The Consumer Financial Protection Bureau has to make an important decision soon, about arbitration clauses. Forced arbitration clauses (or “mandatory pre-dispute arbitration clauses” as they are sometimes called) appear in many standard consumer contracts. If you have a Paypal account, a mobile phone contract, a credit card, an employment contract, or if you have purchased a car of other large consumer item, the chances are that all of these contracts have forced arbitration clauses in them. Most people don’t read consumer contracts very closely, and many if not most people have ever even heard of forced arbitraiton. But suppose that you gave 600 ordinary American consumers a typical contemporary consumer contract, asked them to read it and then gave them a quiz. How would they do?
That is more or less what a major study by the St John’s University School of Law led by Professor Jeff Sovern did. It seeks to answer the question: do we understand forced arbitration clauses?
How Common Are Arbitration Clauses?
First, remember that forced arbitration clauses are common. Attention often focuses on credit cards. About 48% of credit card agreements are subject to arbitration clauses right now. However, this number is artificially low: several major credit card companies were forced to get rid of forced arbitration clauses for several years as a result of class action lawsuits against them. The CFPB estimated that over 90% of credit cards would be subject to forced arbitration under normal circumstances. In a few years, when those class action settlements are concluded, forced arbitration clauses will likely re-appear in all those credit card contracts. Forced arbitration clauses are present in many other sectors, most notably employment contracts, nursing homes and auto sales contracts. However these areas have been less intensely studied than consumer finance contracts.
How the Study Worked
The study conducted an online survey of consumers. The participants were asked to read a standard form credit card contract. The contract chosen was shorter than the average contract: it was only 7 pages long. The forced arbitration clause was 615 words long; most are over 1,000 words. The document (at pages 82-88 of the article) will be familiar to anyone how has tried to read a credit card contract. It consists of a one-page disclosure box – the “Schumer Box” – and six pages of dense, two-column print. After reading the contract, the participants were asked to answer some questions about the forced arbitration clause.
668 people took the survey. They were demographically representative of the adult US population (although of course the study excluded non-internet users and people who don’t like surveys).
What the Study Found
- Consumers Don’t Read Contracts
First, the study confirmed what is already known: consumers do not pay much attention to credit card contracts. The participants in the study were asked to read the contract. They spent an average of about four minutes reading through. The average adult reads at about 300 words per minute. At that speed the study estimates that participants had time to read about 14% of the contract.
This is still better than End User License Agreements (EULAs) for software, which many people click through in seconds, without any attempt to read. However this is unlikely to reflect the actual attention people pay to credit card agreements in the real world: participants in the study were directed to read the contract, they presumably knew that the survey would relate to the contract and may have paid more attention to it than they would in everyday life for that reason.
Participants had a variety of opinions about reading the contract. Some refused to (with one calling it a “bunch of meaningless crap”, some expressed guilt about not reading it, but did not expect it to contain any “unusual terms”, others would prefer to ask the bank issuing the card questions about the terms and some were reluctant to read because they knew that the terms were non-negotiable. The most common comment appears to have been that the contract was simply too long and hard to understand. That is not a surprising or uncommon sentiment. In fact, it is shared with Senator Elizabeth Warren, who famously admitted “I teach contract law at Harvard and I can’t understand my credit card contract.”
- Consumers Don’t Read Arbitration Clauses
If consumers make some effort to read the contract, will they read the forced arbitration clause?
Forced arbitration clauses are often accompanied by features such as text encouraging consumers to “Read These Terms Carefully” or making the text italic or ALLCAPS. The study indicates that this does not work. The forced arbitration clause in the sample contract was split over two pages. The first page contained the most important parts of the arbitration clause: the parts claiming to waive the consumer’s rights to class action or public litigation. Participants spent little more than 19 seconds reading that entire page (which included other text as well). 19 seconds is not sufficient time, at normal speed, to read the text of clause on that page. The participants took longer on the second page, but it is unclear why: perhaps the non-arbitration terms on the second page were perceived to be more important.
So, what did the participants read? The most read page was the last. It contained a section on billing rights, and the tail end of the arbitration clause. However, participants were also informed that it was the last page and it may have attracted more attention for that reason, rather than for its content. The second most read page was the first, containing the Schumer Box. Even then, at average speed, the average time spent was only enough to read 38% of the words in the box.
The least read page was page 5. Page 5 contained part of a section on interest, a section on default and part of a section on cancellation (and unilateral amendment by the creditor). At average speed, the average participant would have read only 5% of the words on the page. All of those are pretty important things, but none of them attracted much attention from the participants.
- Consumers Don’t Remember The Forced Arbitration Clause
The study authors wanted to know whether consumers found the forced arbitration clause to be particularly important: how “salient” was the arbitration clause to them?
The participants were asked to write down 5 things they remembered from the contract, in order of importance. Most could not remember 5 things – the average was less than 3. In total the participants wrote down 1975 items, 19 of which did not appear in the contract (the study doesn’t specify what they were but the examples given are “401K” and “ARM” which suggest that these are vaguely financial terms which participants may have remembered from some other contract or discussion of financial matters). There were 119 items that were mentioned more than once. The arbitration clause was one, mentioned by between 18 and 23 times, depending on what items are counted as being about the arbitration clause. Participants seem to have been more interested in the items in the mandatory disclosure box at the front of the contract – the Schumer Box. Cancellation and minimum payments (which are not in the box) were mentioned about as frequently as the arbitration clause.
So, it seems that despite the “Read Carefully” warnings, the italics and ALLCAPS, forced arbitration clauses were not very salient to the participants: they were not as important or memorable as the Schumer box items.
- Consumers Still Expect To be Allowed to Sue
43% of participants realized that the contract required them to arbitrate (so, a little less than half of them picked up that much from skimming the agreement). However, the study then asked participants a hypothetical about a billing dispute.
Suppose after you paid your credit card bill, you realized the credit card company overcharged you. The credit card company, however, believes it has not overcharged you and refuses to give you your money back. The dispute is too large to be decided by a small claims court. Under the terms of the contract you just saw, if the amount of the dispute was large enough, would you have a right to have a court decide the dispute even if the credit card company didn’t want a court to decide the dispute?
The correct answer, under the forced arbitration clause, is “no”. However, only 14% of all participants in the study knew that. Even among the 43% who realized they had agreed to arbitrate, 61% thought that they could still take the hypothetical dispute to court. Only 9% of participants both realized that the contract mandated arbitration and knew that that meant they could not sue in court.
Participant’s comments indicated that they thought suing was a right that the contract could not remove. One wrote:
I did not read this information but I would expect that [suing in a non-small claims court] would be my right as a free citizen of the US.
Another stated the point even more clearly:
You always have a right to pursue legal action when someone has wronged you. It is not up to one party or another to decide whether or not they will take away that right.
Participants’ answers to a question about the small claims exception in the arbitration clause paint an even more confusing picture: only 28% thought they could sue in a small claims court in a hypothetical billing dispute.
The study found similar misunderstandings about the waiver of jury trial and of class actions: more people incorrectly thought they retained those rights than understood that the forced arbitration clause eviscerated them.
5. Consumers Don’t Understand The Rules Surrounding Forced Arbitration
Next the study tested the participants expectations about how arbitration works. Participants were asked hypothetical questions about a “properly worded” arbitration clause. In short they were asked (a) how likely it was that a “properly worded” clause would be upheld if challenged in court (b) whether a class action could be brought under the terms of a “properly worded” clause and (c) what appeal rights the consumer would have if an arbitrator made a legal error in his decision.
Supreme Court jurisprudence makes it very unlikely that a properly worded clause could be challenged in court, but less than half of participants knew that: only 43% thought it was very unlikely or unlikely that a challenge could be successful.
Only 29% of participants knew that they would not be able to join a class action, under the “properly-worded” arbitration clause.
By the same token, most participants thought that they could appeal to someone: Less than 20% knew that the arbitrator’s decision would be final.
- Consumers Don’t Know If They Are Subject To Forced Arbitration
The study also explored whether consumers know that they are subject to forced arbitration under contracts they have actually signed. Participants were asked whether they had signed a contract with an arbitration clause, then asked whether they had any of a few common consumer contracts which do contain arbitration clauses – the contracts were AT&T, Verizon or Sprint phone contracts and Paypal or Skype accounts. 47% of participants thought they had never entered into a contract with an arbitration clause. But of that 47%, 87% were wrong: they had one of the listed contracts, and were subject to an arbitration clause.
- Looking For Arbitration Clauses Doesn’t Help
Finally, the study asked if participants looked for arbitration clauses in contracts they signed. 27% did. More than half of those thought that they had not entered into a contract with a clause, but most of them had. People who looked for arbitration causes did not avoid them: 85% of those who looked had arbitration clauses, compared to 87% of those who did not look.
Consumers Failed the Quiz
The core finding of the study, according to the authors is that
[i]t is not an exaggeration to say that consumers have no idea what they are agreeing to when they enter into contracts containing arbitration clauses.
This is well illustrated by a very simple figure (page 112 of the draft article). It shows how well participants answered questions which had right and wrong answers. Participants got 25% of answers right; 37% wrong and for 38% they answered “I don’t know.”
All of this underscores this common sentiment: if arbitration is so great, why do you have to force it on people? Let the free market decide. If arbitration is truly better than litigation, then let the parties choose it when a dispute arises. Do not hide forced arbitration clauses in complex contracts. These are precisely the tricks and traps that the new era of consumer protection is supposed to get rid of.