Consumer Law & Policy Blog

The Consumer Bureau’s New Arbitration Rule: What’s Really at Stake

Here's a post that I wrote for the American Constitution Society's blog last Friday -- the day after the CFPB released its proposed arbitration rule.

Paul Bland's HuffPo Arbitration Column: The CFPB Just Took a Huge Bite Out of Predatory Lending

Here.

CFPB issues proposed rule on forced arbitration clauses that ban class actions

The CFPB has just released its much-awaited proposed rule on forced arbitration clauses -- arguably the single biggest step the Bureau can take to level the playing field for American consumers. 

If adopted after notice-and-comment, the CFPB's new rule would prohibit forced arbitration clauses that prevent consumers from banding together to hold companies accountable in court, effectively nullifying the impact of the Supreme Court's AT&T Mobility v. Concepcion decision in the market for consumer financial services. The proposed rule would also require companies with arbitration clauses to send the CFPB the claims, awards, and other information filed in arbitration cases, to allow the Bureau to monitor what until now has largely been a secret system of corporate tribunals. 

You can read the Bureau's entire 376-page proposal here. It contains an extensive history of class actions and arbitration, a summary of the Bureau's study on arbitration clauses, and a sustained defense of the policy merits of the Bureau's proposal. 

The proposal will be announced by Rich Cordray at a field hearing in Albuquerque, New Mexico on Thursday morning. I will be speaking as a consumer representative, along with Christine Hines of the National Association for Consumer Advocates and Paul Bland of Public Justice. The industry will be represented by Travis Norton of the U.S Chamber, Alan Kaplinksy, and a lawyer for credit unions.

Early coverage can be found in The Hill, the New York Times, and the L.A. Times. The U.S. Chamber came out swinging even before the proposal was released, decrying the "CFPB's class-action rule" as a "rich deal for trial lawyers" and a "raw deal for consumers." 

Along similar lines, a shadowy outfit calling itself "Protect America's Consumers" has just released a very nasty TV ad attacking the CFPB, suggesting (without a shred of evidence) that Rich Cordray's personal motive in supporting the rule is to gin up trial lawyer donations for a future gubernatorial run in Ohio. If previous campaigns by this group are any guide, the ad will likely receive signifiant airtime--possibly during the presidential debates.

The Chamber's congressional allies are likewise attempting to tie the Bureau to trial-lawyer groups. In a recent letter, Congressman Sean Duffy of the House Financial Services Committee informed the CFPB about an investigation into the rule. He asked asked for communications between bureau officials and consumer advocacy and trial-lawyer groups including the American Association for Justice, National Consumer Law Center, National Association of Consumer Advocates, Alliance for Justice, and Public Justice. 

Chamber of Commerce Letter on Arbitration: Does it Make the Case for Class Actions?

by Jeff Sovern

Earlier today, the US Chamber of Commerce released a letter to CFPB Director Richard Cordray from David Hirschmann, President and CEO, Center for Capital Markets Competitiveness, urging the Director to address certain issues at Thursday's CFPB arbitration field hearing. Here's one of those issues, as stated in the letter:

[T]he public would benefit if your remarks were to include a discussion of how a consumers with a small claim based on unique circumstances would be able to vindicate those legal claims if companies, faced with the need to reserve millions of dollars for class action defense, were to cease subsidizing consumer arbitration programs. Under the current class action litigation rules, many small claims that involve issues that customers actually care about, such as alleged overcharges or the failure to credit a deposit on time, are unlikely to be classable because they are individualized disputes. For these claims, consumers will therefore have virtually no economically rational options for seeking redress: arbitration (in which most companies pay for consumers to bring claims against them, making it free to the consumer) will be gone; class action litigation will not be available; and rational consumers are not going to pay a $400 filing fee to pursue a $25 claim in court. Taking the opportunity to highlight how consumers will obtain redress for these types of claims would be very helpful in advancing the discussion.

I'm going to assume for this blog post that the industry would indeed no longer use arbitration if they couldn't combine it with class action waivers.  Would consumers really suffer if they couldn't bring arbitration claims for $25?  Well, the CFPB study found that consumers almost never bring arbitration claims when less than $1,000 is at issue, so the ability to assert small claims in arbitration isn't worth much.  But if consumers want to bring $25 claims, they could still do so in small claims courts (I would be curious to hear about small claims courts that charge a $400 filing fee for a $25 claim).  So even if arbitration goes away, consumers would lose something they don't use and don't need when it comes to small claims.

Perhaps the most notable part of the paragraph is its concession that consumers will not devote substantial resources to winning $25 claims. That is precisely why we need class actions to protect consumers against being taken advantage of in small amounts: so that companies will be deterred from bilking consumers in amounts too small to justify consumers investing resources in stopping them.

 

Chamber of Commerce to Have Speaker at Next Week's CFPB Arbitration Hearing

The CFPB typically invites representatives from various organizations to speak at its field hearings.  According to an email report, U.S. Chamber Center for Capital Markets Competitiveness Executive Director Travis Norton will be one of the speakers at next Thursday's arbitration field hearing. 

CFPB Announces Arbitration Field Hearing

Here.  Because the Bureau usually combines field hearings with announcements of related developments, it is likely to announce its proposed arbitration rules that day. 

Imre Szalai on Direct TV and Jedi Mind Tricks

Imre S. Szalai of Loyola New Orleans has written DIRECTV, Inc. v. Imburgia: How the Supreme Court Used a Jedi Mind Trick To Turn Arbitration Law Upside Down, 32 Ohio State Journal on Dispute Resolution, 1, (2016 Forthcoming). Here's the abstract:

The Federal Arbitration Act (FAA) is the primary federal statute governing millions of arbitration agreements that have mushroomed in every nook and cranny of modern American society. The Supreme Court of the United States has grossly erred when construing and applying the FAA in a long series of cases spanning the last few decades, and these flawed decisions have encouraged this explosion of arbitration agreements across America. In its most recent FAA decision from December 2015, DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015), the Supreme Court continued its awkward tradition of issuing preposterous FAA rulings. However, the Court in DIRECTV reached a new low, a result so extreme and “dangerous,” according to the dissenting Justices, that the Court’s DIRECTV decision turns arbitration law completely upside down.

This Article explores the Supreme Court’s deeply flawed interpretation of the FAA in DIRECTV. The Court’s decision desecrates the most fundamental principle of arbitration law, that arbitration must be based on the agreement of the parties. The Court in DIRECTV overrides the intent of the parties in this case, as well as the intent of Congress in enacting the FAA. The first part of this Article explains the background of the DIRECTV case. The second part of the Article closely examines the deep, multiple flaws in the opinion. Finally, the Article concludes by addressing how DIRECTV’s holding applies to some common hypotheticals in order to demonstrate the broader impact of this case in shutting off access to America’s civil justice system.

Al Jazeera Report on Arbitration

 

The New Yorker on the Impact of Scalia's Death on Class Actions and Arbitration

Here. Excerpt:

[M]any of the Roberts Court’s most important business cases were decided by a 5–4 margin, with the five conservative Justices voting as a bloc. And, as [Vanderbilt law professor Brian] Fitzpatrick points out, “Scalia has done more than any other justice in making it difficult for consumers and employees to bring class-action suits. So his absence alone may make a difference.”

(HT: Eric Sanders)

 

What Made Starbucks Change its Arbitration Clause?

by Jeff Sovern

Gregory Gauthier has pointed out that Starbucks has changed its arbitration clause and wonders why. The old version is described here.  The new version is somewhat less onerous. For example, it permits the arbitration to be "held in a reasonably convenient location in the state in which you reside or at another mutually agreed location," while the old version required the arbitration to take place in Seattle unless otherwise agreed.  If you have a thought as to this or other changes, please comment below.