Why Allowing Pre-Dispute Arbitration Opt-Out Clauses Is Not Effective Consumer Protection

by Jeff Sovern

One possible alternative to the Arbitration Fairness Act is an approach that permits consumers, when entering into contracts that contain pre-dispute arbitration clauses, to opt-out of arbitration before a dispute has arisen. This approach permits the illusion of consumer protection without the reality. Here are some reasons why:

There's reason to think most consumers simply don't opt out in consumer transactions. For example, each year, financial institutions bombard consumers with privacy notices informing customers that they have the right to opt out of the sale of their financial information to others. Yet the available evidence suggests that very few consumers have acted to prevent the sale of information about their transactions. See Testimony of John C. Dugan, Partner at Covington and Burling on behalf of the Financial Services Coordinating Council, Before the U.S. Sen. Com. On Banking, Housing and Urban Affairs, Sept. 19, 2002 (“opt-out rates have generally been low, and in nearly all cases under 10 percent.”); W.A. Lee, Opt-Out Notices Give No One A Thrill, 166 Am. Banker 1 (July 10, 2001) (“5% opt-out rate . . . has been circulating as the unofficial industry figure . . . .”); America’s Community Bankers, Wash. Perspective (Supp. Dec. 3, 2001) ("ACB Survey") (60% of financial institutions report that less than one percent of customers opted out).

Many consumers stay with the default, whatever that default is. As we wrote in our casebook:

[S]ome evidence suggests that many consumers choose the course of least resistance. An unintentional experiment in automobile insurance in New Jersey and Pennsylvania illustrates the point. Pennsylvania policies provided that consumers could bring a certain claim, but offered them the choice of paying lower rates in exchange for foregoing the right to bring the claim. Approximately 75% decided to keep the right to sue. By contrast, New Jersey policies did not permit drivers to bring the claim, but offered them the right to do so if they paid higher rates. About 20% agreed to pay the higher rates. In other words, most motorists did not deviate from the default choice. Eric J. Johnson, John Hershey, Jacqueline Meszaros and Howard Kunreuther, Framing, Probability Distortions, and Insurance Decisions in CHOICES, VALUES, AND FRAMES 224-40 (D. Kahneman and A. Tversky, eds. 2000).

The reasons for this tendency to stay with the default are unclear, and may vary in different contexts. My own belief is that one reason is that businesses increase consumer transaction costs in opting out; that is, they make it harder for consumers to opt out. One form this takes is to adopt strategies that reduce the likelihood that consumers even notice that their rights are at issue. For example, in Ting v. AT&T, 319 F.3d 1126( 9th Cir.), cert denied, 540 U.S. 811 (2003), (litigated by co-blogger Paul Bland), AT&T sent consumers a Customer Service Agreement (CSA) containing in bold text a disclaimer that service and billing would not change under the new CSA. The CSA also contained an arbitration clause. The court wrote:

AT&T's market study concluded that most customers “would stop reading and discard the letter” after reading this disclaimer. AT&T did not change the substance of the letter as a result of its market research -- indeed, internal AT&T documents indicate that the letter was specifically intended to make customers less alert to the details of the CSA.