to the Bureau, class actions that settled on a classwide

basis—and for which it was thus even possible that a class action could provide benefits to

absent class members—took an average of two years to resolve. And that period may not even

include the time for consumers to submit claims and receive payment. By contrast, arbitrations

11 Id. at section 8, page 30.

12 Chamber Study at 7 & n.20.

13 Id.

14 CFPB Study at section 8, pages 27-28.
- 5 -

resolved by the arbitrator took between four and eight months to resolve, and those arbitrations

that were settled took between two to five months.15

One thing is clear, however: while class members receive little, the lawyers who bring

these class actions do very, very well for themselves. Based on the Bureau’s report, the amount

received by plaintiffs’ lawyers—as a percentage of the total announced settlement (not the

smaller amount actually distributed to class members)—averaged 41%, with a median of 46%.

The total: $424 million for 419 cases, or an average of more than $1 million per case.16 It is

telling that the Bureau did not attempt to compare the amount received by plaintiffs’ lawyers

with the amount class members actually received.

These massive fees are but one part of the equation: They do not include the other very

large transaction costs associated with litigating class actions—the defense costs that companies

must pay in all cases, and the cost to the courts of handling these cases. The Bureau does not

even attempt to determine whether the costs of the system are worth the $30 benefit that a

relatively small number of consumers may receive.

C. The Bureau’s study does little to evaluate—or even describe—the procedures available in

arbitration that afford consumers with fair, faster, and less expensive dispute resolution

compared with litigation.

The Bureau’s own study reveals that—especially in contrast to class action litigation—

arbitration provides consumers with effective procedures that enable them to obtain relief on

claims that would be impractical to pursue in court.

The reasons that consumers cannot pursue most of their potential claims in court are (1)

the claims are too small to attract a lawyer (typically more than $50,000 must be at issue in order

to do so), and (2) the claims are too individualized to be addressed in a class action. Consumers

who use arbitration get decisions on the merits more frequently and more quickly than they

would in court.

The Bureau made no serious effort to examine the benefits of arbitration because it did

not make any qualitative effort to assess how arbitration’s procedures work and whether those

procedures would facilitate the ability of consumers to bring claims.

But even the narrow examination of arbitration that the Bureau did undertake confirms

arbitration’s advantages:

 More of consumers’ affirmative claims were decided on the merits: 24% in arbitrations,

compared to less than 8% in litigation (and all but three of those were default

judgments).17 The success rate for consumers was even higher—27.2%—in the subset of

arbitrations where the consumer brought affirmative claims but did not dispute any

alleged debts.18

15 Id. at section 5, page 72; id. at section 8, page 37.

16 Id. at section 8, page 33.

17 See id. at section 6, pages 48-49.

18 Id. at section 5, page 39.
- 6 -

 In arbitrations resolved by arbitrators involving affirmative claims by consumers where

data on the amount of the award was available, consumers received relief on 32 claims

on the merits; the average payment to consumers was $5,389, and the median amount

was $2,682.19 Those awards are significantly greater than the relief to claimants in class

action settlements.

 The one reported court award was $4,925; the average settlement was $2,128; and the

median amount was $1,001. Those consumers who were able to use arbitration to obtain

a merits decision did much better.

To the extent the Bureau does discuss the terms of arbitration agreements, it presents a

false and misleading picture of the arbitral process. The Bureau recites various provisions of

certain arbitration agreements—for example, provisions that bar punitive or consequential

damages, limit the time period for filing claims, or require hearings in particular locations, or

permit a company to recovery attorneys’ fees whenever it prevails.20 But the Bureau fails to

explain that courts have routinely and consistently invalidated such provisions on state-law

unconscionability grounds—a point that has been made fully clear to the Bureau.21 That failure

is an obvious attempt by the Bureau to create the patently erroneous impression that such

provisions are being applied in practice simply because they are included in the terms of some

arbitration agreements.

Even more troubling, the Bureau simply failed even to mention—much less analyze—

the extent to which arbitration creates incentives for companies to settle individual claims or

disputes even before the filing of a formal arbitration proceeding. Because businesses subsidize

most or all of the costs of arbitration—under AAA consumer rules, for example, a business

must cover at least $1500 in filing fees22—it is therefore economically rational for every business

that is subject to an arbitration provision to settle disputes of less than $2,000-5,000 before an

arbitration is commenced. But that same incentive is lacking in court, where the cost burden

falls on the consumer.

In addition, many arbitration agreements create significant incentives to settle claims

before arbitration begins, such as through arbitration provisions that—like the provision at

issue in AT&T Mobility v. Concepcion—contain potential bonus payments to customers who do

better in arbitration than a company’s last settlement offer (providing, for example, that the

customer will be awarded a minimum amount, often $5,000-10,000, plus attorneys’ fees and,

often, other costs). It is thus a straightforward matter of economics that, if a consumer has a

dispute with a company of less than the bonus figure—and the claim is not frivolous or

abusive—the company has every reason to settle by offering a payment (often for the full

amount of the claim plus an amount for attorneys’ fees) that satisfies the customer.

Thus, as the Supreme Court explained in Concepcion, the consumers’ claim in that case

was “most unlikely to go unresolved” because the arbitration provision at issue provided that

19 Id. at section 5, page 41.

20 Id. at section 2, pages 45-64.

21 Chamber Comment II at 23-28.

22 AAA Consumer Arbitration Rules at 34, available at https://www.adr.org/aaa/ShowProperty?

nodeId=/UCM/ADRSTAGE2021425&.
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the company would pay the Concepcions a minimum of $7,500 and twice their attorneys fees if

they obtained an award “greater than AT&T’s last settlement offer.”23 And this self-imposed

incentive to settle occurs not just at the stages of a formally commenced arbitration or the prearbitration negotiation period. Instead, large numbers of AT&T customers have their concerns

resolved at a much earlier point by calling or e-mailing AT&T’s customer care department,

which is remarkably effective: the record in Concepcion indicated that AT&T representatives

awarded more than $1.3 billion in compensation to customers during a single twelve-month

period in response to customer concerns and complaints.

The Supreme Court, and other courts, have found that provisions like these give

companies a very significant incentive to settle even marginally meritorious claims on terms

favorable to claimants—in order to avoid the downside risk of losing and having to pay the

bonus amount.24 That confers an important benefit not available in litigation, and one that

cannot be quantified by looking at the results of arbitration proceedings. But the Bureau failed

to examine the issue.

The Bureau also failed to examine how a well-functioning arbitration system works in

practice. For example, the Bureau could have—but did not—study the arbitration system for

the Kaiser Foundation Health Plan in California, which has more than seven million members.

The Kaiser arbitration system gets high marks from health plan members, who have been

involved in arbitration proceedings, most of them over medical malpractice claims. According

to a 2013 survey conducted by Kaiser’s independent arbitration administrator, almost 50% of

the parties and attorneys who went through arbitrations that year reported that the arbitration

system was better than going to court, another 38% reported that it was the same as going to

court—and only 14% reported it was worse.25

The CFPB’s December 2013 preliminary results of its arbitration study—attached as the

Appendix A to the CFPB’s report—suggest that few individuals bring small dollar claims in

arbitration.26 But for several reasons, the number of formal claims filed by consumers in

arbitration and in court says nothing about the accessibility and fairness of the two methods of

dispute resolution.

First, consumers’ claims are often resolved before the filing of a formal arbitration

proceeding. Individuals who file arbitration demands—just like those who file small claims

court cases or lawsuits in court—are almost always a very small group of consumers whose

concerns were not resolved through less-formal customer service mechanisms. When

companies have millions of customers, it is likely that thousands—perhaps tens of thousands—

23 AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1753 (2011).

24 See id.; see also Coneff v. AT&T Corp., 673 F.3d 1155, 1159 (9th Cir. 2012) (noting that ‘the Concepcion

Court [had] examined this very arbitration agreement’ and concluded ‘that aggrieved customers who

filed claims would be essentially guaranteed to be made whole’” because “the arbitration agreement [at

issue] has a number of fee-shifting and otherwise pro-consumer provisions”) (quoting Cruz v. Cingular

Wireless, 648 F.3d 1205, 1215 (11th Cir. 2011) (citing Concepcion, 131 S. Ct. at 1753)).

25 Annual Report of the Office of the Independent Administrator of the Kaiser Foundation Health Plan, Inc.

Mandatory Arbitration System for Disputes with Health Plan Members, January 1, 2014 – December 31, 2014 at

44, available at http://www.oia-kaiserarb.com/pdfs/2014-Annual-Report.pdf.

26 CFPB Study at Appendix A, pages 76-82.
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of customers will at some point in their relationship have concerns that may or may not develop

into full-fledged disputes. But the vast majority of those customer concerns are resolved

through informal channels, such as customer service processes, negotiation, or mediation,

before a concern ripens into a dispute and a formal arbitration demand is filed.

Indeed, there are significant incentives for businesses to settle claims before arbitration

begins. As explained above (at pages 6-7), businesses subsidize most or all of the costs of

arbitration, and many have adopted arbitration agreements that provide for potential bonus

payments to customers who do better in arbitration than a company’s last settlement offer.

Significantly, a great many arbitration provisions require the company involved to pay all or

nearly all of the arbitration costs, and many of the provisions include bonus provisions. Those

agreements provide a very powerful incentive for pre-arbitration settlement of any nonfrivolous consumer claim of $5,000 or less.

Second, a concerted campaign to invalidate arbitration agreements was underway for

the period studied by the Bureau. Plaintiffs’ lawyers vigorously resisted arbitration (with

success in certain “magnet” jurisdictions for class actions) before Concepcion. And after the

Supreme Court held in Concepcion that class waivers in arbitration agreements are enforceable,

the plaintiffs’ bar has continued to search for ways to avoid their clients’ agreements to resolve

their disputes in arbitration. The unfortunate effect of these widespread efforts is that lawyers

who represent consumers and their allies in consumer advocacy organizations have

discouraged consumers from pursuing their disputes in simplified, often cost-free arbitration.

Third, the focus on “small-value” claims presents a misleading picture of arbitration.

The Bureau arbitrarily reported the incidence of claims involving $1,000 or less and then

concludes that few consumers arbitrate small claims.27 But that definition is odd, given that—

based on information compiled by the CFPB’s own December 2013 preliminary results—most

state small-claims courts permit the assertion of claims of up to $10,000.28

Hopefully, the Bureau did not adopt this overly narrow definition in order to be able to

assert, erroneously, that consumers do not use arbitration for small claims. In addition, of

course, this analysis ignores entirely the fact, discussed above, that the terms of a growing

number of arbitration agreements provide a very substantial incentive for the pre-arbitration

settlement of such claims.

In sum, the Bureau’s examination of how arbitration works is patently inadequate, and

will undermine the validity of any regulations that the Bureau might attempt to promulgate.

D. The Bureau’s survey of consumers reveals only that consumers do not focus on dispute

resolution when choosing among consumer financial products and services.

The Bureau’s study touts the results of a telephonic survey in asserting that consumers

are uninformed about the dispute resolution terms of their credit card agreements. But that

survey is completely irrelevant to determining whether regulation of arbitration is “in the

public interest and for the protection of consumers.”

27 CFPB Study at Appendix A, page 14.

28 Id. at Appendix A, page 160-61.
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That is because the Bureau refused to obtain information about consumers’ baseline

level of knowledge of other key provisions of their card agreements.29 Without that

comparative baseline, the Bureau cannot determine whether consumers pay greater, less, or the

same attention to dispute resolution clauses as to other clauses important to them—and why

that might be so. As a result, the Bureau was not able to place information regarding dispute

resolution systems in context—and thereby derive information that might be relevant to

assessing consumers’ relative awareness of arbitration agreements versus other credit card

contract provisions. The Bureau’s failure to elicit such information renders the survey data

meaningless.

Indeed, the approach taken by the Bureau in constructing the survey unfortunately

suggests that the Bureau’s analysis is results-oriented. Any neutral evaluation of credit card

agreements would have not just inquired about dispute resolution provisions but also about

other provisions as comparators (such as whether consumers recalled the interest rate or credit

limit). Why didn’t the Bureau ask such a basic question? In the absence of an explanation from

the Bureau, observers are left to conclude that obtaining such information would not serve the

Bureau’s pre-ordained goals. If consumers do recall their interest rates and credit limits, that

result would confirm that dispute resolution is not as salient as other terms (like the price of

credit); and if they did not, that response would indicate that consumers simply don’t recall any

of the elements of the credit card deal once they have entered into it, even those that are

undoubtedly important to their decision. Either way, the irrelevance of the Bureau’s survey

approach would have been confirmed.

The only data that the Bureau’s study delivers is that, unsurprisingly, consumers are not

focused on arbitration clauses: Not one consumer (of 1,007 who completed the survey)

volunteered dispute resolution procedures as a feature relevant to selection of their credit card.

Even when asked to respond to each of a list of nine elements, dispute resolution was the leastselected choice.

Finally, the Bureau also cites a paper describing a web survey that was authored by

Professor Jeff Sovern of St. Johns’ Law School (among others).30 But the Bureau’s discussion of

that study fails to disclose (as Professor Sovern does) that the study was paid for from a grant

by the American Association of Justice—i.e., the trial lawyers who benefit from class action

attorneys’ fee awards and therefore are invested in maintaining the class action system.

Moreover, Sovern’s web survey also fails to ask participants about any contract provision other

than the arbitration clause. It is telling (and quite unfortunate) that the Bureau’s survey suffers

from the same problem that the trial-lawyer-funded Sovern study does.

29 The Chamber repeatedly urged the Bureau to obtain such information, but the Bureau refused to

do so. See Letter from David Hirschmann & Lisa Rickard, Re: “Telephone Survey Exploring Consumer

Awareness of and Perceptions Regarding Dispute Resolution Provisions in Credit Card Agreements,” Docket No.

CFPB-2013-0016 (June 30, 2014), available at http://www.regulations.gov/#!documentDetail;D=CFPB2014-0011-0015; Letter from David Hirschmann & Lisa Rickard to Matthew Burton & PRA Office, Re:

“Telephone Survey Exploring Consumer Awareness of and Perceptions Regarding Dispute Resolution Provisions

in Credit Card Agreements,” Docket No. CFPB-2013-0016 (Aug. 6, 2013), http://www.regulations.gov/

#!documentDetail;D=CFPB-2013-0016-0015.

30 See CFPB Study at section 3, pages 7-8 (citing Jeff Sovern, Elayne E. Greenberg, Paul F. Kirgis, and

Yuxiang Liu, “Whimsy Little Contracts” With Unexpected Consequences: An Empirical Analysis of Respondent

Understanding of Arbitration Agreements (Oct. 29, 2014), available at http://ssrn.com/abstract=2516432).
- 10 -

E. Arbitration clauses lead to lower prices for consumers.

It cannot be debated that litigation in court—especially class-action litigation—imposes

substantial transaction costs on businesses. Because arbitration offers a less-expensive forum

for the resolution of disputes, it should reduce the transaction costs that businesses bear in the

judicial system, and basic economic principles teach that some portion of those cost savings will

be passed along to consumers.31

Here’s how Professor Stephen Ware explains this phenomenon:

 “The consensus view is that businesses using adhesive arbitration agreements do so

because those businesses generally find that those agreements lower their dispute

resolution costs.”

 “In the case of consumer arbitration agreements, this benefit to businesses is also a

benefit to consumers. That is because whatever lowers costs to businesses tends over

time to lower prices to consumers.”

 “While the entire cost-savings is passed on to consumers only under conditions of

perfect competition, some of the cost-savings is passed on to consumers under noncompetitive conditions, even monopoly.”

 “The extent to which cost-savings are passed on to consumers is determined by the

elasticity of supply and demand in the relevant markets. Therefore, the size of the price

reduction caused by enforcement of consumer arbitration agreements will vary, as will

the time it takes to occur.”

 “But it is inconsistent with basic economics to question the existence of the price

reduction.”32

The Bureau’s analysis of whether consumers experience cost savings from arbitration is

“inconsistent with basic economics,” because it claims that cost savings are absent.

The report does include caveats that would allow a careful reader to understand that, in

fact, the Bureau’s analysis is of little value. Unfortunately, the Bureau failed to highlight those

cautions. That said, the Bureau acknowledges that:

 “[t]he assertion that pre-dispute arbitration clauses generate cost savings, in itself, is

difficult to test and has not been established or disproved”;

 “[w]hether such savings, to the extent they exist, are passed along to consumers is

even more difficult to establish or disprove”;

31 See Chamber Comment II at 37-38, 54-55.

32 Stephen J. Ware, The Case for Enforcing Adhesive Arbitration Agremeents—With Particular

Consideration Of Class Actions and Arbitration Fees, 5 J. Am. Arbitration 251, 254-57 (2006) (emphasis

added; footnotes omitted; citing, inter alia, Richard Posner, Economic Analysis of Law (6th ed. 2003)).
- 11 -

 “[i]mportantly, even a correlation between the use of pre-dispute arbitration clauses

and price levels should not be construed as a casual relationship between the two,

absent additional information.” 33

Despite these acknowledgments—which should have caused the Bureau to undertake a

robust analysis rather than a rushed one—the Bureau proceeded to focus on the implications of

one particular lawsuit (Ross v. Bank of America) in which some settling banks agreed not to use

arbitration for a 3-1⁄2 year period.34 The question the Bureau asked is “whether it can find

statistically significant evidence, at standard confidence level (95%), that companies that

eliminated arbitration raised their prices (measured by total cost of credit) in a manner that was

different from that of comparable companies that had not changed their policies regarding

arbitration provisions.”35

But as the Bureau acknowledges (in a footnote), “the result” of its analysis “has

limitations.”36 That is a serious understatement. To begin with, while the study uses the

language of scientific analysis—describing the settling credit card issuers as a “treatment

group” and other issuers as a “control group”—the Bureau states that the “control group” “may

or may not have used pre-dispute arbitration provisions” at all.37 To be blunt, the Bureau is

saying “there was no control group.”38

More troubling, the Bureau’s report never assesses whether issuers that used arbitration

agreements during the time frame studied actually had experienced any cost savings from the

use of arbitration—if there were no cost savings, there would be no price increase when

arbitration was eliminated. And when one looks at the time frame studied by the Bureau, it is

apparent that there were virtually no cost savings to be had because of the state of the law

during that time. Specifically, the Bureau purported to examine the total cost of credit (a

defined term subject to its own limitations) with a “before” period from November 2008 to

October 2009 and an “after” period from January 2010 to November 2011.39 But the problem

with this time frame is that virtually all of it occurred before the Supreme Court decided AT&T

Mobility LLC v. Concepcion40 in late April 2011—i.e., when arbitration clauses were routinely not

being enforced in magnet jurisdictions for consumer class actions (including California, New

Jersey, Illinois, and Washington state). When courts do not enforce arbitration agreements and

allow class-action lawsuits to proceed, it is self-evident that the company that is party to an

arbitration agreement does not experience reduced transaction costs from arbitration.

33 CFPB Study at section 10, page 5.

34 Id. at section 10, pages 6 & n.14 (citing Ross v. Bank of America, No. 05-cv-7116 (S.D.N.Y.)).

35 Id. at section 10, pages 5-6.

36 Id. at section 10, page 8.

37 Id. at section 10, page 8.

38 Bizarrely, the report does not identify specific issuers “[f]or maximum protection of supervisory

data.” Id. at section 10, page 8 n.18. In light of the fact that the Bureau maintains an online database of

credit card agreements (http://www.consumerfinance.gov/credit-cards/agreements/), this rationale for

concealing information about issuers seems doubtful.

39 CFPB Study at section 10, page 9.

40 131 S. Ct. 1740 (2011).
- 12 -

Economic theory (and common sense) suggest that, in the absence of reduced

transaction costs to businesses, there are no cost savings to pass along to consumers. There is

no doubt that, as a result of Concepcion, courts are today enforcing fair arbitration agreements,

compelling arbitration, and dismissing class action lawsuits. As a result, credit card issuers are

now experiencing reduced transaction costs because of arbitration, and it is reasonable to expect

that some of the cost savings from arbitration place downward pressure on the price of credit

(although other types of regulation, including by the CFPB, have placed upward pressure on

those prices). But the Bureau’s study asks the wrong question by focusing on a time frame

when no reasonable person would contend that arbitration agreements were being enforced

with the regularity needed to lead to reduced transaction costs.

The better question is whether “prices would . . . increase in the face of an industry-wide

repeal of arbitration clauses, when uniform market pressure is no longer in play to keep prices

low.”41 Unlike the retrospective analysis the Bureau undertook focusing on the wrong time

frame, the real question, as a matter of public policy, is whether the elimination of pre-dispute

arbitration in consumer financial service contracts will force financial services companies to

increase prices to customers, and whether the benefits of class action litigation are worth

imposing the costs of a CFPB “regulatory tax.”

F. Government enforcement plays a significant role in protecting consumers.

Critics of arbitration have sometimes argued that the threat of judicial litigation—and in

particular class actions—is needed to deter companies from engaging in wrongdoing. But there

is no evidence that companies alter their behavior based on a threat of class actions, because the

costs in class actions are incurred without regard to the wrongfulness of the underlying

conduct. As the Chamber has previously explained to the Bureau, the burdens of class actions

are a function of who plaintiffs’ lawyers choose to sue—for the plaintiffs’ lawyer’s goal is to find

a claim for which the complaint can withstand a motion to dismiss and that can satisfy the

(legitimately) high hurdles of class certification—rather than a function of who has engaged in

actual wrongdoing.42

Businesses are far more likely to be deterred from wrongdoing by reputational

consequences, as the Chamber has previously discussed—and they are therefore particularly

likely to be deterred by the threat of government enforcement action. That is especially the case

in light of the enhanced government enforcement capabilities in the consumer financial

protection space. Not only are the monetary penalties higher, but an enforcement action

brought by the government reflects the government’s judgment that its limited resources

should be used to combat what it considers improper activity.43

Of course, not all government enforcement actions are brought against covered persons

who have actually engaged in wrongdoing. But while companies view class actions as a cost of

doing business—rent seeking by any one of a large number of entrepreneurial plaintiffs’

41 James Kim et al., Flawed CFPB Study and the Future of Arbitration Clauses, Corporate Counsel (Mar.

24, 2015), available at http://www.corpcounsel.com/id=1202721480235/Flawed-CFPB-Study-and-theFuture-of-Arbitration-Clauses?slreturn=20150409121634.

42 Chamber Letter II at 52-54.

43 CFPB Study at section 9, page 12.
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lawyers who are banking on the possibility that they may be able to coerce a settlement—

companies are far more likely to take notice of a government enforcement action. For that

reason, government enforcement plays a significant role in protecting consumers. That role is

likely to increase substantially given the Bureau’s supervision and enforcement authority.

The Bureau’s study provides zero support for class action proponents’ common claim

that class actions play an important role in supplementing government enforcement efforts.

The Bureau found, for example, that most government enforcement is independent of private

lawsuits. Less than 9% of government enforcement actions were preceded by a private class

action.44

For cases in which there was no government enforcement action (6%), the study does

not indicate how much consumers actually received under class action settlements. (It only

provides “gross” numbers.) It is therefore impossible to determine whether these settlements

actually provided meaningful consumer benefits. It is also impossible to determine what

amount of these settlements companies actually paid out – the amount that would be relevant

if, contrary to the evidence, companies were deterred by the prospect of settling class actions

brought by entrepreneurial plaintiffs’ lawyers.

Most importantly, the study period ended in 2012, and therefore entirely fails to take

account of the effect of the Bureau’s own fully functioning enforcement and supervision

programs. In the year ending December 31, 2012, the Bureau was a party to 9 enforcement

actions.45 In the year ending September 30, 2014, there were 41 public enforcement actions.46

And the Bureau has used its supervisory authority to conduct hundreds of examinations.47

The entire reason for creating the Bureau was to increase enforcement of consumer laws:

the Bureau’s existence, combined with the numerous other state, local, and federal enforcement

agencies, underscores that class actions have little, if any, role to play in this context—unless the

Bureau does not believe that its significant resources and authority will provide consumers with

additional protection.

Moreover, the Bureau is likely to focus on the precise types of wrongdoing that are

susceptible to class actions: misconduct that affects a large number of consumers. And the

Bureau’s examination authority, combined with its enforcement activities and consumer

complaint database, make it highly likely that the Bureau will detect such wrongdoing. The

Bureau’s enforcement powers therefore provide an additional, significant factor why the threat

of class actions is irrelevant to deterring wrongful conduct in this context.

44 Id. at section 9, page 14.

45 Semi-Annual Report of the CFPB, March 2013, at 66, available at http://files.consumerfinance.gov/

f/201303_CFPB_SemiAnnualReport_March2013.pdf.

46 Semi-Annual Report of the CFPB, Fall 2014, at 103, available at http://files.consumerfinance.gov/f/

201412_cfpb_semi-annual-report-fall-2014.pdf.

47 CFPB Supervisory Highlights, Spring 2014, at 5, available at http://files.consumerfinance.gov/f/

201405_cfpb_supervisory-highlights-spring-2014.pdf (“In 2013, the CFPB conducted over one hundred

supervisory activities—such as full scope reviews and subsequent follow-up examinations—and plans to

conduct approximately 150 of these activities in 2014.”).