Amazon Scrapped Arbitration, But That May Not Help Consumers

Consumer advocates are cheering Amazon’s quiet decision to stop mandating arbitration for most customer disputes. The online retail giant, like other vendors, has heretofore included in its terms of service a ban on lawsuits. Without making a public announcement, the company has switched gears.

We might be cheering too soon.

Even though Amazon had little choice — more on that momentarily — the company’s retreat is a big deal. Mandatory arbitration clauses are widely reviled, including among heavy hitters. The arbitration process is “secretive” (Wall Street Journal), exists to allow companies “to prevent potentially damaging decisions in court” (Engadget), and sets us “on the path toward less accountability” (Techdirt). The clauses, writes the excellent Cory Doctorow, have enabled “a massive wealth-transfer to corporations.”


Let me suggest that the demonization of mandatory arbitration clauses is, as they say, undertheorized. Maybe the critics are right. But let’s think it through.

Companies prefer arbitration to litigation because arbitration lowers their costs. The Consumer Financial Protection Board argues consumers do worse in arbitration than in lawsuits. But many consumers have little choice about where to file complaints, because when they click “I agree,” they bind themselves to anti-litigation clauses whose existence they probably don’t suspect. In this sense, the clauses are classic examples of “shrouded attributes” — aspects of the deal that sellers try to conceal from “myopic” consumers who are less focused than other buyers on hidden costs.

This all sounds rather creepy, particularly if one believes that a citizen’s right to have a day in court is fundamental to democracy. Having a day before the arbitration panel just doesn’t carry the same ring. But there are strong arguments the other way. 

For one thing, most consumer cases, whether they head to court or to arbitration, are settled. A much-cited study found little difference in the size of those settlements per consumer. (Those big, ballyhooed class action settlements look a lot smaller when spread across all the plaintiffs.) Moreover, consumers with small claims that aren’t suitable for a class action will often have trouble finding a lawyer to represent them. For many people of modest incomes, litigation of small-stakes claims is essentially unaffordable.

This is no trivial distinction. Over the last few decades, legal scholars have increasingly come to understand that many laws intended to protect consumers turn out to be regressive. For example, laws that mandate full disclosure of credit terms seem appealing. In practice, however, the group of potential borrowers who use the information to shop around tend to be the well-off and well-educated. This leaves poorer and less-educated consumers to borrow from sources that offer credit on worse terms. As the legal scholar Omri Ben-Shahar points out in a perceptive 2016 article, the same might be true of limits on mandatory arbitration clauses.

How so? Suppose that going to court does indeed impose higher costs on companies than arbitration does. In that case, if the consumer can take a claim to court, providing the product or service becomes more expensive for the seller. If the company can’t mandate arbitration, the price will rise to include an implicit premium to pay for the difference: “A nondisclaimable right to litigate is merely a type of mandatory quality improvement, and like any other such feature, it effectuates a cross-subsidy in favor of the group that enjoys it more.”

Fair enough. Who pays the subsidy? Who enjoys the right? Ben-Shahar argues forcefully that the cross-subsidy for the right to litigate is likely to be enjoyed mainly the better off: “If I am a poor consumer unlikely to go to court, I do not benefit from access to courts, and I might be worse off for it, by having to pay higher prices.” One might answer that the change in price, spread over the buying public, might be only a dollar or two, but that answer does not quite come to grips with what it means to be poor.

Amazon’s decision might itself be taken as evidence for Ben-Shahar’s point. Like most companies that mandate arbitration, Amazon has long agreed to pay the costs. In recent years, the plaintiffs’ bar has hit upon the strategy of flooding companies with so many individual claims that litigation begins to look cheaper. In Amazon’s case, the costs were running into the tens of millions, due largely to some 75,000 complaints that Amazon’s Echo device retains overheard conversations without user consent. If true, a good reason to complain; but it’s hard to describe the Echo as anything but a luxury good.

Such arguments could be wrong, of course. We need a lot more data. But that’s the point. There’s a tendency to condemn the imposition of mandatory arbitration without giving sufficient attention to the possibility that it might lower consumer costs ... or that banning it might actually cause the poor to subsidize the rich. Before we leap to conclusions, let’s take the time to make sure.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen L. Carter is a Bloomberg Opinion columnist. He is a professor of law at Yale University and was a clerk to U.S. Supreme Court Justice Thurgood Marshall. His novels include “The Emperor of Ocean Park,” and his latest nonfiction book is “Invisible: The Forgotten Story of the Black Woman Lawyer Who Took Down America's Most Powerful Mobster.”

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