Arbitration – A First Line of Defense and a Powerful Tool

In last month’s column I addressed the need for a Compliance Management System as dealers must come to terms with the fact that compliance must be part of their business regimen. In brief, a Compliance Management System requires a written plan, appointed compliance officer, a board which oversees the plan and compliance officer, a dedicated telephone line for consumer complaints coupled with a program to redress those complaints and finally, a periodic third-party audit of the program. Such a program will help dealers proactively comply with federal and state law. This program will be addressed in detail in a future column. 

In briefest terms, arbitration is an alternative dispute resolution mechanism which replaces traditional litigation. If a matter is arbitrated it supplants the need for litigation.

If a dealer has a good compliance program the need for litigation or arbitration is reduced substantially. Most individual consumer complaints are relatively small and can be cured by settling with the consumer for an amount of less than $5,000. One of the reasons dealers have legal problems is that the dealer principal never learns of the consumer complaint because the salesman or finance manager who created the issue attempts to conceal it from upper management. A good compliance program will keep management informed and settling a consumer complaint may be the prudent choice of action.

But even the most well planned compliance program can’t prevent all legal problems. There is no document or program which is bullet-proof from legal attack regardless of the competence of the attorney hired or the vendor chosen. Dealers must have alternative contingency plans to complement their proactive compliance program. This column addresses such a plan which every dealer should implement: requiring every transaction to include an arbitration provision.

The Legal Threat

Dealer operations will continue to come under attack from two different quarters: government and private plaintiffs.

Recent enforcement actions and settlements by the CFPB and FTC and the CFPB’s new Civil Investigative Demands should put all dealers on notice. State regulators have also been active. However, what is not as commonly reported is the litigation generated from private plaintiffs representing consumers.

There are several national organizations which provide a forum for consumer attorneys to collaborate on lawsuits against dealers. In fact, there are more than 1,000 attorneys nationally whose primary objective is to sue dealers. These attorneys understand the automotive business and they rely upon practice guides which are published by highly competent attorney organizations with instructions on how to effectively sue dealers.

Litigation can be extremely expensive. And every consumer complaint contains within it the potential for a class action lawsuit, which can be enormously expensive to defend. For private lawsuits, dealers need to be prepared. Arbitration is an effective foil against these private actions, and helps dealers control the extent of their possible liability.

It’s important to note that including an arbitration provision in every transaction does not have any effect on government actions, except for possibly controlling publicity and avoiding government regulators from taking notice – which is quite a benefit.

As a personal observation, and during my tenure in the Florida Attorney General’s Office policing automotive fraud, consumers would consistently complain about the high cost of attempting to hire an attorney. For a consumer to typically hire an attorney, he or she would have to pay a $5,000 to $10,000 retainer fee just to begin the process. Unfortunately, there are some dealers which exploit their customers, and these customers have a right to seek recompense for their losses through a legal channel.  I came to the conclusion that arbitration was a good substitute as consumers could arbitrate their complaints without the need of an attorney. Moreover, in my experience, most consumer complaints are for amounts less than $5,000 and are quite suitable for arbitration. Most, if not all, consumer advocates would disagree with my personal conclusion.

Comparing and contrasting the advantages versus the disadvantages of arbitration clearly indicates that arbitration should be preferred by dealers.

There are many advantages to arbitration:

Avoidance of Class Actions

This may be the most important advantage to a dealer. Almost every consumer attorney, who is presented with a consumer complaint against a dealer, sees it as an opportunity to maximize his rate of return and convert the single claim into a class action. Class actions can be enormously expensive. Arbitration provisions should always contain a class action waiver, meaning that the consumer doesn’t have this option of initiating a class action. No issue is more contentious with consumer attorneys and consumer rights groups than class action waivers, which underscores their effectiveness for defendants.

Plaintiffs’ Attorneys Don’t Like Them

One of the most compelling reasons to adopt an arbitration program is that often, attorneys don’t represent consumers in cases where there is an arbitration clause in the documents, as they fear they won’t get their fees. This lack of representation often may dissuade consumers from even advancing their own cases.

More Cost Efficient

Although arbitration is becoming more expensive it remains a cost efficient alternative to litigation. There are two reasons for this cost efficiency: the process is quicker and the procedures are less onerous. Dealers would continue to have an attorney represent them in arbitration, but those legal fees would be less since the process is shortened and simpler.

Less Contentious

Consumers can represent themselves in arbitration and don’t need an attorney. The arbitrator can work directly with the consumer, along with the defendant dealer, in a collaborative manner. Collaboration of this nature differs from the antagonism inherent in litigation or a trial.

Rules of Evidence and Legal Procedures Are More Relaxed

Legal procedures for arbitration are far simpler than the usual demands of litigation. One of the major elements of civil procedure is called discovery. It entails depositions, requests to produce documents, interrogatories and so forth. This rigorous process is not the practice in arbitrations which saves both time and money.

Provides Scheduling Flexibility

Litigation is a lengthy process as the civil procedure practice code in all states necessitates various steps. Judges are charged with many cases on their dockets, and they are not quick to render decisions on the various pleadings and motions which are presented to them. Moreover, if a motion must be heard, scheduling that motion may be delayed for many months. Conversely, arbitrations can be held around the demands of the conflict including evenings and weekends. A typical arbitration should be completed in less than half the time of traditional litigation.

Privacy

Arbitrations are often conducted in private, unlike litigation. When documents are filed in the courthouse, or a case is heard in front of a judge, it is a public event. Public events often inspire others to sue, unlike private arbitrations. In addition, the media may report these events in the newspapers, radio, or television.

There are very few disadvantages to employing arbitration for dealers, none of which are compelling.

Additional Legal Fees

Dealers may wish to retain an attorney’s services to draft the appropriate arbitration language. However, major forms vendors may have legally qualified and appropriate arbitration language which meets a dealer’s needs already.

Adding Arbitration Would Require Changing Your Forms

This would require dealers to review their forms and add language where appropriate or adopt a stand-alone arbitration document.

Advancing the Consumer’s Arbitration Fees

Legal attacks against arbitration provisions often include the concepts of procedural unconscionability and the unfairness for a consumer to have to waive his right to go to court, yet nevertheless pay high fees to arbitrate his case. Some of these attacks have been successful and courts have ruled that these arbitration provisions shouldn’t apply for these reasons. To counter this legal claim, well-drafted arbitration provisions may require the dealer to advance the costs of arbitration to the consumer. In other words, the dealer pays for all the initial costs of the proceeding up to a certain dollar amount. The dealer may get this money back depending upon the arbitrator’s decision.

Lack of Appeal

Arbitration decisions usually provide less opportunity for appeal. If the consumer prevails, the dealer may have great difficulty in seeking to have the decision reversed.

Arbitrator Bias

It is alleged that by the very nature of arbitration consumers are disadvantaged. Some statistical analyses would conclude otherwise.

Not Open for Public Review

Arbitration proceedings are not open to the public, and this fact may imply that there may be a bias against the consumer since it would be the defendant dealer who would be more likely to select arbitration to resolve the complaint.

Expense

Historically, arbitration was less expensive than it is presently. Legal attacks against arbitration procedures have escalated the costs since dealers should take the lead in paying for the arbitration expenses.

The Consumer Finance Protection Bureau (CFPB) is studying arbitration and it is expected to abolish arbitration for consumer transactions in the next two to three years. Until that time, however, arbitration remains legally valid.

Dealers should adopt an arbitration program simply because it protects them from the potential large legal costs of lawsuits and class actions. And, it can be managed far better than the traditional legal process. It complements a sound compliance program and it does so at a very reasonable cost.