Arbitration costs and contingent fee contracts

Vanderbilt Law Review

Volumn 59, Issue 3, 2006, Pages 729-791

  Drahozal, Christopher R ^a  

^a University of Kansas School of Law   (United States)

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EID: 33750077580     PISSN: 00422533     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (274)

1. PUBLIC CITIZEN, THE COSTS OF ARBITRATION 1 (2002), available at http://www.citizen.org/documents/ACF110A.PDF.
2. Id. at 5. Public Citizen provides no empirical evidence to support this provocative statement, however, and it seems to be contradicted by the over 5,000 consumer and employment arbitrations reported by the AAA from January 1, 2005 through June 30, 2005 (as required by California law), many of which settled or resulted in an award. See American Arbitration Association, CCP Section 1281.96 Data Collection Requirements (July 1, 2005), www.adr.org/CDataQ2.pdf (last visited Apr. 30, 2006).
3. Mark E. Budnitz, The High Cost of Mandatory Consumer Arbitration, 67 LAW & CONTEMP. PROBS. 133, 161 (2004).
4. Charles L. Knapp, Taking Contracts Private: The Quiet Revolution in Contract Law, 71 FORDHAM L. REV. 761, 781 (2002).
5. Reginald Alleyne, Arbitrators' Fees: The Dagger in the Heart of Mandatory Arbitration for Statutory Discrimination Claims, 6 U. PA. J. LAB. & EMPL. L. 1, 30 (2003).
6. NATIONAL CONSUMER LAW CENTER, CONSUMER ARBITRATION AGREEMENTS: ENFORCEABILITY AND OTHER TOPICS § 1.3.6, at 9 (4th ed. 2004);
7. see also Dennis Nolan, Labor and Employment Arbitration: What's Justice Got to Do With It?, 53 DISP. RESOL. J. 40, 47 (1998) ("[S]haring the arbitrator's fees and expenses might prove an insurmountable barrier for the putative grievant.").
8. See Michael H. LeRoy & Peter Feuille, When Is Cost an Unlawful Barrier to Alternative Dispute Resolution: The Ever Green Tree of Mandatory Employment Arbitration, 50 UCLA L. REV. 143, 176-77 (2002) (reporting results of empirical study of cost challenges).
9. 531 U.S. 79 (2000).
10. Id. at 90. But the Court held in Green Tree that the plaintiff had failed to make a sufficient showing of the likely cost of arbitration (without indicating what showing would have been sufficient). See infra text accompanying notes 94-98.
11. Budnitz, supra note 3, at 154-56; see also infra text accompanying notes 101-116.
12. 317 F.3d 646, 664 (6th Cir. 2003) (en banc).
13. Id. at 664; see also Cooper v. MRM Inv. Co., 367 F.3d 493 (6th Cir. 2004).
14. Morrison, 317 F.3d at 664.
15. Id. at 663.
16. See infra text accompanying notes 48-49.
17. See infra text accompanying note 50.
18. PUBLIC CITIZEN, supra note 1, at 1.
19. Id. at 8, 21, 25. Not all of the arbitrations cited by Public Citizen involved low-income claimants. At issue in one arbitration, for example, were alleged defects in a $605,000 home. Id. at 16.
20. Id. at 52.
21. Morrison v. Circuit City Stores, Inc., 317 F.3d 646, 664 (6th Cir. 2003) (en banc).
22. PUBLIC CITIZEN, supra note 1, at 65.
23. See, e.g., Samuel Estreicher & Matt Ballard, Affordable Justice Through Arbitration: A Critique of Public Citizen's Jeremiad on the "Cost of Arbitration", DISP. RESOL. J. 8, 10 (Nov. 2002/Jan. 2003) ("[T]he Public Citizen report makes the faulty assumption that lower-income parties are otherwise being denied their 'day in court' due to mandatory predispute arbitration agreements.");
24. Eric J. Mogilnicki & Kirk D. Jensen, Arbitration and Unconscionability, 19 GA. ST. U.L. REV. 761, 770 n.50 (2003) ("Public Citizen's report fails to consider, however, the costs of legal representation in its analysis - costs that are often substantial.");
25. News Release, Cato Institute, Public Citizen Arbitration Study Contains Errors, Half-Truths and Exaggerations, Scholar Says (May 3, 2002) ("Any honest comparison of arbitration and litigation must include the cost of legal fees, discovery and delay. Those costs are generally lower in arbitration, and Public Citizen offers no persuasive evidence to the contrary.") (quoting Professor Stephen J. Ware), available at http://www.cato.org/new/05-02/05-03- 02r-2.html;
26. AMERICAN ARBITRATION ASSOCIATION, FAIR PLAY: PERSPECTIVES FROM AMERICAN ARBITRATION ASSOCIATION ON CONSUMER AND EMPLOYMENT ARBITRATION (Jan. 2003) [hereinafter AAA, FAIR PLAY].
27. E.g., AAA, FAIR PLAY, supra note 22, at 23 (quoting Lewis L. Maltby): Arbitration, because it is private, inherently requires those who use the system to pay the costs. The real question is, and has always been, whether the total cost to the employee/plaintiff is higher or lower in arbitration. An employee/plaintiff is far better off spending $2,000 on forum costs and $10,000 on legal fees in arbitration than virtually nothing on forum costs and $20,000 on legal fees in court.
28. The available empirical evidence provides some support for this view. In a recent study of American Arbitration Association employment arbitrations, Theodore Eisenberg and Elizabeth Hill reported being "unable to compare litigation and arbitration results for lower-paid employees due to the lack of data about litigation commenced by employees in this economic group." Theodore Eisenberg & Elizabeth Hill, Arbitration and Litigation of Employment Claims: An Empirical Comparison, DISP. RESOL. J., Nov. 2003/Jan. 2004, at 44, 45. In other words, while the lower-paid employees in their dataset were able to bring claims in arbitration, the employment cases in court (at least those not involving discrimination claims) were brought mostly by higher-paid employees. Eisenberg and Hill concluded that "[l]ower-pay employees seem unable to attract the legal representation necessary for meaningful access to court." Id. at 61.
29. 513 U.S. 265 (1995).
30. Id. at 280; see also Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 123 (2001) ("Arbitration agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts.").
31. Public Citizen argues as well that no evidence exists that total process costs are lower in arbitration than in court. PUBLIC CITIZEN, supra note 1, at 61.
32. See supra text accompanying notes 20-21.
33. See infra text accompanying notes 161-180.
34. Herbert M. Kritzer, The Wages of Risk: The Returns of Contingency Fee Legal Practice, 48 DEPAUL L. REV. 267, 270 (1998);
35. see also RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 624 (5th ed. 1998) ("The solution to this liquidity problem is the contingent fee contract."); see infra text accompanying notes 190-191.
36. Kritzer, supra note 30, at 270.
37. See infra text accompanying notes 194-200.
38. See, e.g., PUBLIC CITIZEN, supra note 1, at 4-5. In addition, losses due to the time value of money might also be classified as a cost (or benefit) of arbitration. See Matthew T. Bodie, Questions About the Efficiency of Employment Arbitration Agreements, 39 GA. L. REV. 1, 12 (2004) (explaining that supporters of arbitration argue that "an arbitral award might have a higher expected value since it would be granted more quickly than a litigation award").
39. See infra text accompanying notes 190-191.
40. E.g., Herbert M. Kritzer & Jill K. Anderson, The Arbitration Alternative: A Comparative Analysis of Case Processing Time, Disposition Mode, and Cost in the American Arbitration Association and the Courts, 8 JUSTICE SYS. J. 6 (1983). Case selection effects make carrying out such studies extremely difficult. See infra text accompanying notes 135-137.
41. 28 U.S.C. § 1914(a) (2006).
42. Id. § 1915(a)(1).
43. E.g., POSNER, supra note 30, at 639-40; Frank A. Sander, Varieties of Dispute Resolution, 79 F.R.D. 76, 125-26 (1976).
44. CPR Institute for Dispute Resolution, Defenders and Proponents Square Off on New Report, 20 ALT. TO THE HIGH COSTS OF LITIG. 91, 104 (2002) (quoting India Johnson, Vice President, American Arbitration Association).
45. But see Jeffrey W. Stempel, Reflections on Judicial ADR and the Multi-Door Courthouse at Twenty: Fait Accompli, Failed Overture, or Fledgling Adulthood?, 11 OHIO ST. J. ON DISP. RESOL. 297, 357-58 (1996) (arguing that private dispute resolution is subsidized to some extent by the government).
46. For a comparison of the fees charged by the National Arbitration Forum and JAMS with the AAA fee structure, see Budnitz, supra note 3, at 138-43.
47. See American Arbitration Association, Commercial Arbitration Rules, Rule R-51(a) (effective Sept. 15, 2005), available at http://www.adr.org/sp.asp?id= 22440 ("Arbitrators shall be compensated at a rate consistent with the arbitrator's stated rate of compensation.") [hereinafter AAA Commercial Arbitration Rules]. By comparison, some international arbitration institutions set out a schedule for arbitrators' fees based on the amount in dispute.
48. See, e.g., International Chamber of Commerce, Rules of Arbitration of the International Chamber of Commerce, App. III, Art. IV(B) (effective Jan. 1, 1998), available at http://www.jus.uio.no/lm/icc.arbitration .rules. 1998.
49. The sources for data in the table are the following: Affidavit of Frank Zotto ¶ 13, Phillips v. Associates Home Equity, Case No. 01 CH 1944 (N.D. Ill. July 9, 2001) (reporting results of "random sampling of 60 arbitrators on the Commercial Panel in the Chicago, Illinois area"); Affidavit of Frank Zotto ¶ 10, Pope v. AutoNation USA, Case No. A-0001609 (Ohio Ct. Common Pleas Aug. 15, 2001) (reporting results of "sampling of 31 arbitrators on the Commercial Panel in Hamilton County, Ohio"); Affidavit of Christine Newhall ¶ 6, Cowart v. Credit Counselors Corp., Inc., Case No. IP00-0701 (S.D. Ind. Apr. 18, 2001) (reporting on the results of "random sampling of 26 arbitrators on the Commercial Panel in the State of Indiana"); Affidavit of Frank Zotto ¶ 9, Calvo v. PIA Merchandising Co., Case No. 2:OOcv873 (E.D. Va. Oct. 4, 2001) (reporting results of "sampling of 15 arbitrators on the Employment Panel in the Virginia, North Carolina, Washington, D.C. and Maryland area"); Affidavit of Frank Zotto ¶ 7(h), Physicians Data, Inc. v. Quest Wireless, L.L.C., Case No. OOCV631 (Colo. Dist. Ct. June 28, 2001) (reporting results of "random sampling of 38 arbitrators on the Commercial Panel in the Denver, Colorado area"). All of the affidavits are included in the CD-ROM Appendix to NATIONAL CONSUMER LAW CENTER, supra note 6; see also Ting v. AT&T, 182 F. Supp. 2d 902, 934 (N.D. Cal. 2002) (citing "average daily rate of arbitrator compensation in Northern California" as $1899), aff'd in part and rev'd in part, 319 F.3d 1126 (9th Cir. 2003).
50. AAA Commercial Arbitration Rules, supra note 41, Rule R-52.
51. American Arbitration Association, AAA Implements New Consumer Initiatives, Revises Consumer Rules, www.adr.org/sp.asp?id=21892 (last visited Apr. 30, 2006). Because more complex cases are likely to have longer hearings, one would expect the availability of arbitrators willing to serve pro bono would be more helpful to claimants with small claims than those with large claims.
52. See infra text accompanying notes 54-58.
53. American Arbitration Association, Administrative Fee Waivers and Pro Bono Arbitrators Services, http://www.adr.org/sp.asp?id=22040 (last visited Apr. 30, 2006) [hereinafter AAA Administrative Fee Waivers].
54. AAA Commercial Arbitration Rules, supra note 41, Rule R-49.
55. Id.
56. Putting aside access issues, charging fees that vary with the amount of the claim has potential benefits for dispute resolution processes. See, e.g., Christopher R. Drahozal, A Behavioral Analysis of Private Judging, 67 LAW & CONTEMP. PROBS. 105, 129 (2004) (noting possible constraint on attorneys seeking to benefit from anchoring effects by claiming large amounts of damages).
57. AAA Commercial Arbitration Rules, supra note 41, Rule R-4(a)(ii).
58. Id. ("Fees").
59. Id.
60. See infra text accompanying notes 63-70. Employee claims are dealt with under the AAA's Employment Arbitration Rules, which contain similar provisions for low-cost arbitration of small claims.
61. AAA Commercial Arbitration Rules, supra note 41, Rule R-49.
62. AAA Administrative Fee Waivers, supra note 46. Those amounts range from $17,180 for a one-person family in the 48 contiguous United States and Washington D.C., to $74,380 for an eight-person family in Alaska. Id.
63. Id. Although the potential proceeds from the claim involved in the arbitration might be characterized either as potential future income or an asset of the claimant, there is no indication that the AAA has used such an interpretation.
64. Id.
65. See supra text accompanying notes 44-46.
66. AAA Commercial Arbitration Rules, supra note 41, Rule R-50.
67. Id.
68. Id. Rule R-49.
69. See Linda J. Demaine & Deborah Hensler, "Volunteering" to Arbitrate Through Predispute Arbitration Clauses: The Average Consumer's Experience, 67 LAW & CONTEMP. PROBS. 55, 70-71 (2004) (various consumer contracts);
70. Christopher R. Drahozal, "Unfair" Arbitration Clauses, 2001 U. ILL. L. REV. 695, 735-36 (franchise agreements).
71. American Arbitration Association, Supplementary Procedures for Consumer-Related Disputes, http://www.adr.org/sp.asp?id=22014 (last visited Apr. 30, 2006) [hereinafter AAA Consumer Procedures]. More precisely, the AAA Consumer Procedures apply to any "agreement between a consumer and a business where the business has a standardized, systematic application of arbitration clauses with customers and where the terms and conditions of the purchase of standardized, consumable goods or services are non-negotiable or primarily non-negotiable in most or all of its terms, conditions, features, or choices," and when the product or service involved is "for personal or household use." Id. Rule C-1(a).
72. The Consumer Procedures differ in a number of ways other than costs from the AAA Commercial Arbitration Rules, but those differences are not relevant here.
73. AAA Consumer Procedures, supra note 63, Rule C-8 ("Arbitrator Fees").
74. See supra text accompanying notes 41-42.
75. AAA Consumer Procedures, supra note 63, Rule C-8 ("Fees and Deposits to be Paid by the Consumer").
76. Id. ("Fees and Deposits to be Paid by the Business").
77. Id. ("Fees and Deposits to be Paid by the Consumer").
78. See supra text accompanying notes 41-62.
79. E.g., NATIONAL ARBITRATION FORUM, CODE OF PROCEDURE, "FEE SCHEDULE" (effective Jan. 1, 2005), available at http://www.arb-forum.com/ programs/code_new/2005_fees.pdf. In addition, Rule 44(G) of the NAF Code of Procedure sets out a process whereby a consumer "who asserts that arbitration fees prevent the Consumer Party from effectively vindicating the Consumer's case in arbitration may . . . prior to paying any filing fee" request the arbitrator to require "another Party or Parties [to] pay all or part of the arbitration fees" or declare the arbitration agreement "unenforceable." Id. Rule 44(G), available at http://www.arb-forum. com/programs/code_new/2005_code.pdf. "If there is no agreement by the Parties," the arbitrator is directed to resolve the request "based on the applicable law." Id.
80. Claimants sometimes make an analogous challenge based on a state law cause of action, asserting that an arbitration agreement is invalid because it precludes claimants from vindicating their state statutory rights. So long as the Federal Arbitration Act applies to the arbitration agreement (i.e., it is within the scope of Congress's Commerce power) such an argument likely is preempted by federal law. See Stephen J. Ware, The Case for Enforcing Adhesive Arbitration Agreements - with Particular Consideration of Class Actions and Arbitration Fees, 5 J. AM. ARB. 251, 270-72 (2006).
81. A preliminary legal question is whether a court even can make such determinations, or whether they are matters for the arbitrator. Given the Supreme Court's recent decisions in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003); PacificCare Health Systems v. Book, 538 U.S. 401 (2003); and Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), the question is an interesting one, but is beyond the scope of this paper. For a case that considers the question, see Scovill v. WSYX/ABC, 425 F.3d 1012, 1019 (6th Cir. 2005).
82. For one exception, see Pro Tech Indus., Inc. v. URS Corp., 377 F.3d 868, 873 (8th Cir. 2004) ("Under Texas law, we only consider the circumstances at contract formation to determine if a contract is unconscionable, rendering Pro Tech's current inability to afford the costs of arbitration irrelevant to the conscionability determination."). Cf. Ware, supra note 72, at 267-68 (stating that in applying unconscionability doctrine to arbitration clauses, "a court should assess the 'values exchanged' as of the time the contract was formed, rather than as of a later time, such as the time of a dispute").
83. This description is an overgeneralization; the approaches taken by the courts differ to some degree, as described in more detail in the following sections. But with only limited exceptions, it is clear that the claimant must show that cost precludes him or her from vindicating statutory rights, not merely that the claimant is worse off in arbitration than in litigation.
84. See Budnitz, supra note 3, at 157.
85. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991); Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989) (overruling Wilko v. Swan, 346 U.S. 427 (1953)); Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974).
86. Gilmer, 500 U.S. 20 (1991).
87. Id. at 28 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985)).
88. The theory seems to be that if a prospective waiver of statutory rights would be invalid, an arbitration clause that has the effect of a prospective waiver of statutory rights also should be invalid.
89. Actually, the Supreme Court has decided two Green Tree cases: Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), and Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003). The earlier case (Randolph) typically is known as "Green Tree," while the later case is known as "Bazzle."
90. 531 U.S. 79 (2000). Prior to Green Tree, the leading court of appeals case was Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997), which construed an assertedly ambiguous arbitration clause to require the employer to pay all arbitration costs.
91. Also at issue in Green Tree was whether the court of appeals had jurisdiction to review the district court's order under 9 U.S.C. § 16. The Supreme Court held that the court of appeals' exercise of appellate jurisdiction was proper. Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 89 (2000).
92. The language of the arbitration clause, which is problematic in other respects, is in relevant part as follows: All disputes, claims, or controversies arising from or relating to this Contract or the relationships which result from this Contract or the validity of this arbitration clause or the entire contract, shall be resolved by binding arbitration by one arbitrator selected by Assignee with the consent of Buyer(s). This arbitration Contract is made pursuant to a transaction in interstate commerce, and shall be governed by the Federal Arbitration Act at 9 U.S.C. Section 1. Judgment upon the award may be entered in any court having jurisdiction. The parties agree and understand that they choose arbitration instead of litigation to resolve disputes. The parties understand that they have a right or opportunity to litigate disputes through a court, but that they prefer to resolve their disputes through arbitration. THE PARTIES VOLUNTARILY AND KNOWINGLY WAIVE ANY RIGHT THEY HAVE TO A JURY TRIAL EITHER PURSUANT TO ARBITRATION UNDER THIS CLAUSE OR PURSUANT TO A COURT ACTION BY ASSIGNEE (AS PROVIDED HEREIN). The parties agree and understand that all disputes arising under case law, statutory law, and all other laws, including, but not limited to, contract, tort, and property disputes will be subject to binding arbitration in accord with this Contract. The parties agree and understand that the arbitrator shall have all powers provided by the law and the Contract. Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 83 n.1 (2000). One problem with the clause is its language on arbitrator selection, which provides that Green Tree shall select the arbitrator "with the consent of Buyer(s)." An important element of arbitration is that the arbitrator be neutral, with both sides involved in selection. In Harris v. Green Tree Financial Corp., 183 F.3d 173 (3d Cir. 1999), the Third Circuit rejected a challenge to the enforceability of the clause on the basis of the arbitrator selection language. Id. at 183-84.
93. 15 U.S.C. § 1601 et seq. (2006).
94. Green Tree required Randolph to buy Vender's Single Interest insurance, which provided coverage for its expenses in the event Randolph defaulted on the loan. Green Tree, 531 U.S. at 82.
95. 15 U.S.C. § 1640 (2006).
96. Randolph v. Green Tree Fin. Corp., 991 F. Supp. 1410, 1415 (M.D. Ala. 1997).
97. Randolph v. Green Tree Fin. Corp., 178 F.3d 1149 (11th Cir. 1999) (reversing Randolph v. Green Tree Fin. Corp., 991 F. Supp. 1410 (M.D. Ala. 1997)).
98. See supra text accompanying notes 40-70.
99. As described by the Supreme Court, that evidence consisted of (1) a statement that the filing fee for AAA arbitration for claims under $10,000 would be $500 (not including arbitrators' fees or administrative fees); and (2) an article quoting an AAA executive that arbitrators' fees averaged $700 per day. Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 90 n.6 (2000).
100. Randolph v. Green Tree Fin. Corp., 178 F.3d 1149, 1158 (11th Cir. 1999).
101. Green Tree Fin. Corp.-Ala. v. Randolph, 529 U.S. 1052 (2000).
102. 531 U.S. at 90.
103. Id.
104. Bureau of National Affairs, Labor Lawyers at ABA Session Debate Role of American Arbitration Association, DAILY LABOR REPORT, Feb. 15, 1996 (cited in Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 90 n.6 (2000)).
105. 531 U.S. at 90 n.6.
106. Id. at 91.
107. Id. at 92.
108. Id.
109. The courts of appeals also appear to differ as to several other issues that arise in cost-based challenges. First, there appears to be some difference among the circuits as to the proper timing of the challenge. The circuits all seemingly permit claimants to challenge the enforceability of the arbitration agreement in court prior to the arbitration proceeding. See infra App. A. The Eleventh Circuit, however, while apparently willing to consider such challenges, has suggested that such challenges are unlikely to prevail because the claimant can challenge the arbitration award after it is made. See Musnick v. King Motor Co., 325 F.3d 1255, 1261 (11th Cir. 2003) (refusing to remand a cost-based challenge to the district court for further evidentiary development, concluding that "there is no record that could be made at this point" because the agreement permitted the prevailing party to recover the costs of arbitration, and if the claimant prevails "he will incur no fees at all. . . . In this event, obviously, he will not have been deprived of any statutory right or remedy by the mandatory arbitration"); see also Summers v. Dillards, Inc., 351 F.3d 1100, 1101 (11th Cir. 2003) (reversing a district court decision invalidating arbitration agreement on cost grounds as "too speculative"; "It is unclear at this time which party may prevail at arbitration and Summers may seek judicial review of an award if she feels that her available remedies were hindered."). By contrast, the en banc Sixth Circuit in Morrison v. Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003) (en banc), expressly rejected the adequacy of post-award challenges. Id. at 662 (contending that claimant would be in a "Catch-22" because the fact that claimant obtained an arbitration award might be used to demonstrate that cost did not deter him or her from arbitrating the statutory claims). Second, the circuits differ as to the effect of a post-dispute offer by the respondent to pay all arbitration costs. Such offers are common in the reported cases. See infra App. A (in 42 out of the 163 federal court cases studied, the court stated that the respondent had offered to pay the claimant's arbitration costs after a dispute arose). The courts are split on the relevance of such an offer-when it is rejected by the claimant-to the cost-based challenge. The Sixth Circuit in Morrison held that the respondent's offer should be disregarded, reasoning that "[b]ecause the employer drafted the arbitration agreement, the employer is saddled with the consequences of the provision as drafted." 317 F. 3d at 677 (emphasis in original). A number of other courts, however, have concluded that such an offer effectively moots the cost-based challenge, presumably because arbitration costs cannot preclude a claimant from vindicating statutory rights when the claimant does not have to pay any costs. E.g., Large v. Conseco Fin. Servicing Co., 292 F.3d 49, 56-57 (1st Cir. 2002). Third, the circuits differ as to the consequences of a successful challenge (although the differences may be due at least in part to differences among the challenged arbitration clauses). See Booker v. Robert Half Int'l, Inc., 413 F.3d 77, 84 (D.C. Cir. 2005) ("Decisions striking an arbitration clause entirely often involved agreements without a severability clause . . . or agreements that did not contain merely one readily severable illegal provision, but were instead pervasively infected with illegality. . . . Decisions severing an illegal provision and compelling arbitration, on the other hand, typically considered agreements with a severability clause and discrete unenforceable provisions.") (Roberts, J.). In some cases, courts have held the cost provision severable from the arbitration clause, thus directing the parties to arbitrate while imposing the arbitration costs on the respondent. E.g., Spinetti v. Service Corp. Int'l, 324 F.3d 212, 219-23 (3d Cir. 2003). In other cases, the courts have held the cost provision not severable and invalidated the arbitration agreement in its entirety. E.g., Alexander v. Anthony Int'l., L.P., 341 F.3d 256, 271 (3d Cir. 2003). Such a result is more common when the claimant challenges the enforceability of other provisions of the arbitration agreement as well, such as a provision limiting the damages that can be recovered in arbitration. A third alternative would be to direct the parties to arbitrate all claims but the federal statutory claim at issue in the case. This alternative draws on the doctrinal basis for the vindication-of-statutory rights theory in the first place-that Congress intended to permit arbitration of federal statutory claims so long as the individual could vindicate his or her statutory rights in the arbitral forum. If the costs preclude the claimant from effectively vindicating federal statutory rights, then those claims-but not any others-should be resolved in court. Cf.
110. E.g., Musnick v. King Motor Co. of Fort Lauderdale, 325 F.3d 1255, 1259 (11th Cir. 2003) ("Since Green Tree, all but one of the other Circuits that have reconsidered this issue have applied a similar case-by-case approach."). The Musnick court cites the Ninth Circuit as adopting a per se rule. See id. at 1259 n.3 (citing Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 894 (9th Cir. 2002) (stating that a clause providing for the sharing of arbitration costs between claimants and respondents "alone would render an arbitration agreement unenforceable")). The Ninth Circuit's decisions, in Adams and other cases, are based on state law unconscionability grounds rather than a vindication-of-statutory-rights theory. Id.; see also Al-Safin v. Circuit City Stores, Inc., 394 F.3d 1254, 1260-62 (9th Cir. 2005) (Washington law); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1178-79 (9th Cir. 2003) (California law); Ting v. AT&T, 319 F.3d 1126, 1151 (9th Cir. 2002) (California law). See generally infra text accompanying notes 104-116.
111. See, e.g., Budnitz, supra note 3, at 154 ("Courts are split over what type of showing is required to prove that costs are so high as to bar access to justice. Interpretations of what Green Tree requires focus on three factors: the financial condition of the claimant, the absolute cost of arbitration, and the relative cost of arbitration when compared to court proceedings.").
112. 238 F.3d 549 (4th Cir. 2001).
113. 317 F.3d 646 (6th Cir. 2003) (en banc).
114. 238 F.3d at 556. The court of appeals noted that "parties to litigation in court often face costs that are not typically found in arbitration, such as the cost of longer proceedings and more complicated appeals on the merits." Id. at 556 n.5.
115. Id. at 558.
116. 317 F.3d at 660.
117. Id. at 661.
118. Id. at 663.
119. Id.
120. Id. at 664.
121. Id. at 665.
122. Id. By contrast, "[i]t will find, in many cases, that high-level managerial employees and others with substantial means can afford the costs of arbitration, thus making cost-splitting provisions in such cases enforceable." Id.
123. Id. at 664.
124. Id.
125. See infra App. A.
126. See, e.g., Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669 (Cal. 2000) (holding an arbitration agreement unconscionable); Brower v. Gateway 2000, Inc., 676 N.Y.S. 2d 569 (N.Y. App. Div. 1998) (holding an arbitration agreement unconscionable on cost grounds but remanding based on substitution of alternative institutional rules).
127. Section 2 of the FAA makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2 (2006). Courts look to general contract defenses under state law for evaluating the enforceability of arbitration agreements. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995). Unconscionability is one of the most commonly asserted such defenses. See, e.g., Susan Randall, Judicial Attitudes Toward Arbitration and the Resurgence of Unconscionability, 52 BUFF. L. REV. 185, 195-98 (2004) (highlighting the resurgence in successful assertion of unconscionability claims against enforcement of arbitration agreements);
128. Jeffrey W. Stempel, Arbitration, Unconscionability, and Equilibrium: The Return of Unconscionability Analysis as a Counterweight to Arbitration Formalism, 19 OHIO ST. J. ON DISP. RESOL. 757, 799-803 (2004) (same).
129. See NATIONAL CONSUMER LAW CENTER, supra note 6, § 5.4.1, at 113: If high fees are assessed to arbitrate a federal claim, the consumer can argue both that the fees conflict with the federal statute and that they make the clause unconscionable. If high fees are assessed to arbitrate a state statutory claim, however, the consumer should rely on an unconscionability argument or another argument that would apply to any contract term, such as the argument that the term is unenforceable as against public policy.
130. 676 N.Y.S.2d 569 (N.Y. App. Div. 1998).
131. Gateway was the defendant in a series of cases involving challenges to the enforceability of the arbitration clause in the Gateway Standard Terms and Conditions. E.g., Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997), cert. denied, 522 U.S. 808 (1997); Klocek v. Gateway, Inc. 104 F. Supp. 2d 1332 (D. Kan. 2000); Westendorf v. Gateway 2000, Inc., No. 16913, 2000 Del. Ch. LEXIS 54 (Del. Ch. March 16, 2000). Brower is unusual among those cases in the court's reliance on the doctrine of unconscionability. 676 N.Y.S.2d at 252-55.
132. International Chamber of Commerce, supra note 41, App. III.
133. Brower, 676 N.Y.S.2d at 571.
134. Id. at 574.
135. 298 F.3d 778 (9th Cir. 2002).
136. E.g., Al-Safin v. Circuit City Stores, Inc., 394 F.3d 1254 (9th Cir. 2005); Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101 (9th Cir. 2003); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003); Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003); Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002). Most of the decisions are based on California law and at least purport to rely on Armendariz v. Foundation Health Psychcare Servs., Inc., 6 P.3d 669 (Cal. 2000), the leading California Supreme Court case.
137. 42 U.S.C. §§ 2000e-2a, 2000e-3 & 1981a(c) (2006).
138. 6 P.3d 669 (Cal. 2000).
139. 298 F.3d at 786.
140. See supra note 127.
141. I include the decision so long as it is available on LEXIS, even if the opinion is formally unpublished by the court.
142. Other results are reported in Part V.B. The cases are listed infra in Appendix A.
143. 531 U.S. 79 (2000).
144. Christopher R. Drahozal, Ex Ante Selection of Disputes for Litigation (Feburary 27, 2004) (Working Paper), available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=510162.
145. See George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. LEGAL STUD. 1, 4-5 (1984) (describing case selection by settlement).
146. For additional studies of case selection by settlement, see Theodore Eisenberg, Testing the Selection Effect: A New Theoretical Framework with Empirical Tests, 19 J. LEGAL STUD. 337 (1990);
147. Daniel Kessler et al., Explaining Deviations from the Fifty-Percent Rule: A Multimodal Approach to the Selection of Cases for Litigation, 25 J. LEGAL STUD. 233, 235 (1996);
148. Joel Waldfogel, The Selection Hypothesis and the Relationship Between Trial and Plaintiff Victory, 103 J. POL. ECON. 93 (1995);
149. Peter Siegelman & John J. Donahue III, The Selection of Employment Discrimination Disputes for Litigation: Using Business Cycle Effects to Test the Priest-Klein Hypothesis, 24 J. LEGAL STUD. 427 (1996);
150. Donald Wittman, Is the Selection of Cases for Trial Biased?, 14 J. LEGAL STUD. 185 (1985);
151. Keith N. Hylton, Asymmetric Information and the Selection of Disputes for Litigation, 22 J. LEGAL STUD. 187, 188 (1993);
152. Luke Froeb, The Adverse Selection of Cases for Trial, 13 INT'L REV. L. & ECON. 317, 317 (1993);
153. Bruce H. Kobayashi, Case Selection, External Effects, and the Trial/Settlement Decision, in DISPUTE RESOLUTION: BRIDGING THE SETTLEMENT GAP 17 (David A. Anderson ed., 1996).
154. Joel Waldfogel, Selection of Cases for Trial, in 3 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 419, 419 (Peter Newman ed., 1998).
155. In a handful of cases, the court of appeals issued an opinion that did not address the cost issue. In such cases, the district court opinion is used rather than the court of appeals' opinion.
156. Two courts described the cost-based challenge as based on public policy.
157. Other consumer claims were against companies such as debt collectors, brokerage firms, home builders, mobile home manufacturers, telephone companies, insurers, a payment service provider, and a fast food restaurant chain.
158. Because the motion to compel arbitration was resolved before a class was certified, it is not possible to determine whether a class would have been certified. Thus, in characterizing these cases I rely solely on whether the claimant sought to proceed on a class basis.
159. I did not attempt a comprehensive cataloguing of the types of claims asserted by claimants. Thus, so long as the claimant asserted either a Title VII claim or a TILA claim I saw no reason to examine the case further. Only in cases in which the claimant did not assert either a Title VII claim or a TILA claim did I collect information on what other federal law claim the claimant alleged, if any. Likewise, only if the claimant did not assert a federal law claim did I make note of what sort of state law claim the claimant asserted.
160. Once again I emphasize that this differential does not necessarily reflect differences in approaches by the courts. Instead, it may merely reflect cases with different factual records being decided by the courts.
161. See Ruth V. Glick, California Arbitration Reform: The Aftermath, 38 U.S.F. L. REV. 119, 120-23 (2003) (describing legislation).
162. CAL. CIV. PROC. CODE § 1284.3 (2006).
163. Id. § 1284.3(a).
164. Id. § 1284.3(b). In its fee waiver procedures, the American Arbitration Association identifies indigent consumers based on a maximum monthly income of 200 percent of the federal poverty standard. See supra text accompanying note 55. But for consumers in California, the fee waiver procedures expressly acknowledge and apply the California statutory definition. Id.
165. Id. § 1284.3(b)(3). The arbitration institution must keep all information received from the consumer confidential. Id. § 1284(b)(4). But the arbitration institution "may not keep confidential the number of waiver requests received or granted, or the total amount of fees waived." Id.
166. 114 Cal. App. 4th 77 (Ct. App. 2003).
167. Id. at 98.
168. For an overview of RUAA, see Timothy J. Heinsz, The Revised Uniform Arbitration Act: Modernizing, Revising, and Clarifying Arbitration Law, 2001 J. DISP. RESOL. 1.
169. N.M. STAT. ANN. § 44-7A-1 (2006).
170. Id. § 44-7A-1(b)(4)(a).
171. Id. § 44-7A-5.
172. Id.
173. Oklahoma has taken yet another approach in its version of RUAA. See 12 OKLA. STAT. § 1880 (2006): B. In applying and construing the Uniform Arbitration Act, to the extent permitted by federal law, recognition shall be given to the following considerations as applicable: 1. Agreements to arbitrate are often included in standard forms prepared by one party and in a context where there is little or no ability to negotiate or change the terms of the agreement to arbitrate; and 2. In such cases, clauses providing . . . for the expenses of arbitration . . . and for other matters that may represent a serious disadvantage to the party or parties that did not prepare the form shall be closely reviewed for unconscionability based on unreasonable one-sidedness and understandable or unnoticeable language or lack of meaningful choice and for balance and fairness in accordance with reasonable standards of fair dealing.
174. More generally, a number of bills have been introduced into Congress that would limit or restrict consumer or employment arbitration, either by excluding certain claims from arbitration or invalidating pre-dispute arbitration agreements in certain contracts. See, e.g., Jean R. Sternlight, Is the U.S. Out on a Limb? Comparing the U.S. Approach to Mandatory Consumer and Employment Arbitration to that of the Rest of the World, 56 U. MIAMI L. REV. 831, 840 (2002). Only one bill has been enacted into law, however: the Motor Vehicle Franchise Contract Arbitration Fairness Act makes pre-dispute arbitration agreements unenforceable in motor vehicle franchise agreements (i.e., franchise agreements between car manufacturers and car dealers). See 15 U.S.C. § 1226(a) (2006).
175. S. 3026, 107th Cong. § 2(b)(10) (Oct. 1, 2002).
176. In his statement on introducing the bill, Senator Sessions touted the benefits of arbitration, asserting that "arbitration can give the consumer and employee a cost-effective forum in which to assert their claim," particularly for the "overwhelming majority of the people who could not afford a lawyer to litigate in court." 148 CONG. REC S9721 (daily ed. Oct. 1, 2002) (statement of Sen. Sessions). He explained the arbitration cost provision as follows: 11. Expenses. The bill grants all parties the right to have an arbitrator provide for reimbursement of arbitration fees in the interests of justice and the reduction, deferral, or waiver of arbitration fees in cases of extreme hardship. It does little good to take a claim to arbitration if the consumer or employee cannot even afford the arbitration fee. This provision ensures that the arbitrator can waive or reduce the fee or make the company reimburse the consumer or employee for a fee if the interests of justice so require. Id.
177. Thus, I do not address whether consumers and employees are better off in arbitration than in court, although certainly whether they can assert their claim in arbitration is relevant to that inquiry.
178. For overviews of the expected value model, see ROBERT G. BONE, CIVIL PROCEDURE: THE ECONOMICS OF CIVIL PROCEDURE (2003);
179. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW (6th ed. 2003);
180. A. MITCHELL POLINSKY, AN INTRODUCTION TO LAW AND ECONOMICS (3d ed. 2003);
181. STEVEN SHAVELL, FOUNDATIONS OF THE ECONOMIC ANALYSIS OF LAW (2004);
182. ROBERT D. COOTER & THOMAS S. ULEN, LAW AND ECONOMICS (4th ed. 2004);
183. Bruce H. Kobayashi & Jeffrey S. Parker, Civil Procedure: General, in V THE ENCYCLOPEDIA OF LAW & ECONOMICS 1, 3-4 (Boudewijn Bouckaert & Garrit De Geest eds., 2000).
184. For other writings on the subject, see William M. Landes, An Economic Analysis of the Courts, 14 J.L. & ECON. 61 (1971);
185. Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399 (1973).
186. Benefits also could include non-financial considerations. A more sophisticated model would focus on the settlement value of the case rather than the expected judgment. The more simplified model used here is sufficient for my purposes.
187. See supra text accompanying notes 33-34.
188. Keith N. Hylton, Agreements to Waive or to Arbitrate Legal Claims: An Economic Analysis, 8 SUP. CT. ECON. REV. 209, 226-27 (2000).
189. I assume here that the parties have entered into a pre-dispute arbitration clause, so that the claimant's options after the claim arises are either to file a claim in arbitration or not to file a claim in arbitration. A third possibility, of course, is for the claimant to challenge the enforceability of the arbitration agreement in court, which I take up momentarily. For an economic analysis of the decision whether to enter into a pre-dispute arbitration agreement, see Hylton, supra note 164, at 223-28; Steven Shavell, Alternative Dispute Resolution: An Economic Analysis, 24 J. LEGAL STUD. 1 (1995).
190. Lucian Ayre Bebchuk, Suits with a Negative Expected Value, in 3 NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 551-54 (Peter Newman ed., 1998). The fact that a claim has a negative expected value does not necessarily mean that it is a frivolous claim. It may be a meritorious claim but one that is so costly to litigate that a claimant cannot do so economically. POSNER, supra note 30, at 632.
191. See, e.g., Lucian Ayre Bebchuk, Suing Solely to Extract a Settlement Offer, 17 J. LEGAL STUD. 437 (1988) (imperfect information);
192. Avery Katz, The Effects of Frivolous Lawsuits on the Settlement of Litigation, 10 INT'L REV. L. & ECON. 3 (1990) (imperfect information);
193. David Rosenberg & Steven Shavell, A Model in Which Suits are Brought for their Nuisance Value, 5 INT'L REV. L. & ECON. 3 (1985) (differences in the timing of litigation costs incurred by plaintiffs and defendants);
194. David C. Croson & Robert H. Mnookin, Scaling the Stonewall: Retaining Lawyers to Bolster Credibility, 1 HARV. NEGOT. L. REV. 165 (1996) (plaintiffs pre-commitment to pay his or her attorney part of the litigation costs);
195. Amy Farmer & Paul Pecorino, A Reputation for Being a Nuisance: Frivolous Lawsuits and Fee Shifting in a Repeated Game, 18 INT'L REV. L. & ECON. 147 (1998) (attorney who develops a reputation for bringing negative expected value claims);
196. Lucian A. Bebchuk, A New Theory Concerning the Credibility and Success of Threats to Sue, 25 J. LEGAL STUD. 1 (1996) (the possibility that the claimant can subdivide his or her litigation expenses).
197. Drahozal, supra note 62, at 749-50.
198. Moreover, the claimant will challenge the enforceability of the arbitration agreement in court so long as the expected cost of the challenge (e) is less than the expected benefit from the challenge (the probability of success (p) times the claimant's benefit from being in court (i.e., e < p((Jp-Cp)-(J'p-C'p))).
199. See supra text accompanying notes 23-26.
200. Bradford Cornell, The Incentive to Sue: An Option-Pricing Approach, 19 J. LEGAL STUD. 173, 173 (1990).
201. E.g., Cornell, supra note 171, at 173; Peter H. Huang, Lawsuit Abandonment Options in Possibly Frivolous Litigation Games, 23 REV. LITIG. 47 (2004);
202. Joseph A. Grundfest & Peter H. Huang, The Unexpected Value of Litigation, 58 STAN. L. REV. 1267 (2006).
203. Cornell, supra note 171, at 176-82.
204. Grundfest & Huang, supra note 172, 1277; Huang, supra note 172, at 63-64.
205. The characterization is even stronger when viewed from the perspective of the plaintiffs attorney. As Kritzer explains, "[t]he work of the contingency fee lawyer can best be viewed as the management of a portfolio of cases." HERBERT M. KRITZER, RISKS, REPUTATIONS, AND REWARDS: CONTINGENCY FEE LEGAL PRACTICE IN THE UNITED STATES 11, 12-16 (2004). The attorney can have an incentive to bring (and finance) even negative expected value cases as part of his or her portfolio because the attorney can drop the cases that prove to have poor outcomes while continuing to litigate the cases that prove to have favorable outcomes.
206. See supra text accompanying notes 168-69.
207. Grundfest & Huang, supra note 172, at 1276.
208. NEIL VIDMAR, MEDICAL MALPRACTICE AND THE AMERICAN JURY: CONFRONTING THE MYTHS ABOUT JURY INCOMPETENCE, DEEP POCKETS AND OUTRAGEOUS DAMAGE AWARDS 221-35 (1995);
209. Neil Vidmar & Jeffrey J. Rice, Assessments of Noneconomic Damage Awards in Medical Malpractice: A Comparison of Jurors with Legal Professionals, 78 IOWA L. REV. 883, 891-92 (1993).
210. Grundfest & Huang, supra note 172, at 1312.
211. Id. at 1275.
212. A claimant is risk averse when he or she would prefer a smaller, certain amount to a larger, uncertain amount. For example, a claimant is risk averse if he or she would prefer a certain sum of $100 to a 50% chance of receiving $200. A claimant is risk neutral if he or she is indifferent between a certain sum of $100 and a 50% chance of receiving $200.
213. I say "relatively" certain because if the claimant prevails the arbitrator may require the respondent to reimburse the claimant for the upfront arbitration costs. See supra text accompanying notes 59-62.
214. Under prospect theory, individuals are assumed to be risk averse as to gains but risk seekers as to losses. See Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, 47 ECONOMETRICA 263 (1979);
215. see, e.g., Jeffrey J. Rachlinski, Gains, Losses, and the Psychology of Litigation, 70 S. CAL. L. REV. 113 (1996);
216. Russell Korobkin, Aspirations and Settlement, 88 CORNELL L. REV. 1, 14 (2002);
217. Chris Guthrie, Framing Frivolous Litigation: A Psychological Theory, 67 U. CHI. L. REV. 163 (2000). If arbitration costs were framed as losses, then they might be less likely to deter claimants from arbitrating their claims.
218. See Michael Abramowicz, On the Alienability of Legal Claims, 114 YALE L.J. 697, 700-01 (2005);
219. Richard W. Painter, Litigating on a Contingency: A Monopoly of Champions or a Market for Champerty, 71 CHI-KENT L. REV. 625 (1995). Of course, if a claimant can obtain financing for his or her claim, then liquidity barriers would not be a reason for invalidating the arbitration clause.
220. 317 F.3d 646 (6th Cir. 2003) (en banc).
221. Id. at 665.
222. PUBLIC CITIZEN, supra note 1, at 52-53.
223. KRITZER, supra note 175, at 36 (listing types of cases handled by lawyers on contingent fee basis); Painter, supra note 184, at 626 & n.3 (listing types of cases and noting that "[n]inety-five percent of personal injury cases are taken on a contingency").
224. See Elizabeth Hill, AAA Employment Arbitration: A Fair Forum at Low Cost, DISP. RESOL. J. 9, 12 (May-June 2003) (finding that in the sample of AAA employment arbitrations studied, "most lower-income employees have agreed to representation on a contingency basis").
225. KRITZER, supra note 175, at 39.
226. Herbert M. Kritzer, The Wages of Risk: The Returns of Contingency Fee Legal Practice, 47 DEPAUL L. REV. 267, 270 (1998); see also POSNER, supra note 30, at 624 ("The solution to this liquidity problem is the contingent fee contract.");
227. ALEXANDER TABARROK & ERIC HELLAND, Two CHEERS FOR CONTINGENT FEES 6-7 (2005) (arguing that contingent-fee system results in "Improved Access to the Legal System" and "Risk Spreading");
228. Painter, supra note 184, at 653 (arguing that "[a] lawyer working on a contingent fee" is not only providing legal services, but also is providing "credit - postponing payment until the client collects on a judgment" and "insurance - agreeing to waive payment for legal services that do not achieve favorable results"); Ted Schneyer, Legal-Process Constraints on the Regulation of Lawyers' Contingent Fee Contracts, 47 DEPAUL L. REV. 371, 376-77 (1998) (citing four functions of contingent fee contracts: (1) expanding access to justice by enabling claimants to finance litigation; (2) providing a source of financial credit; (3) avoiding agency costs due to shirking by lawyers; and (4) "offer[ing] clients a form of legal expense insurance");
229. Murray L. Schwartz & Daniel J.B. Mitchell, An Economic Analysis of the Contingent Fee in Personal-Injury Litigation, 22 STAN. L. REV. 1125, 1125 (1969-1970) (citing, among other "common justifications" given for contingent fees, that "[t]he contingent fee allows the client to shift some of the risk inherent in his case to the lawyer" and "allows the client to borrow the lawyer's services in advance of settlement").
230. MODEL RULES OF PROF'L CONDUCT R. 1.8(e) (2006): A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that: (1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome
231. See Lester Brickman, Effective Hourly Rates of Contingency-Fee Lawyers: Competing Data and Non-Competitive Fees, 81 WASH U. L.Q. 653, 735 (2003) ("[M]any firms make no effort to seek reimbursement of expenses if there is no recovery.");
232. Kevin M. Clermont & John D. Currivan, Improving on the Contingent Fee, 63 CORNELL L. REV. 529, 532 n.3 (1978) ("In event of defeat, the client theoretically must refund all of these litigation expenses advanced by the lawyer. . . . [In] [a]ctual practice, however, . . . the client usually does not pay back these expenses.");
233. Samuel R. Gross & Kent D. Syverud, Getting to No: A Study of Settlement Negotiations and the Selection of Cases for Trial, 90 MICH. L. REV. 319, 349 n.71 (1991) ("In practice, attorneys rarely attempt to collect expenses from personal injury clients, both because it would be impractical and because such a practice might drive away future clients.").
234. THE MISSOURI BAR, SAMPLE FEE AGREEMENT: FORMS & COMMENTS 15 (Revised Apr. 2003), available at http://home.mobar.org/lpmonline/fdrsamples.pdf.
235. Id.
236. Caruso Law Offices, Agreement for Representation by Counsel, ¶ 3 (copy on file with author). The agreement goes on to state that the "[c]lient is responsible for costs irrespective of outcome" and that "[a]ttorneys have the option to advance costs but are not required to do so." Id.
237. Winer Mehuela & Devens LLP, Attorney Fee Agreement and Authorization (Premises Liability), http://www.pacificlaw.com/files/attorney_fee-premises-f. pdf (last visited Apr. 30, 2006).
238. No. 01-10657-GAO, 2002 U.S. Dist. LEXIS 18066 (D. Mass. Sept. 26, 2002).
239. Id. at *9-10.
240. As noted above, the claimant sought to bring the suit as a class action in court, which likely would not have been permitted in arbitration. According to the claimant's attorney, the individual claims in arbitration likely would have provided a "relatively small recovery." Id. at *10.
241. One possibility for some of the contracts is that the provisions were intended to deal with court-annexed arbitration, rather than contractual arbitration.
242. See, e.g., Sprague v. Household Int'l, No. 04-0106-CV-W-NKL, 2005 U.S. Dist. LEXIS 11694, at *21 (W.D. Mo. June 15, 2005): During a teleconference with the parties on July 20, 2004, Household argued that the Plaintiffs would not be responsible for paying arbitration fees due to a contingency fee arrangement with their counsel. When the Plaintiffs denied that allegation, the Court ordered the Plaintiffs to submit their fee agreement under seal for in camera inspection. After reviewing the agreement, the Court determined that the agreement would require the Plaintiffs to bear all costs of arbitration, including the arbitration fees.
243. PUBLIC CITIZEN, supra note 1, at 65.
244. See Al-Safin v. Circuit City Stores, Inc., 394 F.3d 1254, 1261-62 (9th Cir. 2005) (Washington law); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1178-79 (9th Cir. 2003) (California law); Ting v. AT&T, 319 F.3d 1126, 1151 (9th Cir. 2002) (California law); Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 894 (9th Cir. 2002) (California law); see also Musnick v. King Motor Co. of Fort Lauderdale, 325 F.3d 1255, 1259 n.3 (11th Cir. 2003) (citing Ninth Circuit as applying per se standard to cost-based challenges).
245. Indeed, the claimants might be better off in arbitration than in litigation if the total process costs in arbitration are less.
246. In fact, claimants in court have an incentive to claim larger rather than smaller amounts of damages because of possible anchoring of jury awards on the amount sought by the plaintiff. Arbitration costs may constrain that incentive to some degree, as noted earlier. See supra note 49.
247. 478 U.S. 546 (1986).
248. Id. at 565.
249. See Brief of Petitioners at 46-47, Green Tree Fin. Corp. v. Randolph, 531 U.S. 79 (2000) (No. 99-1235) (citing attorneys' fee provision of TILA and stating that "[g]iven these incentives, it is no surprise that this Court has addressed numerous cases involving parties who brought individual lawsuits to vindicate their rights under TILA").
250. See, e.g., Snowden v. Checkpoint Check Cashing, 290 F.3d 631, 638-639 (4th Cir. 2002); Battels v. Discover Bank, No. 2:03cv238-A, 2004 U.S. Dist. LEXIS 28012, at *37 (M.D. Ala. Aug. 27, 2004).
251. At least one court already has done so. Sprague v. Household Int'l, No. 04-0106-CV-W-NKL, 2005 U.S. Dist. LEXIS 11694, at *21 (W.D. Mo. June 15, 2005).
252. Indeed, there may already be a two-tiered market for legal services under contingent fee contracts. One tier of lawyers, willing to handle cases in arbitration, might routinely advance the costs of arbitration. Another tier of lawyers, who handle only cases in court, would not advance arbitration costs, instead relying on the possibility a claimant might incur prohibitive costs as a basis for challenging the enforceability of the arbitration agreement. The different tiers of lawyers might follow different business models, with lower-risk/lower-return firms in the first tier and higher-risk/higher-return firms in the second tier.
253. See supra text accompanying notes 132-143.
254. Of course, some claimants deterred from bringing claims might not challenge the enforceability of the arbitration agreement in federal court (or any court). The cases studied obviously provide no information about how many such cases exist.
255. See supra text accompanying notes 210-211.
256. See McBride v. St. Anthony Messenger Magazine, No. 2:02-cv-0237-JDT-WTL, 2003 U.S. Dist. LEXIS 6449 (S.D. Ind. Feb. 6, 2003). The court in that case upheld the arbitration clause against the cost-based challenge.
257. In one case, the opinion did not indicate whether either the plaintiff or the defendant was represented by counsel.
258. In some cases, while counsel for the claimant was identified by name, no affiliation for the attorney was listed.
259. 28 U.S.C. § 1332(a) (2006).
260. Id. § 1331.
261. See, e.g., 42 U.S.C. § 2000e-5(k) (2006) (Title VII); 12 U.S.C. § 2607(d)(5) (2006) (Real Estate Settlement Practices Act); 15 U.S.C. § 1640(a)(3) (2006) (Truth in Lending Act); 29 U.S.C. § 626(b) (2006) (Age Discrimination in Employment Act); 15 U.S.C. § 2310(d)(2) (2006) (Magnuson-Moss Warranty Act).
262. Of the cases brought by individual employees, forty-two included claims under Title VII, five included claims under the Age Discrimination in Employment Act, four included claims under the Americans with Disabilities Act, two included claims under the Family and Medical Leave Act, two included claims under the Fair Labor Standards Act, and two included civil rights claims under 42 U.S.C. § 1981. Twelve cases raised solely state claims, including claims under the D.C., Florida, and Virgin Islands Civil Rights Acts, and two others were described as involving a claim of discrimination and a claim of age discrimination respectively. Two case reports did not specify the claims at issue.
263. Of the cases brought by individual consumers, eighteen included claims under the Truth in Lending Act, three included claims under the Fair Credit Reporting Act, two included claims under the Magnuson-Moss Warranty Act, two included RICO claims, and one included securities fraud claims. Fourteen cases raised solely state law claims, including a claim under the New Jersey Consumer Fraud Act and a claim under the Oregon Unfair Trade Practices Act. One case report did not specify the claims at issue in the case.
264. Of the class cases, fourteen included claims under the Truth in Lending Act, five included claims under the Fair Labor Standards Act, four included claims under the Fair Credit Billing Act, three included claims under the federal antitrust laws, two included claims under Title VII, and one each included claims under the Real Estate Settlement Practices Act, the Equal Credit Opportunity Act, RICO, the Fair Credit Reporting Act, the Credit Repair Organizations Act, and the Fair Debt Collection Practices Act. One included unspecified federal claims. Five cases raised solely state law claims, one of which was a claim under the California Consumer Protection Act and one of which was a claim under the Illinois Consumer Fraud Act. Two case reports did not specify the claims at issue.
265. The other cases may have included such a claim, but there was no indication from the court's opinion that they did.
266. 482 U.S. 483 (1987).
267. Id. at 492 n.9 (dicta).
268. Christopher R. Drahozal, Federal Arbitration Act Preemption, 79 IND. L.J. 393, 411 (2004).
269. See, e.g., Randolph v. Green Tree Fin. Corp., 244 F.3d 814, 816-19 (11th Cir. 2001). See generally Jean R. Sternlight, As Mandatory Binding Arbitration Meets the Class Action, Will the Class Action Survive?, 42 WM. & MARY L. REV. 1 (2000).
270. See Lloyd v. MBNA Am. Bank, N.A., No. 01-1752, 2002 U.S. App. LEXIS 1027 at *7 (3d Cir. Jan. 7, 2002) (unpublished) ("But Johnson [v. West Suburban Bank, 225 F.3d 366 (3d Cir. 2000)] makes clear that the TILA does not provide an unwaivable right to a class action. Lloyd may not attempt to end-run that holding by couching his claim in terms of unvindicated rights."); Taylor v. First N. Am. Nat'l Bank, 325 F. Supp. 2d 1304, 1318 (M.D. Ala. 2004): [T]he gist of her argument is that it does not make economic sense to bring individual TILA claims. This may be true as a matter of fact, but it is an argument that applies to claims litigated in federal court as much as to claims litigated before an arbitrator. Furthermore, to the extent that Taylor's argument is that the bad economics of individual lawsuits means that she should have a right to bring a class action as the only way to enforce her rights under TILA and the FCBA, that argument is exactly the one rejected by the court in Randolph [v. Green Tree].
271. Myriam Gilles, Opting Out of Liability: The Forthcoming Near-Total Demise of the Modern Class Action, 104 MICH. L. REV. 373, 408 (2005).
272. Some of the state law claims, however, likely involved state fee-shifting statutes.
273. Indeed, the court invalidated the arbitration agreement in five of the eight cases (62.5%) in which the opinion indicated the claimant was represented by a clinic.
274. See supra text accompanying notes 135-137.