Like nutrition labels that expose toxic junk foods, revenue yield maps expose toxic junk development policies
The invaluable organization "Strong Towns" (StrongTowns.org) found a brilliant young man, Nitin Gadia, who is doing some home-brew map-making that has revolutionary potential to force cities and towns to be honest about their self-destructive and even suicidal development policies, which are all based on "Continuing and Promoting the Reign of the Automobile." Mr. Gadia's maps show that it wealth is essentially the product of people in proximity, and that the form of development that has dominated in the United States since 1945 is a kind of deadly self-inflicted wound on our cities and towns, where the stroads (street-road hybrids that combine the worst of each) bleed energy and wealth into the suburbs where it is dissipated and lost.
Every municipality in Oregon should be forced to make such maps and to make them available on websites so that every taxpayer can see the folly of auto-centered development schemes.
Below is an interview by a StrongTowns staffer and Gadia, who demonstrates that a small set of sharp young people could easily accomplish great things in terms of exposing absurd policies that allow bad development policy to predominate. Immediately below is a snapshot from the StrongTowns site, which lets you play with Gadia's map. The interview contains links you can follow to find and explore the map.
Rachel Quednau, StrongTowns: Hi everyone and welcome to the Strong Towns podcast. Our guest today, whom I'll bring on in just a moment, is Nitin Gadia. He created a fantastic mapping tool that examines whether property tax revenue is covering the cost of street maintenance for every property in his hometown of Ames Iowa.
“Examining the CFPB’s Proposed Rulemaking on Arbitration: Is it in the Public Interest and for the Protection of Consumers?”
(This OregonPEN is published early to allow the staff to celebrate a 32nd wedding anniversary on its usual Saturday delivery date. Normal delivery will resume on the following Saturday.)
Claims that program must cut benefits is attempt to undermine it by destroying its popular support
Steven Hill has a knack for being right about wonky important things that require real insight and original thought, instead of just repackaged conventional wisdom. For example, with Rob Richie, Hill founded Fairvote, originally known as the Center for Voting and Democracy, which has done important work on reforms to make U.S. elections better, advocating for the national popular vote, proportional representation, and ranked-choice voting (also known as "instant runoff voting." Fairvote is probably the leading non-partisan election reform nonprofit in the United States.
Hill has since applied his knack for original thinking to other issues, and his latest book is a timely look at Social Security system. Since Reagan, the war cry of the Very Serious People is that the US must have "entitlement reform" because . . . well, because all the Very Serious People say that we must! Their silent caveat is "because we refuse to cut the Pentagon and we have no intention of giving back any of the tax-cuts we stole since the Reagan years."
As Beacon Press (publisher of The Pentagon Papers) notes, Hill has made a habit of being ahead of the curve: Steven Hill is a Senior Fellow with the New America Foundation and a Holtzbrinck Fellow at the American Academy in Berlin. He is the author of six books, including Raw Deal: How the “Uber Economy” and Runaway Capitalism Are Screwing American Workers, which was selected by The Globalist as one of the Top Ten Books of 2015. His op-ed’s, articles and media interviews have appeared in the New York Times, Washington Post, Wall Street Journal, The Atlantic, Politico, CNN, C-SPAN, BBC, Financial Times, Guardian, Bloomberg News, Fox News,National Public Radio, The Nation, Salon, Slate, Observer, Fast Company, Business Insider, HuffingtonPost, Le Monde, Die Zeit, Al Jazeera and many others. His other books include Europe’s Promise: Why the European Way Is the Best Hope in an Insecure Age and 10 Steps to Repair American Democracy. He is a co-founder of FairVote/Center for Voting and Democracy. Follow him on Twitter at @StevenHill1776 and visit his website.
The US retirement system, with all its components parts including Social Security at its core, has been the yellow brick road leading to a pot of gold at the end of most workers’ careers. Social Security has demonstrated its value decade after decade, and it has been one of the most successful government programs of all time. And yet it is threatened now more than ever by leading politicians, business leaders, and media pundits who insist, despite all the facts to the contrary, that Social Security benefits are no longer affordable and must be cut. To the extent that there is another “side” of this debate over whether to cut Social Security, it comes mainly from those who are on the defensive, fighting merely to maintain Social Security as it is, or those who propose incremental reforms to preserve the status quo—even though the status quo is increasingly inadequate. Neither “side” of this debate is addressing the reality of America’s retirement crisis.
The Governor's handpicked panel of non-visionaries put together to dream up a "vision" that allows for business as usual issued their report. OregonPEN will have lots to say about the plan fantasies later. For now, we will just document the panel's touching complex of beliefs that amount to "If we all close our eyes to trends (such as record-breaking droughts and temperatures, year after year), they can't hurt us."
Oregon is a state blessed with incomparable natural beauty and a strong economy prized for its agriculture commodities, forest products, and its technology goods and services. Its people are also renowned for their civic engagement and innovation in public policy. This is a place where people from all parts of the country want to live, and where Oregonians want to stay. We are here to raise families, do business, enjoy our golden years, and take part in our shared high quality of life.
Oregon’s Transportation: A History
The panel believes that the findings outlined in this report w a lasting and positive impact on the fabric of Oregon’s econ and security, as well as the vibrancy of our communities. We are also greatly encouraged that, from across Oregon, there is support for our shared transportation system and clear focus on the need to maintain the system we have today, address con meet seismic needs, and make appropriate investments in transit.
Between January and March of 2016, the Transportation Vision Panel held a series of eleven Regional Forums across the state.
Investing in Transportation
For decades, investments in transportation were grounded by the principle of ‘the user pays’ and supported by robust trust funds that both built and maintained transportation assets. In recent years, the revenue raised to support trust funds is no longer sufficient. The reasons for the shortfall vary. Even so, the need for adequate resources to maintain and improve a multimodal transportation system remains.
The "Oregon Transparency" website - lies, damn lies, and statistics
Dead reckoning – Part 2
Last week, OregonPEN published the first in what will be a series on Oregon's "dead reckoning" ability -- how well public agencies perform in terms of having a clear and accurate sense of their own performance at any given time. As any sailor knows, dead reckoning can be a life-saver, or a deceiver that guides you onto the rocks and disaster. The difference arises mainly from two things:
1) How carefully the navigator trying to steer a course behaves in terms of keeping track of the heading and progress actually made, without regard to hopes and wishes; and
2) Whether the navigator overcomes human nature and honestly incorporates the signs that internal problems and external forces are producing travel in directions other than the desired course.
Whether Oregon public agencies are any good at planning for the future is difficult to know; however, it seems likely that agencies that do a good job knowing what their past progress has been are the ones in the best position to plan for the future. So in this issue, OregonPEN visits a website that provides links to some of the Oregon state agency "annual progress reports" submitted to the Legislative Fiscal Office, just to get a rough sense of whether agencies take the reporting obligation seriously and try to make it useful for themselves and the public.
What stands out when sampling this site and the agency self-evaluation reports?
First, the progress report format seems designed to defeat or at least seriously deter transparency. Individually prepared reports that do not use a common set of agency metrics prevents comparison of agencies, despite the principle of “transparency” that is supposed to animate the whole effort. Worse, the progress reports themselves are scans of static paper reports containing inconsistent low-resolution black and white graphics, so that there are no live links and no connections to the underlying data. In other words, although these reports are prepared using digital tools that make it possible to provide inexpensive, real-time, vivid updates of all the key metrics, Oregon has instead chosen to force the data out of the digital realm and onto paper so that it is an information dead-end. Anyone trying to use these reports to assess agency performance against other Oregon agencies faces a hopeless task.
Second, even the ordering of the reports works against real transparency, because the reports are presented in the least useful order possible, alphabetically. This trivial point is actually not so trivial, because the way the agency progress reports are presented has a good deal to do with how likely they are to be viewed and considered, and how easy is it for an Oregonian to turn the data into usable knowledge.
The Accountancy Board is not ranked first in terms of importance to understanding what state government is doing. Absent a better plan, the agencies reports should appear according to budget size, or budget categories, with the major agencies grouped as one category, minor agencies another, professional licensing boards in another. The object should be to group like with like, to promote comparisons and , present the reports according to agency importance – how much that agency affects the people of Oregon. While this can be difficult to know (the DMV might be the agency with the greatest amount of contact with Oregonians), agency budget provides a reasonable index for ranking agency importance.
Another problem with the presentation is that the agency listing approach provides no warning about gaps. No matter how long they were given, few Oregonians looking at the Oregon Transparency website are likely to note that the Oregon State Bar, the organization responsible for licensing and regulating attorneys, is nowhere to be found there. Are reports from other important state entities missing?
Third, Oregon allows all agencies to create or propose their own performance metrics. That sounds reasonable until you seek to compare two agencies that serve similar functions, such as the Board of Accountancy, the Board of Dentistry, the Licensed Professions Counselors & Therapists Board, the Licensed Social Workers Board, the Medical Board, the Board of Medical Imagine, and so on down the professions. While the professional licensing boards are superficially diverse, they are essentially all the same – each one is the body that is supposed to oversee and implement the regulations that the state has deemed necessary to apply to members of that profession for the benefit of the public. A real transparency effort would require all similar agencies to use a “Common Core” of performance measures, supplemented by any agency-specific measures that are appropriate because they add value in terms of helping Oregonians understand what they are getting in return for the resources spent on that particular agency.
Fourth, related to the problem of allowing agencies to define their own performance measures, it is impossible to summarize the data using a common measure. That means that Oregonians have no simple way to judge performance of one agency against another, even when there are similar metrics being used that could be made comparable with some effort. Compare that to the way that the federal Department of Transportation auto mileage regulations create a common standard of comparison (mpg, or miles per gallon rating) for city and highway driving. Even though personal vehicles range from enormous SUVs and big pickup trucks to tiny two-seaters, every gas vehicle completes a standardized testing regime and is assigned a city and a highway mpg rating figure. Even if these DOT ratings are off in an absolute sense, because the tests don’t reflect real-world driving conditions, they are still valuable because a would be car-buyer can still rely on the ratings to rank the different cars being considered, since every car completes the same testing.
This same issue creates another problem, namely that of “standardless standards.” Without a common basis for comparison between agencies, it is impossible to assess which agency or board sets the standard to which the rest should aspire. Without common measures, there can be no cross-agency benchmarking. Without benchmarks, agency performance measures and goals reflect agency culture, morale, and history instead of realistically attainable results.
Wherever there are agencies and boards with common functions within Oregon, the performance measures should not just be comparable, they should also be compared, and all the agencies should be ranked against each other, measure by measure, and the best performing agencies on any given measure should be studied to determine what they are doing that the rest are not.
Where there are truly no in-state agencies with a similar function to compare against, each agency should be responsible for identifying out-of-state agencies to benchmark against.
Probably the most important problem with the Transparency website is the “streetlight problem.” The streetlight problem is named for the old joke about the drunk who gets kicked out of the bar and finds that he has lost his keys, but only looks for them under a streetlight where visibility is good. In this electronic world, it is relatively easy to get good visibility for a number of activities that are easily tracked and measured. What is important, on the other hand, is how well an agency’s chosen performance measures actually reflect something important about the agency’s product rather than its inputs, its ends rather than its means.
What separates dead reckoning from simply robotic recording of course and speed changes is that the navigator is continuously assessing how well reality compares to the idealized (estimated) track that would be traveled if the engine speeds ordered and the course headings chosen did not have to operate against hidden factors such as tides, currents, compass errors and wind. It is tempting for any agency to dispense with this assessment part, and to simply measure inputs and activities – investigations opened, investigations closed, delays, etc. – without ever bothering to look at whether the problems that caused the agency to be formed in the first place are being addressed or not.
Another way to describe the streetlight problem is the old saying that “When you’re up to your ass in alligators, it can be pretty hard to remember that you were actually sent there to drain the swamp.” Report after report on the Oregon Transparency website shows this perfectly: each report presents a handful of “key performance indicators,” or KPIs, that refer only to easily-measured busyness or internal agency activity, with no reference to any real-world outcome that would be meaningful in terms of the agency’s purpose.
In medical research, this is the “intermediate endpoints” problem, where researchers fail to remember that the goal is health or longevity, not some intermediate measure such as lower cholesterol. In the last fifty years, American medicine became fanatical in pursuit of lower cholesterol scores, and drug sales soared, even as heart disease and other chronic diseases soared apace.
For real transparency, the “key performance indicators” need to really be about performance in draining the swamp that the agency was created to drain, with a focus on results in the real world, outside the boundary of the given agency. And the measures actually need to be “key,” and not just easily keyed into a computer. That means selecting important endpoints about things that actually matter to regular Oregonians (health, crime, environmental quality, etc.) instead of the barrage of intermediate agency-centered midpoints such as how fast the agency responds to inquiries, issues permits, or conducts investigations.
A maxim of quality management is that “a crude measure of something important is better than a precise measure of something that’s not.” The Oregon Transparency progress reports are filled with precise measures of nothing important, mostly about agency internal process instead of about real world outcomes that affect Oregon, and all are presented in a way that masks and conceals deficiencies instead of providing actual transparency so that problems can be identified and addressed.
Many of the Oregon Transparency reports illustrate many of the shortcomings noted above, as well as others not mentioned. However, one agency report in particular exemplifies the problems with the entire project.
The progress report from the Oregon Teacher Standards and Practices Commission could be an “anti-Transparency” award winner, as it stands head and shoulders above the rest in displaying a commitment to obscure and excuse performance rather than to present it fairly. Not only are all four TSPC metrics all intermediate process/busy-ness rather than important outcomes in terms of the agency’s stated mission, the text accompanying the report flatly attempts to contradict the data in the report.
In any public agency, if the key performance indicators are actually important at all, then poor results cannot be ignored or minimized. In its claims that the agency is actually performing well, the TSPC report asks the reader, “Who you gonna believe, me or your own lying eyes?”
TEACHER STANDARDS and PRACTICES COMMISSION
The first specific indicator is simply responding to phone and email contacts within 3 days. This provides TSPC with an opportunity to look reality in the eye and deny it, stating that
"We do not have actual data, but in reviewing results with many of our neighboring states (through informal conversations), it appears that even though we are not meeting our own expectations, in the educator licensure arena, Oregon's office excels at customer service."
As with the 3-day response data, the data on the rates of licenses issued within 20 days is presented mainly to argue for additional resources; apparently, failing to meet performance targets -- even key performance measures -- year after year causes no introspection among management as to methods and processes. Instead, TSPC highlights its own failure to find real benchmarks, which continuing to insist that all is well: "Our customer service survey respondents tell us we are generally faster than California, Washington and Arizona when it comes to issuing licenses. We do not have data on how other state agencies fair [sic] in this area."
1. OUR STRATEGY
The next indicator is the TSPC's rate of closing investigations in 180 days. Again, TSPC ignores that its function is actually quite similar to that of many other regulatory and licensing agencies in Oregon, not to mention in other states. Yet, according to TSPC, "It is difficult to find agencies with similar staffing; similar procedures and similar numbers of investigations." As if the only fair or useful comparison is not with any agency that does not do exactly the same sorts of investigations with the same number of staff.
1. OUR STRATEGY
The graphic for the final TSPC performance indicator is a candidate for a special award in the "How to Lie with Excel Graphs" - one must not merely glance, but must look carefully at the graph to realize that the right-most bar is not the latest result, but is rather the claimed target, although presented as a bar on the chart. This is even leaving aside the quality of the data, which seems extraordinarily weak, as the text connected to the graph highlights.
According to the agency itself, even cherry picking the positive data is not enough to bring the overall satisfaction of customers (teachers) out of the range of abysmal; nonetheless, TSPC determines that the data is good because it "gives general perception of agency's above average performance."
What the agencies claim to have accomplished
Name of Agency Performance Progress Reports
Accountancy, Board of Progress Report
Administrative Services, Department of Progress Report
Advocacy Commissions Office Progress Report
Agriculture, Department of Progress Report
Aviation, Department of Progress Report
Blind Commission Progress Report
Business Oregon Progress Report
Chief Education Office Progress Report
Chiropractic Examiners, Board of Progress Report
Columbia River Gorge Commission Progress Report
Construction Contractors Board Progress Report
Consumer & Business Services, Department of Progress Report
Corrections, Department of Progress Report
Criminal Justice Commission Progress Report
Dentistry, Board of Progress Report
District Attorneys and Their Deputies Progress Report
Education, Department of Progress Report
Employment Department Progress Report
Employment Relations Board Progress Report
Energy, Department of Progress Report
Environmental Quality, Department of Progress Report
Fish and Wildlife, Department of Unreported
Forestry, Department of Progress Report
Geology & Mineral Industries, Department of Progress Report
Government Ethics Commission Progress Report
Governor's Office Progress Report
Higher Education Coordinating Commission Progress Report
Housing and Community Services Progress Report
Human Services, Department of Progress Report
Indian Services, Legislative Commission on Unreported
Judicial Fitness and Disability Commission Unreported
Justice, Department of Progress Report
Labor and Industries, Bureau of Progress Report
Land Conservation and Development Department Progress Report
Land Use Board of Appeals Progress Report
Lands, Department of State Progress Report
Legislative Administration Progress Report
Legislative Counsel Progress Report
Legislative Fiscal Office Unreported
Legislative Revenue Office Progress Report
Library, Oregon State Progress Report
Licensed Professions Counselors & Therapists Board Progress Report
Licensed Social Workers Board Unreported
Long Term Care Ombudsman Office Progress Report
Marine Board Unreported
Medical Board Progress Report
Medical Imaging, Board of Progress Report
Military Department Progress Report
Mortuary and Cemetery Board Progress Report
Naturopathic Medicine, Board of Progress Report
Nursing, Board of Progress Report
Occupational Therapy Licensing Board Progress Report
Oregon Health Authority Progress Report
Oregon Liquor Control Commission Progress Report
Parks and Recreation Department Progress Report
Parole and Post-Prison Supervision, Board of Progress Report
Pharmacy, Board of Progress Report
Psychiatric Security Review Board Progress Report
Psychologist Examiners, Board of Progress Report
Public Defense Services Commission Progress Report
Public Employees Retirement System, Oregon Progress Report
Public Safety Standards & Training Department Progress Report
Public Utility Commission Progress Report
Real Estate Agency Progress Report
Revenue, Department of Progress Report
Secretary of State Progress Report
Speech-Language Pathology and Audiology Progress Report
State Police, Oregon Progress Report
Tax Practitioners, Board of Progress Report
Teacher Standards and Practices Commission Progress Report
Transportation, Department of Progress Report
Treasury, Oregon State Unreported
Veteran´s Affairs, Department of Progress Report
Veterinary Medical Examining Board Progress Report
Water Resources Department Progress Report
Watershed Enhancement Board Progress Report
Youth Authority, Oregon Progress Report
Overview of Oregon's Resilience Plan
A splendid 2015 New Yorker magazine article woke a lot of people up to the fact that here in Oregon, we're overdue for a catastrophe of Biblical proportion, an civilization-leveling earthquake likely to run from magnitude 8.0 or even ten times or more powerful at 9.0+ (quake magnitudes are logarithmic, so each ordinal step, such as 1 to 2 represents an increase in earthquake strength of 10 times).
The paper below is a good overview of the situation, with recommendations for response.
In January 2011, three Oregon earthquake safety advocates suggested in the pages of the Oregonian  that Oregon should take new steps to make itself resilient to a big earthquake.
The definition of (physical) resilience can be better illustrated with the resilience triangle diagram as shown in Fig. 2.
Of all the skills needed to take a nuclear submarine out to sea for months at a time and then bring it home safely, perhaps the most important one is the least heralded and very much the least “modern” of all skills used onboard these fantastically complicated vessels, with their nuclear reactors, sophisticated surveillance devices, lethal weapons, and complex life support systems.
It’s a skill that would’ve been familiar or even ancient in the time of Homer, and it has never not been in daily use all over the world, from shallow coastal waters to the deepest blue seas. It’s so simple that it’s almost overstating it to call it a skill–rather, it’s more of a discipline, a discipline that reflects that word’s root meaning in scholarship, because students of this ancient discipline learn to survive.
Dead reckoning involves keeping track of your course and speed throughout the voyage so that you can plot your best estimate of your current position on a chart. But that’s only the first step to the safe navigation of the ship. What makes dead reckoning work is that, as you plot your course for hours and days and sometimes even weeks, you draw a constantly expanding circle around the point that you hope represents your own true position. That circle of error grows larger and larger the longer you have gone without ”getting a fix,” which doesn’t have to do with drugs although it’s possible to see sailors craving a navigational fix with the same intensity.
Because safe navigation requires that you never let any part of that ever-expanding error circle touch any known hazards, such a shallow waters or submerged rocks. The only way to shrink that circle is to get a fix – to establish your true position with certainty, such as by finding multiple landmarks with the periscope and “shooting” bearings to those landmarks, and drawing the resulting bearing lines on your chart. With luck, the lines all converge at a point, the point where you must have been to view those landmarks from those angles. With such a fix, you can collapse your error circle for a brief moment … though it begins building up again immediately until you get your next “ground truth” fix.
Even more important than the temporary comfort of re-establishing your position with certainty for a moment is what else a fix allows you to do:
A fix after a period of dead reckoning lets you gauge – with real numbers – how good or bad your dead reckoning was, and the rate at which your estimate of your own position is degrading.
And since dead reckoning is pretty simple – the distance you travel in any given direction is simply how fast you are going times the length of time you head in that direction – when you get a reality check that makes you see just how far off your dead reckoning position estimate was compared to reality, what you are really getting a handle on are all the factors you can’t measure directly or control from inside a submarine: You are getting the integrated summation of all the errors and hidden forces that create a difference between your theoretical (dead reckoning) position and reality: ocean tides, deep currents, wind forces, instrument errors, and a hundred other, including the degree to which the sailor at the helm wobbles around the ordered course and the degree of astigmatism in her eyeglass prescription.
If, in the six hours between two fixes, you managed to put a nautical mile between where you thought you were at the moment of the second fix and where the second fix actually showed that you were, you just established what you should assume is your minimum error rate. And with that minimum error rate established, ship’s safety requires you to assume that you will continue to suffer that at least that same rate of positional uncertainty in the future, minute by minute, hour by hour. And that shows up as a bigger and bigger error circle around your position estimate.
That is, if you have found that you were off by a mile after six hours between fixes, then until you have hard evidence to the contrary, you have to let your position error estimate – the ever-growing circle around your dead reckoned position -- grow at the rate of 1 nm per six hours (.17 nm/hour). That’s even if you do nothing but simply sail in (what you believe to be) a straight line for six hours under what you believe to be perfect conditions with no tide, current, wind or wave effects. You learn, the hard way, that your “dead reckoning” position is not the point in the center of your circle. To the contrary, you must always assume that you are actually sailing at the very edge of the circle, on the side closest to the nearest hazard – the undersea mountain, the submerged cable, or what have you.
Without the humility of the error circle, dead reckoning is a recipe for running aground and causing the loss of the ship with all lives. And if fixes are easy to come by – if you’re sailing along a coast with lots of buoys and on-shore landmarks – it’s easy to keep “shrinking the circle” so that it never gets so large that it interferes with where you’d like to go.
But get well away from shore, or get socked in by bad weather such that visibility is nil, and the error circle keeps growing and growing, such that you can wind up unable to go in the direction you want to head because the huge positional uncertainty circle includes hazards in several directions. Until you get some ground truth that lets you shrink the error circle, you are stuck in deep waters, unable to approach the shore.
And that’s where things go wrong. Because it takes iron discipline – in the sense of toughness, not learnedness – to refuse to let your human ego and fondest wishes lead you astray. Humans are less rational creatures than we are rationalizing creatures. And humans in hierarchies are primed for groupthink, which is what leads to refusal to remain humble in the face of fervent desires. When people really want something, and when their superiors really want something, it’s quite difficult to resist the urge to start “shrinking the error circle” based on phony pretexts (rationalization). Nobody says that they want to shrink the circle because, if we don’t, we won’t be able to reach the harbor on time and they’ll miss the Super Bowl or whatever. Instead, they invent persuasive arguments to claim that the error circle was needlessly large, and that it can be reduced without risk.
What does dead reckoning have to do with Oregon, except for helping explain why some of the many ships lost off our coast found a hazard where they hoped for a safe harbor?
Just this: Public agencies – all public agencies, but most especially those that either make or rely on long-range forecasts -- need to learn both the humility and the discipline of dead reckoning, of having a constantly growing measure of uncertainty around every number that they forecast. We need for all government statements about the future to be qualified with the agency’s current dead reckoning error, using numbers that are based on past agency performance, not the hubris of the management.
When an urban renewal agency forecasts the dazzling results to be had from seizing private homes through eminent domain and lavishing cash on contractors and developers to build a new project, there are countless implicit forecasts made, and so the agency should have to show, for each one, how well the agency estimates have performed historically, and the largest of those historical errors should be applied to the proposed project outcomes, giving taxpayers a way to assess those sunny estimates against the wisdom of experience.
Imagine if Oregonians got accustomed to asking all politicians and public officials for the error estimates that apply to every public pronouncement.
Imagine the day when, after the politician proposes longer prison sentences and claims that these longer sentences will reduce crime rates, the citizens respond by pointing out that we know, with hard numbers, that the error in this kind of forecast is approximately infinite (because our prison sentences are already so excessive, longer prison sentences have roughly the same effect on crime as sentencing according to the astrological chart of the prisoner).
Better yet, imagine the discipline of requiring politicians and educators to report and apply their own error rates to their rosy forecasts about the benefits of the next round of “improved” standardized testing for students.
The Oregon Department of Transportation – which is best thought of as simply the Oregon Highway Department hiding under a flimsy pseudonym – is the classic offender of blind dead reckoning without feedback.
They have the dead reckoning part down – they apply a simple formula to draw a straight line from a past known position (say, measured traffic volumes) to a foregone, forecast conclusion (that we have to pour more concrete and asphalt and build more bridges).
But ODOT and other agencies never do is determine their own rate of error expansion and apply that to future estimates.
One measure of autism is the degree to which an autistic person is unable to recognize social cues from others – the feedback from other people about how the autistic person is perceived. Public agencies are positively autistic in their spooky, otherworldly ability to be fantastically wrong in their forecasts, year after year after year, and never have that message penetrate into the part of the agency responsible for forecasting.
That chart is the government equivalent of a ship's navigator who regularly finds that the ship’s true position is actually 20 miles or more outside the fix expansion circle (error uncertainty estimate), the circle that is supposed to be the maximum possible error in the ship’s estimated position. But instead of heading for deep water and safety until the cause of this huge error is understood, this navigator simply sets the error estimate to zero and goes back to dead reckoning (making the same errors in the next forecast), never once asking why reality is so vastly different from the forecast.
From roads and bridges to prisons to energy facilities, from tax policy to spending programs justified by projected returns on investment – for any expensive, long-lived project that takes a long time to plan and construct or implement – the most important thing to a for a planner – and for taxpayers – should be in forcing the planners and politicians to study their own tendency to err, and to include that tendency in all subsequent forecasts. And they must be forced to identify whether that tendency is random or is biased in one particular direction, like the DOT estimates that always, always, always, always shoot high, which just happens to be the direction that requires lost more highway projects.
The other thing that anyone who forecasts or who pays taxes should keep constantly in mind is the way that forecasting requires humility, because it takes humility to admit that your estimates have errors, and that those errors increase with time. And staying with this humility requires great discipline, because it’s demoralizing to have to confront the fact that most of what we actually know is much smaller than we like, and the uncertainty about what we do often dwarfs the amount we can have confidence in.
This discipline is critical because the effect of the errors grow as the size of the decisions grow, and government tends to deal in large decisions. A tiny 1% (0.01) error estimate in the ship’s measured speed is a much bigger problem at 20 knots rather than 5 knots. And a 5% overestimate of traffic demand compounds year after year, producing an estimate that is twice the actual demand in just 14 years.
Just as a ship’s navigator who wants to get home safely must be obsessed with understanding and minimizing the accumulating position estimate errors, citizens who want government to work well must become obsessed with getting government to adopt the discipline of measuring and applying its own forecasting uncertainty to all its programs and projects.
(To be continued.)
Why is Corporate America still in sackcloth and ashes over the death of the late Justice Antonin Scalia? More than anything else, it's because they operated for nearly 30 years under the protection of Scalia's Curse Against America, which was made up of his unyielding commitment to serving corporate power and ensuring that ordinary Americans could not possibly get a level playing field in disputes with corporations.
Scalia was the most radical jurist of the 20th Century, and his unique racket was to pretend to be a faithful servant to Constitutional constraints, while actually acting with complete abandon to junk precedent and tradition whenever it suited his pro-corporate agenda. Scalia was the Donald Trump of the Supreme Court, a truculent child who liked to bully and belittle anyone who opposed him or his agenda, and to hell with the "losers" (regular Americans) shortchanged by it.
But the Consumer Financial Protection Bureau (CFPB), Senator Elizabeth Warren's brainchild, is working on lifting Scalia's Curse Against America with new rules, rules that will let regular people band together against abusive and predatory lenders and hold them accountable in real courts.
Below is a piece by Paul Bland, Executive Director of Public Justice, a public interest nonprofit that has worked tirelessly and heroically to educate America about Scalia's Curse and to restore to America the idea that no one -- not even a powerful corporation -- is above the law.
Oregonians already benefit from the work of Public Justice and the countless other groups that have fought for years to pry open the courthouse doors shut tight by Scalia's Curse, but the real benefits will come when the rules go into effect. Expect more wailing and gnashing of teeth on Wall Street, with the declining corporate media here in Oregon echoing their cries and predicting that the sky will fall if a regular Oregonian can actually get a day in court.
Banks and payday lenders have had a good deal going for a while: They could break the law, trick their customers in illegal ways, and not have to face any consumer lawsuits. Armed by some pretty bad 5-4 Supreme Court decisions, they could hide behind Forced Arbitration clauses (fine print contracts that say consumers can’t go to court even when a bank acts illegally), even when it was clear that the arbitration clauses made it impossible for a consumer to protect their rights.
The banks will fund a huge phony "astroturf" campaign of lies against the proposed rules
Tidal wave of true public support for the rules needed
You may submit comments, identified by Docket No. CFPB-2016-0020 or RIN 3170-AA51, by any of the following methods:
Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public
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All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or Social Security numbers, should not be included. Comments generally will not be edited to remove any identifying or contact information.
How a system for resolving disputes between merchants got turned into an aggressive weapon for businesses against consumers
From the CFPB rulemaking. Footnotes and citations deleted except where shown in [brackets].
Arbitration is a dispute resolution process in which the parties choose one or more neutral third parties to make a final and binding decision resolving the dispute. Parties may include language in their contracts, before any dispute has arisen, committing to resolve future disputes between them in arbitration rather than in court or allowing either party the option to seek resolution of a future dispute in arbitration. Such pre-dispute arbitration agreements – which this proposal generally refers to as “arbitration agreements” – have a long history, primarily in commercial contracts, where companies typically bargain to create agreements tailored to their needs. In 1925, Congress passed what is now known as the Federal Arbitration Act (FAA) to require that courts enforce agreements to arbitrate, including those entered into both before and after a dispute has arisen.
In the last few decades, companies have begun inserting arbitration agreements in a wide variety of standard-form contracts, such as in contracts between companies and consumers, employees, and investors. The use of arbitration agreements in such contracts has become a contentious legal and policy issue due to concerns about whether the effects of arbitration agreements are salient to consumers, whether arbitration has proved to be a fair and efficient dispute resolution mechanism, and whether arbitration agreements effectively discourage the filing or resolution of certain claims in court or in arbitration.
In light of these concerns, Congress has taken steps to restrict the use of arbitration agreements in connection with certain consumer financial products and services and other consumer and investor relationships. Most recently, in the 2010 Dodd-Frank Act, Congress prohibited the use of arbitration agreements in connection with mortgage loans, authorized the Securities and Exchange Commission (SEC) to regulate arbitration agreements in contracts
between consumers and securities broker-dealers or investment advisers, and prohibited the use of arbitration agreements in connection with certain whistleblower proceedings.
In addition, and of particular relevance here, Congress directed the Bureau to study the use of arbitration agreements in connection with other, non-mortgage consumer financial products and services and authorized the Bureau to prohibit or restrict the use of such agreements if it finds that such action is in the public interest and for the protection of consumers.
Congress also required that the findings in any such rule be consistent with the Study. The
Bureau solicited input on the appropriate scope, methods, and data sources for the Study in 2012 and released results of its three-year study in March 2015. Part III of this proposed rule summarizes the Bureau’s process for completing the Study and its results.
To place these results in greater context, this Part provides a brief overview of: (1) consumers’ rights under Federal and State laws governing consumer financial products and services; (2) court mechanisms for seeking relief where those rights have been violated, and, in particular, the role of the class action device in protecting consumers; and (3) the evolution of arbitration agreements and their increasing use in markets for consumer financial products and services.
A. Consumer Rights Under Federal and State Laws Governing Consumer Financial Products and Services
Companies often provide consumer financial products and services under the terms of a written contract. In addition to being governed by such contracts and the relevant State’s contract law, the relationship between a consumer and a financial service provider is typically governed by consumer protection laws at the State level, Federal level, or both, as well as by other State laws of general applicability (such as tort law). Collectively, these laws create legal rights for consumers and impose duties on the providers of financial products and services that are subject to those laws.
Early Consumer Protection in the Law
Prior to the twentieth century, the law generally embraced the notion of caveat emptor or “buyer beware.” [Caveat emptor assumed that buyer and seller conducted business face to face on roughly equal terms (much as English common law assumed that civil actions generally involved roughly equal parties in direct contact with each other).]
State common law afforded some minimal consumer protections against fraud, usury, or breach of contract, but these common law protections were limited in scope. In the first half of the twentieth century, Congress began passing legislation intended to protect consumers, such as the Wheeler-Lea Act of 1938. The Wheeler-Lea Act amended the Federal Trade Commission Act of 1914 (FTC Act) to provide the FTC with the authority to pursue unfair or deceptive acts and practices. These early Federal laws did not provide for private rights of action, meaning that they could only be enforced by the government.
Modern Era of Federal Consumer Financial Protections
In the late 1960s, Congress began passing consumer protection laws focused on financial products, beginning with the Consumer Credit Protection Act (CCPA) in 1968. The CCPA included the Truth in Lending Act (TILA), which imposed disclosure and other requirements on creditors. In contrast to earlier consumer protection laws such as the Wheeler-Lea Act, TILA permits private enforcement by providing consumers with a private right of action, authorizing consumers to pursue claims for actual damages and statutory damages and allowing consumers who prevail in litigation to recover their attorney’s fees and costs.
Congress followed the enactment of TILA with several other consumer financial protection laws, many of which provided private rights of action for at least some statutory violations. For example, in 1970, Congress passed the Fair Credit Reporting Act (FCRA), which promotes the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies, as well as providing consumers access to their own information.
In 1976, Congress passed ECOA to prohibit creditors from discriminating against applicants with respect to credit transactions. In 1977, Congress passed the Fair Debt Collection Practices Act (FDCPA) to promote the fair treatment of consumers who are subject to debt collection activities.
Also in the 1960s, States began passing their own consumer protection statutes modeled on the FTC Act to prohibit unfair and deceptive practices. Unlike the Federal FTC Act, however, these State statutes typically provide for private enforcement. The FTC encouraged the adoption of consumer protection statutes at the State level and worked directly with the Council of State Governments to draft the Uniform Trade Practices Act and Consumer Protection Law, which served as a model for many State consumer protection statutes. Currently, forty-nine of the fifty States and the District of Columbia have State consumer protection statutes modeled on the FTC Act that allow for private rights of action.
Class Actions Pursuant to Federal Consumer Protection Laws
In 1966, shortly before Congress first began passing consumer financial protection statutes, the Federal Rules of Civil Procedure (Federal Rules or FRCP) were amended to make class actions substantially more available to litigants, including consumers. The class action procedure in the Federal Rules, as discussed in detail in Part II.B below, allows a representative individual to group his or her claims together with those of other, absent individuals in one lawsuit under certain circumstances. Because TILA and the other Federal consumer protection statutes discussed above permitted private rights of action, those private rights of action were enforceable through a class action, unless the statute expressly prohibited it.
Congress calibrated enforcement through private class actions in several of the consumer protection statutes by specifically referencing class actions and adopting statutory damage schemes that are pegged to a percentage of the defendants’ net worth. For example, when consumers initially sought to bring TILA class actions, a number of courts applying Federal Rule 23 denied motions to certify the class because of the prospect of extremely large damages resulting from the aggregation of a large number of claims for statutory damages. Congress addressed this by amending TILA in 1974 to cap class action damages in such cases to the lesser of 1 percent of the defendant’s assets or $100,000. Congress has twice increased the cap on class action damages in TILA: to $500,000 in 1976 and $1,000,000 in 2010. Many other statutes similarly cap damages in class actions. Further, the legislative history of other statutes indicates a particular intent to permit class actions given the potential for a small recovery in many consumer finance cases for individual damages. Similarly, many States permit class action litigation to vindicate violations of their versions of the FTC Act. A minority of States expressly prohibit class actions to enforce their FTC Acts.
B. History and Purpose of the Class Action Procedure
The default rule in United States courts, inherited from England, is that only those who appear as parties to a given case are bound by its outcome. As early as the medieval period, however, English courts recognized that litigating many individual cases regarding the same issue was inefficient for all parties and thus began to permit a single person in a single case to represent a group of people with common interests. English courts later developed a procedure called the “bill of peace” to adjudicate disputes involving common questions and multiple parties in a single action. The process allowed for judgments binding all group members – whether or not they were participants in the suit – and contained most of the basic elements of what is now called class action litigation.
The bill of peace was recognized in early United States case law and ultimately adopted by several State courts and the Federal courts. Nevertheless, the use and impact of that procedure remained relatively limited through the nineteenth and into the twentieth centuries. In 1938, the Federal Rules were adopted to govern civil litigation in Federal court, and Rule 23 established a procedure for class actions. That procedure’s ability to bind absent class members was never clear, however.
That changed in 1966, when Rule 23 was amended to create the class action mechanism that largely persists in the same form to this day. Rule 23 was amended at least in part to promote efficiency in the courts and to provide for compensation of individuals when many are harmed by the same conduct. The 1966 revisions to Rule 23 prompted similar changes in most States. As the Supreme Court has since explained, class actions promote efficiency in that “the . . . device saves the resources of both the courts and the parties by permitting an issue potentially affecting every [class member] to be litigated in an economical fashion under Rule 23.” As to small harms, class actions provide a mechanism for compensating individuals where “the amounts at stake for individuals may be so small that separate suits would be impracticable.” Class actions have been brought not only by individuals, but also by companies, including financial institutions.
Class Action Procedure Pursuant to Rule 23
A class action can be filed and maintained under Rule 23 in any case where there is a private right to bring a civil action, unless otherwise prohibited by law. Pursuant to Rule 23(a), a class action must meet all of the following requirements: (1) a class of a size such that joinder of each member as an individual litigant is impracticable; (2) questions of law or fact common to the class; (3) a class representative whose claims or defenses are typical of those of the class; and
(4) that the class representative will adequately represent those interests. The first two prerequisites – numerosity and commonality – focus on the absent or represented class, while the latter two tests – typicality and adequacy – address the desired qualifications of the class representative. Pursuant to Rule 23(b), a class action also must meet one of the following requirements: (1) prosecution of separate actions risks either inconsistent adjudications that would establish incompatible standards of conduct for the defendant or would, as a practical matter, be dispositive of the interests of others; (2) defendants have acted or refused to act on grounds generally applicable to the class; or (3) common questions of law or fact predominate over any individual class member’s questions, and a class action is superior to other methods of adjudication.
These and other requirements of Rule 23 are designed to ensure that class action lawsuits safeguard absent class members’ due process rights because they may be bound by what happens in the case. Further, the courts may protect the interests of absent class members through the exercise of their substantial supervisory authority over the quality of representation and specific aspects of the litigation. In the typical Federal class action, an individual plaintiff (or sometimes several individual plaintiffs), represented by an attorney, files a lawsuit on behalf of that individual and others similarly situated against a defendant or defendants. Those similarly situated individuals may be a small group (as few as 40 or even less) or as many as millions that are alleged to have suffered the same injury as the individual plaintiff. That individual plaintiff, typically referred to as a named or lead plaintiff, cannot properly proceed with a class action unless the court certifies that the case meets the requirements of Rule 23, including the requirements of Rule 23(a) and (b) discussed above. If the court does certify that the case can go forward as a class action, potential class members who do not opt out of the class are bound by the eventual outcome of the case. If not certified, the case proceeds only to bind the named plaintiff.
A certified class case proceeds similarly to an individual case, except that the court has an additional responsibility in a class case, pursuant to Rule 23 and the relevant case law, to actively supervise classes and class proceedings and to ensure that the lead plaintiff keeps absent class members informed. Among its tasks, a court must review any attempts to settle or voluntarily dismiss the case on behalf of the class, may reject any settlement agreement if it is not “fair, reasonable and adequate,” and must ensure that the payment of attorney’s fees is “reasonable.” The court also addresses objections from class members who seek a different outcome to the case (e.g., lower attorney’s fees or a better settlement). These requirements are designed to ensure that all parties to class litigation have their rights protected, including defendants and absent class members.
Developments in Class Action Procedure over Time
Since the 1966 amendments, Rule 23 has generated a significant body of case law as well as significant controversy. In response, Congress and the Advisory Committee on the Federal Rules of Civil Procedure (which has been delegated the authority to change Rule 23 under the Rules Enabling Act) have made a series of targeted changes to Rule 23 to calibrate the equities of class plaintiffs and defendants. Meanwhile, the courts have also addressed concerns about Rule 23 in the course of interpreting the rule and determining its application in the context of particular types of cases.
For example, Congress passed the Private Securities Litigation Reform Act (PSLRA) in 1995. Enacted partially in response to concerns about the costs to defendants of litigating class actions, the PSLRA reduced discovery burdens in the early stages of securities class actions.
In 2005, Congress again adjusted the class action rules when it adopted the Class Action Fairness Act (CAFA) in response to concerns about abuses of class action procedure in some State courts. Among other things, CAFA expanded the subject matter jurisdiction of Federal courts to allow them to adjudicate most large class actions. The Advisory Committee also periodically reviews and updates Rule 23. In 1998, the Advisory Committee amended Rule 23 to permit interlocutory appeals of class certification decisions, given the unique importance of the certification decision, which can dramatically change the dynamics of a class action case. In 2003, the Advisory Committee amended Rule 23 to require courts to define classes that they are certifying, increase the amount of scrutiny that courts must apply to class settlement proposals, and impose additional requirements on class counsel. In 2015, the Advisory Committee further identified several issues that “warrant serious examination” and presented “conceptual sketches” of possible further amendments.
Federal courts have also shaped class action practice through their interpretations of Rule 23. In the last five years, the Supreme Court has decided several major cases refining class action procedure. In Wal-Mart Stores, Inc. v. Dukes, the Court interpreted the commonality requirement of Rule 23(a)(2) to require that the common question that is the basis for certification be central to the disposition of the case. In Comcast Corp. v. Behrend, the Court reaffirmed that district courts must undertake a “rigorous analysis” of whether a putative class satisfies the predominance requirements in Rule 23(b)(3) and reinforced that individual damages issues may foreclose class certification altogether. In Campbell-Ewald Co. v. Gomez, decided this term, the Court held that a defendant cannot moot a class action by offering complete relief to an individual plaintiff before class certification (unless the individual plaintiff agrees to accept that relief). In Tyson Foods, Inc. v. Bouaphakeo, the Court held that statistical techniques presuming that all class members are identical to the average observed in a sample can be used to establish classwide liability where each class member could have relied on that sample to establish liability had each brought an individual action. Finally, in a case not yet decided as of the date of this proposal with implications for certain types of class actions, Spokeo, Inc. v. Robins, the Court is considering whether a plaintiff has standing to sue if they allege a violation of a Federal statute that allows for statutory damages – in this case, FCRA – and claim only those damages without making a claim for actual damages.
C. Arbitration and Arbitration Agreements
As described above at the beginning of Part II, arbitration is a dispute resolution process in which the parties choose one or more neutral third parties to make a final and binding decision resolving the dispute. The typical arbitration agreement provides that the parties shall submit any disputes that may arise between them to arbitration. Arbitration agreements generally give each party to the contract two distinct rights. First, either side can file claims against the other in arbitration and obtain a decision from the arbitrator. Second, with some exceptions, either side can use the arbitration agreement to require that a dispute proceed in arbitration instead of court. The typical agreement also specifies an organization called an arbitration administrator. Administrators, which may be for-profit or non-profit organizations, facilitate the selection of an arbitrator to decide the dispute, provide for basic rules of procedure and operations support, and generally administer the arbitration. Parties usually have very limited rights to appeal from a
decision in arbitration to a court. Most arbitration also provides for limited or streamlined
discovery procedures as compared to those in many court proceedings.
History of Arbitration
The use of arbitration to resolve disputes between parties is not new. In England, the historical roots of arbitration date to the medieval period, when merchants adopted specialized rules to resolve disputes between them. English merchants began utilizing arbitration in large numbers during the nineteenth century. However, English courts were hostile towards arbitration, limiting its use through doctrines that rendered certain types of arbitration agreements unenforceable. Arbitration in the United States in the eighteenth and nineteenth centuries reflected both traditions: it was used primarily by merchants, and courts were hostile toward it. Through the early 1920s, U.S. courts often refused to enforce arbitration agreements and awards.
In 1920, New York enacted the first modern arbitration statute in the United States, which strictly limited courts’ power to undermine arbitration decisions and arbitration agreements. Under that law, if one party to an arbitration agreement refused to proceed to arbitration, the statute permitted the other party to seek a remedy in State court to enforce the arbitration agreement. In 1925, Congress passed the United States Arbitration Act, which was based on the New York arbitration law and later became known as the Federal Arbitration Act (FAA). The FAA remains in force today. Among other things, the FAA makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
Expansion of Consumer Arbitration and Arbitration Agreements
From the passage of the FAA through the 1970s, arbitration continued to be used in commercial disputes between companies. Beginning in the 1980s, however, companies began to use arbitration agreements in contracts with consumers, investors, employees, and franchisees that were not negotiated. By the 1990s, some financial services providers began including arbitration agreements in their form consumer agreements.
One notable feature of these agreements it that they could be used to block class action litigation and often class arbitration as well. The agreements could block class actions filed in court because, when sued in a class action, companies could use the arbitration agreement to dismiss or stay the class action in favor of arbitration. Yet the agreements often prohibited class arbitration as well, rendering plaintiffs unable to pursue class claims in either litigation or arbitration. More recently, some consumer financial providers themselves have disclosed in their filings with the SEC that they rely on arbitration agreements for the express purpose of shielding themselves from class action liability.
Since the early 1990s, the use of arbitration agreements in consumer financial contracts has become widespread, as shown by Section 2 of the Study (which is discussed in detail in Part III.D below). By the early 2000s, a few consumer financial companies had become heavy users of arbitration proceedings to obtain debt collection judgments against consumers. For example, in 2006 alone, the National Arbitration Forum (NAF) administered 214,000 arbitrations, most of which were consumer debt collection proceedings brought by companies.
Legal Challenges to Arbitration Agreements
The increase in the prevalence of arbitration agreements coincided with various legal challenges to their use in consumer contracts. One set of challenges focused on the use of arbitration agreements in connection with debt collection disputes. In the late 2000s, consumer groups began to criticize the fairness of debt collection arbitration proceedings administered by the NAF, the most widely used arbitration administrator for debt collection.
In 2008, the San Francisco City Attorney’s office filed a civil action against NAF alleging that NAF was biased in favor of debt collectors. In 2009, the Minnesota Attorney General sued NAF, alleging an institutional conflict of interest because a group of investors with a 40 percent ownership stake in an affiliate of NAF also had a majority ownership stake in a debt collection firm that brought a number of cases before NAF. A few days after the filing of the lawsuit, NAF reached a settlement with the Minnesota Attorney General pursuant to which it agreed to stop administering consumer arbitrations completely, although NAF did not admit liability. Further, a series of class actions filed against NAF were consolidated in a multidistrict litigation and NAF settled those in 2011 by agreeing to suspend $1 billion in pending debt collection arbitrations. The American Arbitration Association (AAA) likewise announced a moratorium on administering company-filed debt collection arbitrations, articulating significant concerns about due process and fairness to consumers subject to such arbitrations.
A second group of challenges asserted that the invocation of arbitration agreements to block class actions was unlawful. Because the FAA permits challenges to the validity of arbitration agreements on grounds that exist at law or in equity for the revocation of any contract, challengers argued that provisions prohibiting arbitration from proceeding on a class basis – as well as other features of particular arbitration agreements – were unconscionable under State law or otherwise unenforceable. Initially, these challenges yielded conflicting results.
Some courts held that class arbitration waivers were not unconscionable. Other courts held
that such waivers were unenforceable on unconscionability grounds. Some of these decisions also held that the FAA did not preempt application of a state’s unconscionability doctrine.
Before 2011, courts were divided on whether arbitration agreements that bar class proceedings were unenforceable because they violated some states’ laws. Then, in 2011, the Supreme Court held in AT&T Mobility v. Concepcion that the FAA preempted application of California’s unconscionability doctrine to the extent it would have precluded enforcement of a consumer arbitration agreement with a provision prohibiting the filing of arbitration on a class basis. The Court concluded that any State law – even one that serves as a general contract law defense – that “[r]equir[es] the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” The Court reasoned that class arbitration eliminates the principal advantage of arbitration – its informality – and increases risks to defendants (due to the high stakes of mass resolution combined with the absence of multilayered review). As a result of the Court’s holding, parties to litigation could no longer prevent the use of an arbitration agreement to block a class action in court on the ground that a prohibition on class arbitration in the agreement was unconscionable under the relevant State law. The Court further held, in a 2013 decision, that a court may not use the “effective vindication” doctrine – under which a court may invalidate an arbitration agreement that operates to waive a party’s right to pursue statutory remedies – to invalidate a class arbitration waiver on the grounds that the plaintiff’s cost of individually arbitrating the claim exceeds the potential recovery.
Regulatory and Legislative Activity
As arbitration agreements in consumer contracts became more common, Federal regulators, Congress, and State legislatures began to take notice of their impact on the ability of consumers to resolve disputes. One of the first entities to regulate arbitration agreements was the National Association of Securities Dealers – now known as the Financial Industry Regulatory Authority (FINRA) – the self-regulating body for the securities industry that also administers arbitrations between member companies and their customers. Under FINRA’s Code of Arbitration for customer disputes, FINRA members have been prohibited since 1992 from enforcing an arbitration agreement against any member of a certified or putative class unless and until the class treatment is denied (or a certified class is decertified) or the class member has opted out of the class or class relief. FINRA’s code also requires this limitation to be set out in any member company’s arbitration agreement. The SEC approved this rule in 1992. In addition, since 1976, the regulations of the Commodities Futures Trading Commission (CFTC) implementing the Commodity Exchange Act have required that arbitration agreements in commodities contracts be voluntary. In 2004, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) – government- sponsored enterprises that purchase a large share of mortgages – ceased purchasing mortgages that contained arbitration agreements.
Since 1975, FTC regulations implementing the Magnuson-Moss Warranty Act (MMWA) have barred the use, in consumer warranty agreements, of arbitration agreements that would result in binding decisions. Some courts in the late 1990s disagreed with the FTC’s interpretation, but the FTC promulgated a final rule in 2015 that “reaffirm[ed] its long-held view” that the MMWA “disfavors, and authorizes the Commission to prohibit, mandatory binding arbitration in warranties.” In doing so, the FTC noted that the language of the MMWA presupposed that the kinds of informal dispute settlement mechanisms the FTC would permit would not foreclose the filing of a civil action in court.
More recently, the Centers for Medicare and Medicaid Services (CMS) proposed a rule that would revise the requirements that long-term health care facilities must meet to participate in the Medicare and Medicaid programs. Among the new proposed rules are a number of requirements for any arbitration agreements between long-term care facilities and residents of those facilities, including that there be a stand-alone agreement signed by the resident; that care at the facility not be conditioned on signing the agreement; and that the agreement be clear in form, manner and language as to what arbitration is and that the resident is waiving a right to judicial relief and that arbitration be conducted by a neutral arbitrator in a location that is convenient to both parties. Finally, the Department of Education recently announced that it is proposing options in the context of a negotiated rulemaking to limit the impact of arbitration agreements in certain college enrollment agreements, specifically by addressing the use of arbitration agreements to bar students from bringing group claims.
Congress has also taken several steps to address the use of arbitration agreements in different contexts. In 2002, Congress amended Federal law to require that, whenever a motor vehicle franchise contract contains an arbitration agreement, arbitration may be used to resolve the dispute only if, after a dispute arises, all parties to the dispute consent in writing to the use of arbitration. In 2006, Congress passed the Military Lending Act (MLA), which, among other things, prohibited the use of arbitration provisions in extensions of credit to active servicemembers, their spouses, and certain dependents. As first implemented by Department of Defense (DoD) regulations in 2007, the MLA applied to “[c]losed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000.” In July 2015, DoD promulgated a final rule that significantly expanded that definition of “consumer credit” to cover closed-end loans that exceeded $2,000 or had terms longer than 91 days as well as various forms of open-end credit, including credit cards. In 2008, Congress amended federal agriculture law to require, among other things, that livestock or poultry contracts containing arbitration agreements disclose the right of the producer or grower to decline the arbitration agreement; the Department of Agriculture issued a final rule implementing the statute in 2011.
As previously noted, Congress again addressed arbitration agreements in the 2010 Dodd- Frank Act. Dodd-Frank section 1414(a) prohibited the use of arbitration agreements in mortgage contracts, which the Bureau implemented in its Regulation Z. Section 921 of the Act authorized the SEC to issue rules to prohibit or impose conditions or limitations on the use of arbitration agreements by investment advisers. Section 922 of the Act invalidated the use of arbitration agreements in connection with certain whistleblower proceedings. Finally, and as discussed in greater detail below, section 1028 of the Act required the Bureau to study the use of arbitration agreements in contracts for consumer financial products and services and authorized this rulemaking. The authority of the Bureau and the SEC are similar under the Dodd-Frank Act except that the SEC does not have to complete a study before promulgating a rule. State legislatures have also taken steps to regulate the arbitration process. Several States, most notably California, require arbitration administrators to disclose basic data about consumer arbitrations that take place in the State. States are constrained in their ability to regulate arbitration because the FAA preempts conflicting State law.
Today, the AAA is the primary administrator of consumer financial arbitrations. The AAA’s consumer financial arbitrations are governed by the AAA Consumer Arbitration Rules, which includes provisions that, among other things, limit filing and administrative costs for consumers. The AAA also has adopted the AAA Consumer Due Process Protocol, which creates a floor of procedural and substantive protections and affirms that “[a]ll parties are entitled to a fundamentally-fair arbitration process.” A second entity, JAMS, administers consumer financial arbitrations pursuant to the JAMS Streamlined Arbitration Rules & Procedures and the JAMS Consumer Minimum Standards. These administrators’ procedures for arbitration differ in several respects from the procedures found in court, as discussed in Section 4 of the Study and summarized below at Part III.D.
Further, although virtually all arbitration agreements in the consumer financial context expressly preclude arbitration from proceeding on a class basis, the major arbitration administrators do provide procedures for administering class arbitrations and have occasionally administered them in class arbitrations involving providers of consumer financial products and services. These procedures, which are derived from class action litigation procedures used in court, are described in Section 4.8 of the Study. These class arbitration procedures will only be used by the AAA or JAMS if the arbitration administrator first determines that the arbitration agreement can be construed as permitting class arbitration. These class arbitration procedures are not widely used in consumer financial services disputes: reviewing consumer financial arbitrations pertaining to six product types filed over a period of three years, the Study found only three. Industry has criticized class arbitration on the ground that it lacks procedural safeguards. For example, class arbitration generally has limited judicial review of arbitrator decisions (for example, on a decision to certify a class or an award of substantial damages).