Consumer Law & Policy Blog

More From the Times on Arbitration: Efforts to Rein In Arbitration Come Under Well-Financed Attack

Here. Excerpts:

[T]he U.S. Chamber of Commerce, the most powerful business lobby in the country, started a new effort to block the Consumer Financial Protection Bureau by lobbying lawmakers to attach a rider to the federal budget bill that would force the regulator to conduct a new study before issuing any rule, according to people with direct knowledge of the strategy.

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On Wednesday, the Justice Department issued a proposal to protect military service members from arbitration requirements. Earlier this month, Senator Al Franken, Democrat of Minnesota and a longtime opponent of arbitration, renewed his push for Congress to pass a bill he introduced this year that would prevent companies from requiring employees to go to arbitration.

Several Democrats are expected to introduce bills intended to more widely curtail the use of arbitration clauses, according to the people. But with Congress deeply divided, some Democrats are calling on President Obama to use his executive authority to prevent federal contractors from including arbitration clauses in their contracts with customers and employees.

My Latest American Banker Op-ed: CFPB Arbitration Plan Provokes Dubious Industry Claims

 by Jeff Sovern

Here.  Excerpt:

[C]ompanies can use class action waivers to block consumer protection laws unless consumer protection laws find a way to block class action waivers.

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Last month, the bureau made public a proposal to block class action waivers in arbitration clauses. A leading advocate for arbitration in the financial industry, Alan Kaplinsky, responded with [a] forecast of how the industry would respond: "We firmly believe that, should the CFPB enact its proposal to ban class action waivers, most companies will abandon arbitration with the result that arbitration will no longer be available as a quick, efficient and inexpensive way of resolving disputes."

But if the industry truly believes that arbitration is so much better than litigation at resolving disputes, shouldn't it prefer arbitration to litigation for resolving individual disputes, where there is not a threat of a class action? Or should we be shocked, shocked, to discover the industry's love of arbitration is about barring class actions?

 

The second part of the New York Times series on forced arbitration

The second installment of the blockbuster New York Times series on forced arbitration is here. The headline is "In Arbitration, a 'Privatization of the Justice System.'" Whereas the first installment was focused on the macro effects -- how the Supreme Court's rulings have resulted in a massive suppression of claims by consumers and employees -- this second installment focuses on the micro effects: What actually happens to people whose cases are among the few to make it to arbitration? Told through compelling personal stories, this reporting does as good a job as any journalism thus far in revealing the unfairness of forced arbitration. (The Alliance for Justice film Lost in the Fine print also deserves to be mentioned here, because it's unlikely that the Times series would have happened had it not been for the film and because the film too does an excellent job of making this seemingly technical legal issue come alive.)

Yesterday, I said that I hoped that the prominence of this series would have an impact on our collective consciousness on this issue. It appears to have already made a dent. At a Halloween party last night, I was surprised by how many non-lawyers mentioned that they had read the story and were shocked by it. I live in Washington, DC, though, and many of my friends are journalists and people interested in policy; so perhaps that shouldn't be too surprising. Even more remarkable is this fact: Arbitration was a trending topic on Twitter yesterday. Who would ever have predicted that? It's a promising start.

Two Revealing Quotes from the Times Arbitration Report

by Jeff Sovern

 Deepak posted earlier about the extraordinary Times story on arbitration.  I have been studying arbitration for some time, and yet some items in the story were new to me. Though the entire article demands to be read, here are two especially revealing quotes:

Since no government agency tracks class actions, The Times examined federal cases filed between 2010 and 2014. Of 1,179 class actions that companies sought to push into arbitration, judges ruled in their favor in four out of every five cases.

[B]y assembling records from arbitration firms across the country, The Times found that between 2010 and 2014, only 505 consumers went to arbitration over a dispute of $2,500 or less.

Putting those quotes together yields the conclusion that businesses are able to use arbitration clauses to defeat claims where individual consumers have lost small amounts--meaning businesses are free to cheat consumers out of small amounts, unless regulators stop them.

New York Times does a deep dive into the rise of forced arbitration

Jessica Silver-Greenberg and Robert Gebeloff of the New York Times have a must-read story today, the first of several, on the rise of forced arbitration: "Arbitration Everywhere, Stacking the Deck of Justice." The piece weaves together the history of the silent legal coup achieved by the Chamber and the Roberts Court with stories of the real people whose lives it has changed. And, unlike some previous reporting, it focuses firmly on the principal effect of forced arbitration: the suppression of class-action claims. 

Having worked extensively with Silver-Greenberg on this series over the past several months, I can attest that these reporters understand and have explored the issue in greater depth than any previous journalists. I can only hope that this depth and skill of the reporting, and the unique platform of the Times, will translate into a lasting impression on the body politic. This coverage comes at a particularly relevant moment, as the Consumer Financial Protection Bureau prepares to roll out a proposed rulemaking on arbitration that could actually fix the problem--at least in the realm of consumer financial contracts. We'll need all the help we can get to prevent Wall Street's friends in Congress from scuttling the new rule.

Experts Disagree Over Whether Earth is Flat and CFPB Has Power to Regulate Arbitration Clauses

by Jeff Sovern

Did Congress give the CFPB the power to ban or regulate arbitration clauses in consumer financial contracts?  Not according to a Pepper Hamilton partner, according to a pair of recent reports.  Here's an excerpt from a piece at credit.com. The CFPB’s Arbitration Ban Could Be the Next Supreme Court Showdown:

“It comes down simply to whether the (bureau) can now make rules that run directly counter to clear Supreme Court findings [interpreting the Federal Arbitration Act],” said Matt Adler, a law professor at the University of Virginia and chair of the arbitration practice at Pepper Hamilton law firm.

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Now comes the CFPB, offering its own ban on class-action waivers — seemingly in direct contradiction of these Supreme Court rulings.

“It’s really going to come down to whether an agency rule can overcome those cases. There’s absolutely going to be test litigation,” Adler said.

His opinion was clear-cut — absent an explicit amendment to the 1925 Federal Arbitration Act, the CFPB rule won’t survive.

“I think you’re going to need a Congressional Amendment,” he said. “The court will most certainly not roll over in face of an agency rule.”

And here's what an American Banker article, Fierce Battle Ahead for CFPB Arbitration Plan, had to say:

Matthew Adler, a partner at Pepper Hamilton, said a 2013 Supreme Court decision in a case involving American Express made it difficult to invalidate such arbitration clauses without a legislative amendment to the Federal Arbitration Act. Adler said the provisions in the Dodd-Frank do not go that far.

"It's going to be very difficult, without Congress amending the Federal Arbitration Act to invalidate class action waivers, for an administrative agency to do that on its own," said Adler.

As any first-semester law student knows, the starting place to answer a question involving a statute is the statute itself. So let's go to the Dodd-Frank Act, 12 USC § 5518(b):

The [Consumer Financial Protection] Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties . . . .

I cannot imagine how that statute could be interpreted so as not to give the CFPB the power to "prohibit or impose conditions or limitations" on arbitration clauses in contracts within the Bureau's jurisdiction.  Because Dodd-Frank was enacted decades after the FAA, it is obvious that Dodd-Frank was intended to supersede the FAA as to the authority Dodd-Frank grants the Bureau.  Put another way, Dodd-Frank amends the FAA. As a result, it takes precedence over cases, even decided by the Supreme Court, interpreting the FAA, just as any congressional amendment to a statute can overturn Supreme Court decisions interpreting the statute in question--as has happened many times. 

 

Michael Barr Article on Arbitration

Michael S. Barr of Michigan has written Mandatory Arbitration in Consumer Finance and Investor Contracts, 11 New York University Journal of Law and Business (2015). Here is the abstract:

Mandatory pre-dispute arbitration clauses are pervasive in consumer financial and investor contracts — for credit cards, bank accounts, auto loans, broker-dealer services, and many others. These clauses often ill serve households. Consumers are typically presented with contracts on a “take it or leave it” basis, with no ability to negotiate over terms. Arbitration provisions are often not clearly disclosed, and in any event are not salient for consumers, who do not focus on the importance of the provision in the event that a dispute over the contract later arises, and who may misforecast the likelihood of being in such a dispute. The lack of salience means that there is no meaningful competition over arbitration provisions or likely any price effect. Some arbitration proceedings lack procedural protections, and unbiased arbitrator selection essential for fair outcomes. In addition, many arbitration provisions contain “gag” rules barring disclosure of reasoning, evidence, or outcomes. Moreover, arbitration clauses typically preclude consumers from banding together in aggregated actions, which diminishes redress and weakens deterrence. In the wake of the financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the new Consumer Financial Protection Bureau and the U.S. Securities and Exchange Commission to prohibit or condition the use of arbitration clauses in consumer finance and investment contracts, respectively. It is well past time for these agencies to use this authority.

CFPB Considering Ban on Class Action Waivers in Arbitration Clauses

The Bureau's announcement is here.  An excerpt:

Today the Consumer Financial Protection Bureau (CFPB) announced it is considering proposing rules that would ban consumer financial companies from using “free pass” arbitration clauses to block consumers from suing in groups to obtain relief. Buried in many contracts for consumer financial products like credit cards and bank accounts, most arbitration clauses deny consumers the right to participate in group lawsuits against companies. With this free pass, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers. The CFPB’s proposals under consideration would give consumers their day in court and deter companies from wrongdoing.

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

No doubt we will hear more in the Field Hearing at 1:00 ET.

Paul Bland on Spotfiy's Arbitration Clause: Spotify Hits a Sour Note with Secretive Fine Print

Here, in the Daily Kos.  An excerpt:

If Spotify does something illegal, no one can ever know that a consumer is challenging it. And then, if an arbitrator did find that Spotify acted illegally (which is asking a lot, since Spotify will pick the private arbitration company that will, in turn, select the arbitrator to hear the case), whatever the result is must be kept secret.

Spotify’s timing couldn’t be worse. Large corporations are trying to keep big secrets from their consumers and the public. Volkswagen, for example, has been exposed for having rigged their cars to pass emissions tests, and then, shortly afterward, begin polluting at up to 40 times (!?) the amount allowable by law. And there’s a case right now in Pennsylvania federal courts, involving a software company that installed malware permitting the guys at the company to turn on a customer’s computer, activate their camera, and watch people in the presumed privacy of their own homes.  

(HT: Gregory Gauthier)

Consumer Reports on Arbitration Clauses

Here. Excerpt:

We believe that consumers should not be forced into arbitration. The Consumer Financial Protection Bureau should use its authority to stop forced arbitration in financial services; it recently announced it's holding a hearing on October 7 in Denver to discuss the topic, and may make an announcement then. Congress should enact legislation to make arbitration voluntary in other consumer contracts.