A new study from the Consumer Financial Protection Bureau (CFPB) has found that “forced arbitration” clauses in contracts for cellphones, credit cards, and car loans -- which typically include bans on class actions -- are highly beneficial to large corporations and provide little relief to wronged consumers. The study helps debunk the right-wing media's claims that arbitration is a cost-effective and worthy alternative to the courts.

Conservative media outlets have repeatedly claimed that class actions unfairly penalize large corporations while lining the pockets of trial lawyers -- all while ignoring the fact that class-action lawsuits are still the best way for injured consumers to pursue justice and the most efficient way for companies to handle legal claims.

Instead of class-action lawsuits, right-wing media prefer forced arbitration clauses, which require injured consumers to settle legal claims in expensive arbitration proceedings instead of in court. These clauses have become increasingly popular with banks, private student-loan providers, and the payday loan industry, and they are hidden in the fine print of tens of millions of “take it or leave it” contracts. According to Public Citizen, a consumer advocacy group, most Americans don't know that they're subject to the clauses, and the cost of initiating arbitration proceedings is so high that “most individuals covered by an arbitration clause cannot afford these costs and are forced to drop their cases.” These attempts to allow corporate immunity to supersede federal rights are getting worse and can found in employment contracts, as well. As Supreme Court Justice Elena Kagan warned the last time the court's conservative justices permitted these types of “unconscionable agreements” :

Here is the nutshell version of this case, unfortunately obscured in the Court's decision. The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract's arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool's errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability -- even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse. And here is the nutshell version of today's opinion, admirably flaunted rather than camouflaged: Too darn bad.

Yet in the past, National Review has called forced arbitration clauses “especially generous towards consumers” and “an efficient and fair alternative to our costly and burdensome litigation system.”

In reality, forced arbitration clauses rarely, if ever, provide meaningful relief to consumers who are bound by them. According to the groundbreaking new study from the CFPB, prepared in accordance with the Dodd-Frank Act, class-action litigation provides significantly more financial relief than arbitration proceedings do. As Reuters legal analyst Alison Frankel explained, the CFPB report is a “powerful vindication of consumer class actions.” Frankel wrote that the “study's findings are unequivocal: Class actions deliver cash relief to vastly more consumers -- especially those with small dollar claims -- than individual arbitration” (emphasis added):

Proponents of arbitration portray it as a quicker and less expensive alternative to litigation, for businesses and ordinary people alike. Consumers, however, haven't taken advantage of arbitration's purported benefits, according to the CFPB. The study found that between 2010 and 2012, only about 410 individual consumers a year brought arbitration claims against financial services companies at the American Arbitration Association, which handles the majority of such cases. Arbitrators ended up deciding 341 cases in which a consumer claimed money from a bank. Consumers won 32. Another 46 people were granted debt forgiveness. A grand total of four -- four! -- consumers with a claim of less than $1,000 obtained relief in an AAA arbitration in 2010 and 2011. In all, AAA arbitrators awarded less than $173,000 in cash and about $190,000 in forbearance to consumers in those two years. Companies, meanwhile, fared much better. They were awarded about $2 million in arbitration against consumers, winning awards in 227 of the 244 cases in which their claims were decided by arbitrators.

By contrast, Frankel noted that the CFPB report also found that “34 million consumers had received or were due to receive cash from classwide litigation” and that the “total payout to consumers from class action settlements ... was at least $200 million a year, more than $1.1 billion over the timeframe the bureau studied.” As the CFPB noted, “these figures do not include the potential value to consumers of companies changing their behavior” -- another classic deterrent effect of the courts.

Photo via Flickr/Adam Fagen under a Creative Commons License.