Academic

Shouldn't there be a question mark in that title somewhere?

By Mark Weidemaier

Following up on my earlier post on consumer debt arbitration: the National Arbitration Forum has announced, as part of a settlement with the State of Minnesota, that it is withdrawing from the business of conducting any form of consumer arbitration. Here's the announcement. It will be interesting to see how this plays out in today's House subcommittee hearing: "'Arbitration or Arbitrary': The Misuse of Arbitration to Collect Consumer Debts." (Hmm...  there's something about that title...)

As I mentioned in my earlier post, the Minnesota complaint made troubling allegations about ties between the NAF and the consumer finance industry. More generally, there's certainly a case to be made for additional regulation of consumer debt collection practices, and another to be made against the use of arbitration to eliminate class actions. At the least, the question whether parties can give up the right to participate in class actions ex ante - everyone can give up the right to participate (in a damages class action) ex post simply by opting out - ought to be answered in a rational and systematic way. The current method - case by case unconscionability litigation - hardly seems a model of fairness or efficiency.

There is, however, something troubling about the tendency to equate one provider of arbitration-related services, the NAF, with "arbitration" in general, or even with the more limited "consumer arbitration," or even with the still more limited "consumer debt arbitration." As I've explained elsewhere, these providers inhabit a highly segmented market. Different arbitrators and arbitration providers are, well, different. Some cater to a customer base that cares strongly about the legitimacy of their chosen provider (and thus the enforceability of its awards). Others cater to a customer base focused almost exclusively on risk management. The credit card industry is probably an example of the latter kind of customer. At a minimum, then, focusing on credit card industry collections cases paints an incomplete - misleading is probably the better term - picture of other forms of arbitration. (This report, for example, assesses the American Arbitration Association's consumer arbitration practices in a more positive light.) Thus, even within the category of "consumer arbitration," there are models of relatively well-functioning arbitration systems and models of relatively poorly-functioning systems. Needless to say, employment arbitration might look still different.

All of this suggests that regulation is likely to miss the mark if it is based on perceptions about one provider. Dispute resolution provides both personal goods, like redress for harm and procedural justice, and social goods, like precedent and deterrence. It would be better for regulators to decide on a set of standards to ensure that private dispute resolution systems provide minimum quantities of these goods. That's a complicated question, in part because it depends on the extent to which other actors supply social goods like precedent. (Courts still produce employment law, for example.) But regulators might agree on a core set of minimum standards: transparency (at the aggregate level, anyway), some ability to aggregate claims, etc. Imposing these attributes, and otherwise getting out of the way, would be a much more sensible regulatory approach.

Full post as published by The Faculty Lounge on July 22, 2009 (boomark / email).