AuthorPfeffer-Gillett, Alexi

INTRODUCTION 461 I. DEFAULT JUDGMENT IN CIVIL LITIGATION AND ARBITRATION 470 A. Default Judgment and Fees in Court 471 B. The Development of Arbitration's Default Judgment Rules and Fees 474 C. The Modern Reverse Default Judgment Rule 481 1. Initial Fees 482 2. Company's Failure to Pay Initial Fees 483 3. No Default for Failure to Pay 484 4. Extensions on Payment Deadlines 485 5. Recoupment of Fronted Fees 485 6. Refund of Initial Filing Fee 486 7. Punishment for Failure to Pay 486 D. Reverse Default Compared to Civil Default 487 II . THE REVERSE DEFAULT JUDGMENT RULE IN PRACTICE 490 A. Reverse Default Judgment in Individual Arbitration 491 B. The Reverse Default Judgment Rule and Mass Arbitration 494 C. Business Pressure and Arbitration Provider Adaptation 500 D. Gaps in Arbitration Data 502 1. Total Claims 503 2. Fees 505 3. Success Rates 508 4. Importance of Lawyers 508 III. LEGAL AND POLICY RESPONSES TO THE REVERSE DEFAULT JUDGMENT RULE 511 A. Implications for the Courts 511 1. Efficiency 511 2. Risks to Business 514 3. Mutual Assent. 516 4. Effective Vindication of Claims 518 B. Policy Implications and (Tentative) Proposals 520 1. Two Guiding Princ iples 521 2. Tentative Proposals 524 a. Statutory Responses 524 b. Administrative Responses 529 c. Private Actors 531 CONCLUSION 534 INTRODUCTION

Many American consumers have found themselves on the receiving end of harassing debt-collection calls. (1) One of these consumers, Juan Mason, sought to put an end to harassing auto-dialer calls he had been receiving from an automotive finance company, Coastal Credit, LLC, regarding delinquent car payments. (2) In 2017, Mason filed a lawsuit alleging that Coastal Credit's calls violated the federal Telephone Consumer Protection Act and the Florida Consumer Collection Practices Act. (3) In response to Mason's complaint, Coastal Credit promptly filed a motion to compel arbitration based on the terms of the car payment agreement, which, like many other American consumer contracts, contained a clause mandating individual arbitration. (4) Mason consented to the company's demand, dropped his court lawsuit, and, on January 18, 2018, voluntarily initiated arbitration through a leading provider, the American Arbitration Association (AAA). (5) Mason then paid the AAA's required filing fee of $200 and waited for the company's response. (6)

More than two months later, on March 27, 2018, the AAA followed up with a letter to both parties stating that Mason had paid his share of the arbitration fees and, per the AAA's consumer rules, the company owed the remaining $1,700 in filing fees plus $250 for expedited review and $1,500 for the arbitrator's compensation deposit--$3,450 in total. (7)

Rather than quickly paying this fee, as might be expected given the collection company's seeming eagerness to remove the case from federal court and force Mason into arbitration, Coastal Credit began dragging its feet. Five days before payment was due, the company responded to the letter by requesting "an extension of 15 days or so to comply" with the AAA's filing requirements. (8) The AAA immediately granted the fifteen-day extension request. (9)

Despite the extension, Coastal Credit failed to pay any fees by the new deadline of April 25. (10 )The next day, the AAA sent another letter reiterating the need for payment of the $3,450 in fees and providing a new payment deadline of May 10. (11) Importantly, the letter informed Coastal Credit that the AAA had also been "inquiring as to whether the consumer is willing to pay [Coastal Credit's] outstanding amount, minus the expedited review fee of $250." (12) Although Mason was "not obligated to pay [Coastal Credit's] fee," the AAA explained, if the AAA did not "timely receive the business'[s] portion of the filing fees" from either party, it would "administratively close[]" Mason's case. (13)

Faced with the choice of paying $3,450 to defend itself on the merits or further delaying Mason's claims while forcing him to front the remaining arbitration costs, Coastal Credit opted for the latter option. Five days after failing to meet the AAA's third deadline for payment, Coastal Credit emailed Mason's attorney stating that Mason, not the company, would "have to take care of the AAA fees," because the upfront fees were "objectionable to [the company]." (14) The letter also advised Mason to refile his claim with a different arbitration provider should he not wish to pay the fees, despite Mason's car payment contract specifically listing the AAA as a provider available at the customer's choosing. (15)

The AAA, having not received the remaining $3,450 needed to accept the case for review, notified the parties that it "must decline to administer this case and have closed [the] file." (16) As punishment for Coastal Credit's failure to comply with its own contractual payment responsibilities, the AAA threatened that it "may" refuse to administer future cases involving the company. (17)

Having tried unsuccessfully to comply with Coastal Credit's arbitration demand, Mason returned to federal court and filed a new complaint. (18) In response, Coastal Credit filed another motion to compel arbitration identical to its motion the first time Mason sued, except this time the company demanded that Mason file arbitration with a provider other than the AAA. (19) In November 2018, the district court denied this motion, finding that the company's failure to pay the required arbitration fees constituted a waiver of its right to compel arbitration and that Mason, having now twice paid $400 in nonrefundable federal filing fees, could finally proceed with his claims in federal court. (20)

Mason thus spent a year pursuing (and retaining legal counsel to pursue) the mere opportunity to have his consumer claim heard on the merits. This protracted process occurred not because of any failure by Mason or weakness in his case, but because of the convoluted and hidden rules governing arbitration's upfront fees and the consequences (or lack thereof) for defendants who fail to pay. (21)

This Article sheds light on the importance of these hidden arbitration rules. Given that the Supreme Court has frequently celebrated arbitration as a faster and cheaper alternative to the court system, (22) one might assume that arbitration's fee structures would be at least as simple as those in court, where cases are automatically docketed and a judge assigned once the plaintiff makes the requisite fee payments and submits the required filings and notice. (23) And one might further expect that a plaintiff's submission of claims and payment of required filing fees would be sufficient to get the case docketed and have an arbiter appointed to hear the merits, as it would be in court, (24) and that the defendant would be required to respond or else be vulnerable to entry of default judgment in the plaintiff's favor, as in court proceedings. (25)

The rules of leading private arbitration providers appear on first blush to confirm these assumptions: under current arbitration rules, consumer and employee plaintiffs pay a one-time fee of $200 to $400 when filing their claims, and according to the providers, this initial fee is the maximum amount that individual plaintiffs will have to pay for the entire dispute resolution process. (26) As Mason's case shows, however, the reality is far different. To continue with arbitration, Mason would have needed to pay over $3,000 on behalf of the noncompliant defendant-company. And not only was Mason unable to bypass the court system to quickly and cheaply resolve his claims through arbitration, but he actually had to go to court twice and spend a year fighting the defendant-company just to have the opportunity to have anyone--arbitrator or judge--hear his claims. (27)

This highly inefficient and costly outcome arises because the plaintiff's capped filing fee in private arbitration is but a fraction of the total fees necessary to successfully initiate a claim. Thus, unlike in court, an arbitration plaintiff's satisfaction of the initial filing fee payment is insufficient to initiate a claim to which a defendant must respond. Instead, once the plaintiff pays the initial arbitration fee, the burden shifts to the defendant-company to pay the remaining upfront fees that--as seen in Mason v. Coastal Credit (28)--can exceed $3,000. If and only if these additional fees are paid does the arbitration provider consider a claim "filed" and proceed to appoint an arbitrator to hear the case. (29) And only an arbitrator--not the arbitration provider who receives the plaintiff's initial filing fees--is empowered to enter default judgment against an unresponsive or uncooperative defendant. (30) Thus, a plaintiff who refuses to front the defendant's fees will walk away from arbitration with nothing (or worse: nothing minus the fees incurred to file the claim). (31)

Although plaintiffs can technically go to court and seek to compel the defendant to arbitration or assert that the defendant's failure to pay amounts to a waiver of the right to compel arbitration (as Mason did in the above example), few are likely to pursue this option given the time, cost, and legal know-how required to do so. (32) Instead, plaintiffs are more likely to simply abandon their claims, resulting in a victory for unrespohsive defendants. (33) Thus, unlike traditional court default judgment rules that punish defendants who ignore claims, arbitration's payment structure and lack of pre-payment default rules actually reward defendants for neglect and gamesmanship.

This Article presents the first in-depth scholarly analysis of arbitration's perverse payment incentives and default procedures, which I collectively term the "Reverse Default Judgment Rule." In addition to defining the contours of the Reverse Default Judgment Rule and how it came to exist, this Article brings to light the Rule's effects on both plaintiffs and defendants. The Rule directly...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT