What Are Class Action Waivers Worth? A New Study Looks to the Stock Market for Answers

Alan Kaplinsky (0:07)

Welcome to the award-winning Consumer Finance Monitor podcast, where we explore important new developments in the world of Consumer Financial Services and what they mean for your business, your customers and the industry. This is a weekly podcast show brought to you by the Consumer Financial Services Group at the Ballard Spahr Law Firm. I'm your host, Alan Kaplinsky, the founder and former practice group leader for 25 years, and now Senior Counsel of the Consumer Financial Services Group at Ballard Spahr. And I'll be moderating and hosting today's program. For those of you who want even more information, either about the topic that we will be discussing today, which I'll describe to you in a moment, or anything else in the world of Consumer Financial Services, don't forget about our blog, consumerfinancemonitor.com.

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Well, let me tell you about today's show. And I'm very excited about it because on a personal level, it concerns a subject that has occupied a significant portion of my professional career. Namely, arbitration agreements, including class action waivers in a variety of contracts, but mostly in consumer finance contracts. Beginning in the late 1990s, I became one of the principal advocates for the adoption of arbitration provisions containing class action waivers in consumer contracts. Working with banks, credit card issuers, finance companies and other providers of consumer financial services, I urged the use of these provisions as a means of reducing the enormous costs and the very high risks associated with class action litigation, while also providing, at the same time providing, consumers with an alternative form for resolving their disputes, which I believe that it's more efficacious than being a member of a putative class in a class action lawsuit. Many of the largest financial institutions in the country ultimately adopted arbitration provisions, including class action waivers. As many of our listeners know, the enforceability of class action waivers became the subject of extensive litigation, ultimately leading to landmark Supreme Court decisions such as AT&T Mobility versus Concepcion, American Express versus Italian Colors Restaurant, and Epic Systems Court v. Lewis. The debate later moved to the regulatory arena. When the CFPB issued in 2017, the arbitration rule, which would have prohibited the use of class action waivers in many consumer finance contracts.

And then, ultimately, to the, I don't know if I'll say the surprise, but certainly to the satisfaction of the industry, the Congress ultimately repealed the CFPB anti-arbitration rule, or I should say anti-class action waiver rule, under the Congressional Review Act. And that happened with no votes to spare. It required Vice President Pence to break the tie in the Senate, and he did, and that was the end of the CFPB arbitration rule. The policy debate surrounding arbitration is typically focused on questions such as consumer access to justice, litigation costs, the value to consumers of class actions, deterrence of bad behavior by companies, and fairness. The Dodd-Frank Act required the CFPB to conduct the study of consumer arbitration to determine whether there was a need for a regulation curbing the use of arbitration or class action waivers in consumer finance contracts. And ultimately, after conducting the research, the CFPB issued a voluminous report that, among other things, focused on the value of class actions to consumers, and the tremendous cost to the industry of defending class actions.

The following statistics regarding class action waivers were derived from the CFPB's own report, their own study, which was led by Richard Cordray, who was certainly, he was the very first official director of the CFPB, and a very consumer-oriented director, I might say.

They looked at 563 class actions in the study, and they found that only 12.3% of those class actions produced any settlement benefits to the putative class members. Since none of the class actions actually went to trial, that means about 87% of the putative class members received no benefits at all from the class actions that CFPB study. 60% of the class actions either settled individually with the name plaintiff, or were dropped by the name plaintiffs, and the litigation didn't proceed. Leaving the putative class members to fend for themselves. The benefits received by putative class members in the 12.3% of the class actions that settled were minuscule, an average of $32 per class member. For that paltry sum, the settlement class members had to wait two or more years. In class actions that required the members to submit a claim form, the weighted average claims rate was only 4%, meaning that 96% of the potentially eligible putative class members failed to obtain any benefits at all because they didn't submit claims. Director Cordray argued at the time that the lawyers for the class, he stated that the lawyers for the class collect a small portion compared with consumers, but the CFPB study determined that the plaintiff's lawyers received a staggering $424,495, I'm sorry, $424,495,451 in attorney's fees in the class actions that were studied. Hardly what anybody would call a small portion. The CFPB's own study revealed the following data regarding the cost to the industry of defending class action. And this is going to tie in directly with my guest who I'm about to introduce, who's conducted, I think, just a fabulous study about class actions and the impact that it has on stock market value of the company adopting an arbitration program. The CFPB estimated that the proposed rule to ban class action waivers would cause 53,000 consumer finance providers who currently utilize arbitration agreements to incur between $2.62 billion and $5.23 billion over a five-year period to deal with 6,042 additional federal and state court class actions that would be filed due to the proposed rules of elimination of class waivers. So our guest today, that's what was in the CFPB study. Obviously, the CFPB study did not look at what impact, nor did they really care what impact adopting an arbitration provision would have on how Wall Street or how the stock market evaluated the adoption of a class action waiver. Was there any value to it? What does the stock market think of arbitration clauses and class action waivers? What does it think they're worth? The question is the subject of this new working paper entitled The Value of Class Action Waivers, Evidence from Invalidation of the CFPB Arbitration Rule. It's available on the Social Science Research Network, that's SSRN, and as someone who has spent years encouraging financial institutions to adopt these provisions, I found this article intriguing because it attempts to quantify something which many of us believe for years, that protection against class action litigation had substantial economic value. And let me introduce our speaker today.