Consumer Law

Default Rules and the Arbitration Fairness Debate

By Deepak Gupta

by Deepak Gupta

Jeff Sovern and Paul Bland have contributed thoughtful posts on a proposal being pitched as a "compromise" in the debate over arbitration fairness.  It goes something like this: Instead of passing a law like the Arbitration Fairness Act that would make arbitration voluntary, let's just allow consumers to "opt out" of mandatory arbitration clauses, presumably by means of fine-print notices that nobody will actually read, let alone respond to. Professor Sovern rightly describes this as illusory consumer protection and, as Paul Bland notes, it's a technique that many corporations are already employing to try to defeat unconscionability arguments.

The proposal strikes me as a great illustration of the importance of default rules in choice architecture, a subject explored in the literature of law and behavioral economics and discussed in Cass Sunstein and Richard Thaler's recent book, Nudge.  Their argument revolves around a pretty simple empirical premise: ?[I]f, for a given choice, there is a default option?an option that will obtain if the chooser does nothing?then we can expect a large number of people to end up with that option, whether or not it is good for them.?  Corporations take advantage of this insight all the time in consumer transactions. Thaler and Sunstein give the example of offers for magazine subscriptions that consumers continue to receive unless they take affirmative steps to cancel them; Sunstein says he himself has been paying for subscriptions for years because he hasn't gotten around to canceling them. Another example is employer retirement plans; research shows that participation is greatly increased by making it the default instead of requiring employees to opt in.

So I wonder whether proponents of the "compromise" proposal on arbitration fairness would continue to support it if the opt-out mechanism stayed the same, but the default rule were switched: Instead of opting out of mandatory arbitration, consumers would have to read a notice and affirmatively opt in.  I suspect enthusiasm for the proposal would vanish--demonstrating that a truly voluntary system is not the true objective.

Full post as published by CL&P Blog on May 05, 2009 (boomark / email).