Bust for buyers, boon for lawyers

The Consumer Financial Protection Bureau’s arbitration rule is a bust for consumers but a boon for class action lawyers.

The supposed basis for the rule is the bureau’s 2015 study of consumer arbitration. But the study actually showed that arbitration is faster, less expensive and far more effective for consumers to resolve disputes than class action litigation.

Here are the facts: The average arbitration takes less than seven months, while class actions go on for years. In most arbitrations, consumer costs are capped at $ 200, but it costs $ 400 just to initiate a federal court lawsuit.

According to the study, consumers who prevailed in arbitration got an average award of about $ 5,400, but the average class action settlement payment was a paltry $ 32.

Meanwhile, plaintiffs’ class action lawyers pocketed a staggering total of $ 424,495,451.

The study also showed that just 12.3% of class action cases resulted in classwide settlements and benefits to class members. And only 4% of consumers who were entitled to a settlement payment actually filed the necessary claim forms. Probably because the payoff was so small.

The arbitration rule will exact a huge financial toll on the 53,000 companies that currently use arbitration agreements. We calculate that it will cost those companies between $ 2.6 billion and $ 5.2 billion over five years to deal with 6,042 additional federal and state court class actions that will be filed once class action waivers are eliminated. Those numbers will be repeated every five years.

At least some, if not most, of the increased defense costs will likely be passed on to consumers through higher costs or reduced services. Further, the public will have to bear the massive extra expense that our underfunded and overburdened courts will incur in handling the deluge of class actions.

More class action lawsuits aren’t such a good deal — unless you are a class action lawyer.

Alan S. Kaplinsky and Mark J. Levin are partners at the law firm Ballard Spahr LLP in Philadelphia. Mr. Kaplinsky leads the firm’s consumer financial services group.