The Eighth Circuit has overturned an arbitration award in favor of a software developer who took up the $5 million challenge of MyPillow founder, Mike Lindell, to "Prove Mike Wrong" about his claims the 2020 presidential election was stolen. The dispute went to arbitration per the boilerplate predispute terms in Mr. Lindell's contest rules. The arbitrators heard the evidence, gave reasons for their decisions, and decided in favor of the software developer. The software developer then used the Federal Arbitration Act, which requires federal courts to confirm an arbitration award (making them enforceable as a court judgment).
Category: Consumer Arbitration
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Venmo’s Unfair and Abusive Arbitration Opt-Out Provision
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Venmo's changing the terms of its arbitration agreement, and the manner in which it is doing so is unfair and abusive to consumers. The CFPB and state attorneys general need to take action here to protect consumers.
Here's the story. Last night I got an email from Venmo entitled "Upcoming Changes to Venmo." Nothing in the email's title (which is all I see on my devices) signals that there is a change in contractual terms, and I would have just deleted it without reading but for seeing consumer finance list-serv traffic light up about it. So I looked at the email, and in the body it does explain that there are changes to the Venmo arbitration clause. It also tells me that I can opt-out of the Agreement to Arbitrate "by following the directions in the Venmo User Agreement by June 22, 2022". The Venmo User Agreement is hyperlinked. It is a 95 page document. The hyperlink takes me to the very top of the agreement, but the arbitration agreement starts on page 70. It takes a lot of scrolling to get there, and nothing is particularly prominent about the arbitration agreement's text.
The arbitration agreement itself has a summary at the top that includes a few bullet points, one of which is "Requires you to follow the Opt-Out Procedure to opt-out of the Agreement to Arbitrate by mailing us a written notice." The term Opt-Out Procedure is a hyperlink to a form that can be printed (but not completed on-line).
What's so ridiculous about requiring a hand-written form to be sent through the mail is that Venmo will surely digitize the form. That means someone's gotta open the mail and do the data entry. Why not have the customer do that himself? Or for that matter, just have a check box on my Venmo account for opting out of the arbitration agreement? The only reason to use the paper form and posts is to make it harder for consumers to opt-out of the arbitration provision.
What Venmo's doing is unfair and abusive and therefore illegal under the Consumer Financial Protection Act. It's perfectly legal for Venmo to have an arbitration clause, and there is no requirement that consumers have a right to opt-out of arbitration, although a change in terms on an existing contract is a bit more complicated. Be that as it may, Venmo is the master of its offer, and by giving consumers a right to opt-out, but raising barriers to the exercise of that right, Venmo is engaging in an unfair or abusive act or practice. Venmo is trying to have its cake and eat it too, but pretending that consumers have a choice about arbitration, but not actually giving them one.
That's "unfair" under the Consumer Financial Protection Act because the practice makes it likely that consumers will lose their right to proceed as part of a class action. That is a substantial injury to consumers in aggregate. The ridiculous opt-out procedure makes this injury "not reasonably avoidable by consumers." The consumer would have to click on no less than two hypertext links, starting with an email the title of which gives no indication what is at stake, and then navigating through a 95 page agreement to find the second link. After that, the consumer must print, fill out, and mail a form. Whatever one thinks of the benefits of arbitration, there's no benefit to consumers or competition from making the opt-out difficult. To my mind, this is a very clearly unfair act or practice. It's also an "abusive" act or practice under the Consumer Financial Protection Act. Because the terms of the opt-out make it so difficult for a consumer to actually exercise the opt-out, the terms of the opt-out "take unreasonable advantage of —the inability of the consumer to protect the interests of the consumer in…using a consumer financial product or service." (One might also even be able to argue that it is a deceptive practice–the opt-out right has been buried in fine print and hypertext links.)
Both the CFPB and state attorneys general have the ability to enforce the UDAAP provisions of the CFPA against nonbanks like Venmo. I hope the CFPB and state AGs get on Venmo about this. It presents a good opportunity for the Bureau to make clear what it expects in terms of fairness for contract term modification and opt-out rights.
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Commercial and Contract Law: Questions, Ideas, Jargon
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In the Spring I am teaching a research and writing seminar called Advanced Commercial Law and Contracts. Credit Slips readers have been important resources for project ideas in the past, and I'd appreciate hearing what you have seen out in the world on which you wish there was more research, and/or what you think might make a great exploration for an enterprising student. This course is not centered on bankruptcy, but things that happen in bankruptcy unearth puzzles from commercial and contract law more generally, so examples from bankruptcy cases are indeed welcome. You can share ideas through the comments below, by email to me, or direct message on Twitter.
Also, I am considering having the students build another wiki of jargon as I did a few years ago in another course. Please pass along your favorite (or least favorite) terms du jour in commercial finance and beyond.
Thank you as always for your input, especially during such chaotic times.
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ALI Consumer Contracts Restatement-What’s at Stake
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The American Law Institute's membership will vote next Tuesday (the 21st) on whether to approve the ALI's Consumer Contracts Restatement project. Let me recap why you should care about this project: it opens the door for businesses to use contract to abuse consumers in basically any way they want. The Restatement would do away with the idea of a "meeting of the minds," as the touchstone of contract law for consumer contracts, and allow businesses to impose any terms they want on consumers, even if the consumers are unaware of the terms and haven't consented to them.
Under the proposed Restatement, a consumer would be bound by any and all of a business's standard form terms if the consumer (1) assented to a transaction, (2) had notice of the terms, and (3) had a reasonable opportunity to review the terms. In other words, the consumer would not actually have to know or agree to any of the terms to be bound by them. The Restatement would replace meaningful assent with a legal fiction of notice. That opens the door to consumers being deprived of all sorts of rights by contract, starting with arbitration, but then going on the privacy rights and continuing to disclaimer of warranties, etc. If you think I'm being paranoid, go look at Walmart.com's Terms of Use. Few, if any, of those terms exist when you buy something from Walmart at a storefront, but the cost of larding on an extra term on the Internet is so low, that there's no reason for a business not to bury its whole Christmas wishlist in linked on-line terms and conditions.
The Restatement strangely believes that courts will somehow police abuses of contract through unconscionability and deception, but this presumes (1) that consumers will litigate in the first place, and (2) that courts will stretch these constrained doctrines to prevent the enforcement of not just outrageous terms, but also quotidian unfair terms. Do I have a nice bridge to sell you in Brooklyn if you think that's a trade-off that will help consumers….
A bipartisan group of 23 state Attorneys General has recently written publicly opposing the Restatement. That sort of opposition is unprecedented and is a sign that something is seriously amiss with the project.
So, if you know an ALI member, urge them to attend the Annual Meeting session and vote against the Restatement!
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Restatement of Consumer Contracts—On-Line Symposium
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The Yale Journal on Regulation is holding an on-line symposium about the draft Restatement of the Law of Consumer Contracts, which is scheduled for a vote at the American Law Institute's annual meeting this May. The launching point for the symposium are a pair of articles in JREG that take sharp issue with the empirical studies that underlie the draft Restatement.
The American Law Institute (ALI) is a self-appointed college of cardinals of the American legal profession. It's a limited size membership organization that puts out various publications, most notably "Restatements" of the law, which are attempts to summarize, clarify, and occasionally improve the law. Restatements aren't actually law, but they are tremendously influential. Litigants and courts cite them and they are used to teach law students. In other words, this stuff matters, even if its influence is indirect.
The draft Restatement of Consumer Contracts is founded on a set of six quantitative empirical studies about consumer contracts. This is a major and novel move for a Restatement; traditionally Restatements engaged in a qualitative distillation of the law. Professor Gregory Klass of Georgetown has an article that attempts to replicate the Reporters' empirical study about the treatment of privacy policies as contracts. He finds pervasive problems in the Reporters' coding, such as the inclusion of b2b cases in a consumer contracts restatement.
A draft version of Professor Klass's study inspired me and a number of other advisors to the Restatement project to attempt our own replication study of the empirical studies of contract modification and clickwrap enforcement. We found the same sort of pervasive problems as Professor Klass. While the ALI Council completely ignored our findings, we wrote them up into a companion article to Professor Klass's.
Some of the pieces posted to the symposium so far have been focused on replication study methodology (sort of beside the point given the very basic nature of the problems we identified) or defenses of the Reporters including mixed statutory-contract decisions in their data sets (which is no defense to inclusion of b2b cases or duplicate cases or vacated cases, etc.). But Mel Eisenberg has contributed an important piece that highlights some of the substantive problems with the draft Restatement, namely that it guts consumer protections. For example, it would require findings of both procedural and substantive unconscionability for a contract to be unconscionable, while many states only require substantive unconscionability. Not surprisingly, I am unaware of any consumer law expert (other than the Reporters) who supports the project.
But this thing that should really be a wake up call that something is very, very off with this Restatement project is the presence of outside opposition, which is virtually unheard of in the ALI process. Every major consumer group (also here, here, and here), weighed in in opposition as well as 13 state attorneys general (and also here), and our former co-blogger (and also former ALI Vice-Chair), Senator Elizabeth Warren. Nor has the opposition been solely from consumer-minded groups. The US Chamber of Commerce and the major trade associations for banking, telecom, retailers, and insurers are also opposed (albeit with very different motivations). Simply put, it's hard to find anyone other than the Reporters (and the ALI Council, which has a strong tradition of deference to Reporters) who actually likes the draft Restatement.
So, if you're an ALI member, get informed. If you know an ALI member, make sure that s/he is informed. This is coming for a vote in May and if enacted would be bad policy, based on the legal equivalent of "junk science." This isn't what the ALI should be doing.
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Shakespeare Meets ALJs: Much Ado About Nothing
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In a recent oral argument before the U.S. Supreme Court, conservatives urged the Court to outlaw the use of administrative law judges (ALJs) in agency enforcement actions. The Consumer Financial Protection Bureau is paying notice. On January 31, 2018, the CFPB reprised the ALJ debate in its second Request for Information under Acting Director Mick Mulvaney. This RFI asked: should the CFPB shift course to litigate all of its enforcement cases in federal court and none before ALJs? Suffice it to say, there is less here than meets the eye.
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Epic Systems and the Atomization of Employment Disputes
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Millions of American workers are parties to arbitration agreements that require them to bring claims against their employers in individualized arbitration proceedings (rather than as part of a class or collective action, as authorized by some federal and state laws regulating the workplace). In Epic Systems v. Lewis, a 5:4 majority of the Supreme Court held today that these agreements must be enforced even though the federal National Labor Relations Act declares it an unfair labor practice for an employer to interfere with the ability of employees to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The decision is not unexpected, but it is consequential given the number of affected employees.
The case—really, several consolidated cases—was weird for a number of reasons. The NLRB had concluded that employers who insisted on individualized arbitration were engaged in unfair labor practices. Then, in September 2017, the Board fell under Republican control, and many wondered whether it would continue to defend that position. It did, but the administration worked hard to undermine it. In fact, the Solicitor General, which had previously supported the Board in seeking Supreme Court review, later filed a brief disagreeing with it on the merits.
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Summer Associate Arbitration Clauses: Why Disclosure Isn’t Enough
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This weekend a mini-scandal erupted over the law firm Munger, Tolles requiring its summer associates to sign pre-dispute arbitration clauses. Munger, Tolles was rightly shamed into rescinding the practice, but one suspects that Munger, Tolles isn't the only firm doing or contemplating doing this.
I believe law schools have a particular duty to stand up here and protect their students. Law students seeking firm jobs are at an incredibly disadvantage in terms of both market power and knowledge. The students are often heavily leveraged and desperate to land a high-paying job with a large law firm in order to service their educational debt, and even when debt doesn't drive them, a summer associate position at a large firm is often seen as a stepping stone to career success. Law students really have no bargaining power in terms of their contractual relationship with summer employers. It's take-it-or-leave-it, and leave-it isn't an option for law students. Law students also lack knowledge about the importance of an arbitration clause in terms of the procedural and substantive rights they will surrender and knowledge about the firm culture they are stepping into and the likelihood it will result in a dispute of some sort (e.g., sexual harassment). Whatever one thinks of the virtues of arbitration generally, this strikes me as a very clear cut case of pre-dispute arbitration agreements being inappropriate. I don't think it's a stretch to call such arbitration provisions unfair and unconscionable both procedurally and substantively. (Does anyone think the firms are doing this for the summer associates' benefit?)
I believe that the appropriate response for law schools in light of the situation is to refuse access to on-campus interviewing to any firm that requires its summer associates to sign an arbitration clause. Schools have done this when their students civil rights were being threatened both under don't-ask-don't-tell and in the era when firms would often refuse interviews to women and people of color. The right to have one's grievances heard before a court (including for race and gender discrimination!) is also a civil right. It is a civil right that is fundamental to the whole endeavor of law schools, and schools should be just as vigilant to protecting their students civil rights in this instance as they have in the face of discrimination.
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Debbie Does Damages: the Stormy Daniels Contract Clusterf*ck
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There's been a lot of poorly informed reporting about the Stormy Daniels contract litigation, including in some quite reputable publications, but by reporters who just aren't well versed in legal issues. For example, I've seen repeated reference to an "arbitration judge" (no such creature exists!) or to a "restraining order" (there's no enforceable order around as far as I can tell. So what I'm going to do in this blog post, as a public service and by virtue of some tangential connection to our blog's focus, dealing with arbitration agreement (to satisfy Sergeant-at-Blog Lawless), I want to clarify some things about the Stormy Daniels contract litigation and engage in a wee bit of informed speculation based on tantalizing clues in the contract. As a preliminary matter, though, I apologize for the clickbait title.
Let's start with the facts as we know them.
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Stormy Daniels, Donald Trump, and the Role of Arbitration in Ensuring Silence
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[Edited to correct names; too many aliases involved in this one]
For readers who haven't been following along: Stephanie Clifford, aka Stormy Daniels, is an adult film star who allegedly had a sexual relationship with Donald Trump in the mid-2000s. She recently sued Trump and other defendants, seeking to invalidate a settlement agreement in which she was paid to keep silent about the details of the alleged relationship. Here is her complaint, which includes the settlement agreement as an exhibit. And here is some coverage of background details.
The settlement agreement includes an arbitration clause, which should prompt some reflection about the use of arbitration to silence victims of sexual assault (a topic that has attracted attention in the wake of revelations about Harvey Weinstein). On the other hand, people are often too quick to blame arbitration for unrelated problems, so I hope this (long-ish) post can offer a bit of clarity. The short version: Whoever drafted the agreement between Clifford and "David Dennison" gets an A for cynicism, but would have to beg for a C in my arbitration class. (I’m guessing the draftsperson would fail professional responsibility…)