CL&P Blog

Seventh Circuit: Student Loan Borrowers Can Sue Servicers Under State Consumer Protection Laws

Yesterday, a unanimous panel of the U.S. Court of Appeals for the Seventh Circuit issued an opinion in Nelson v. Great Lakes Educational Loan Services, Inc. in which it concluded that the federal Higher Education Act (HEA) does not preempt state law claims against student loan servicers. The case involves a student loan borrower who brought a putative class action against the loan servicer alleging violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, and constructive fraud and negligent misrepresentation under Illinois common law. The district court granted the defendant’s motion to dismiss concluding that these state law claims were expressly preempted by the HEA. On appeal, the Seventh Circuit reversed, writing, in part:

The district court’s ruling was overly broad. When a loan servicer holds itself out to a borrower as having experts who work for her, tells her that she does not need to look elsewhere for advice, and tells her that its experts know what options are in her best interest, those statements, when untrue, cannot be treated by courts as mere failures to disclose information. Those are affirmative misrepresentations, not failures to disclose. Great Lakes chose to make them. A borrower who reasonably relied on them to her detriment is not barred by § 1098g from bringing state‐law consumer protection and tort claims against the loan servicer. Tort law has long recognized the difference between mere failures to disclose information and affirmative deceptions. And as we explain below, the Ninth Circuit decision the district court relied upon, Chae v. SLM Corp., 593 F.3d 936 (9th Cir. 2010), does not apply to claims of affirmative misrepresentations in counseling borrowers in distress.

The full opinion is available here.

(Disclosure: U.S. PIRG Education Fund, along with the Center for Responsible Lending, filed an amicus brief in support of the plaintiff-appellant.)

Imre Szalai Study Finds 78 Fortune 100 Companies Use Class Action Waivers in Consumer Agreements

Imre S. Szalai of Loyola of New Orleans has written The Prevalence of Consumer Arbitration Agreements by America’s Top Companies, 52 U.C. Davis L. Rev. Online 233 (2019). Here is the abstract: 

This article present the results of a study that examines the use of arbitration agreements by the top 100 Fortune Magazine-ranked largest domestic companies in the United States. The market power of these companies, which collectively represent more that two-thirds of the U.S. GDP, have enabled them to impose arbitration agreements upon their customers and have removed themselves from the traditional judicial system when disputes arise with their customers.

This study focuses on two main issues: 1) How many of these top companies have used arbitration agreements in connection with customer transactions since 2010; and 2) Of those companies, how many use arbitration agreements containing a “class waiver” requiring customers to waive their right to proceed collectively or as part of a class. The study then concludes with some observations about the prevalence of consumer arbitration agreements among America’s top companies.

Gilles & Friedman paper on Qui Tam as a model for enforcement of group rights

Myriam E. Gilles of Cardozo and Gary B. Friedman of the Friedman Law Group have written The New Qui Tam: A Model for the Enforcement of Group Rights in a Hostile Era. Here is the abstract:

The present Administration has made clear it has no interest in enforcing statutes designed to protect workers, consumers, voters and others. And, as we have chronicled in prior work, the ability of private litigants to enforce these laws has been undercut by developments in the case law concerning class actions – particularly class-banning arbitration clauses. As these critical enforcement methods recede, will alternative methods of prosecuting claims arise? How might they work? Are they politically and fiscally sustainable? We focus here on a promising approach just now coming into view: qui tam legislation authorizing private citizens to bring representative claims on behalf of consumers, workers, and others. Progressive advocates have recently begun working with legislators in a handful of states to provide a qui tam mechanism for enforcing state statutory rights. The form these new laws might take remains uncertain and their enforceability is sure to be hotly contested by corporate interests and others. This article examines the legal and policy challenges that will face “new qui tam” legislation, and considers arguments for and against enlarging the role of citizens in prosecuting claims – an inquiry that requires us to determine the legitimacy and limits of the private attorney general model in its starkest form.

Industry Lawyer Concedes Arbitration Clauses Suppress Claims and Reduce Payments to Consumers

by Jeff Sovern

Industry lawyer Thomas B. Hudson of Hudson Cook has authored Arbitration Agreements: Not Always Good All the Time for AutoDealer Today, in which he writes:

An arbitration agreement is the dealer’s first and best line of defense against class-action lawsuits. If you think that isn’t reason enough, have a word with the many South Carolina dealers sued in class actions over allegedly improper doc fees who were able to have the class actions dismissed, with individual plaintiffs left with claims in arbitration. Dealers who did not use arbitration agreements paid millions of dollars to their customers and the customers’ class action lawyers.

* * *

Lawyers for consumers, when confronted with documents signed by their clients and containing arbitration agreements, tend to lose interest in pursuing the consumer’s claim. Perhaps these lawyers are unfamiliar with how to handle an arbitration proceeding, or perhaps they are of the view that they can’t get a decent award of attorneys’ fees from an arbitrator.

Whatever the reason, consumers have historically not initiated arbitration proceedings with much frequency. * * *

He also advocates:

In order to make sure arbitration agreements between dealers and consumers will be enforced by courts, and even by those courts that bend over backward to rule for consumers, lawyers for dealers who draft the agreements make them as consumer-friendly as possible. One of the consumer-friendly provisions that you’ll often see is one by which the business undertakes to pay some or all of the consumer’s costs in arbitration. 

Piché Paper on the Effectiveness of Class Action e-Notices

Catherine Piché of the University of Montreal has written The Coming Revolution in Class Action Notices: Reaching the Universe of Claimants Through Technologies. Here's the abstract:

This paper will address whether a correlation may be drawn between the types and modalities of notices sent to class action members and the rate of compensation of these members, based on data collected in 854 class action court files in Quebec superior court over a twenty year period (1997-2017). Notices are essential to fair procedure in all class action regimes, but it is difficult to know whether these notices have reached their intended addressee in such a way as to make them aware of the case and its potential distributions, and eventually allow for this distribution to be completed. If a collective approach to compensation is favored, class notices should aim to compensate at least 50% of the members. My hypothesis is that technologies will help doing just that. In this paper, I ask whether this hypothesis is supported by the data, and which forms of technological notices are actually most effective at reaching and compensating members. I argue that we have come to a revolution in class action noticing, a digital revolution. In traditional forms of notice, reduced cost has almost always meant reduced probability of achieving actual notice. By contrast, properly designed e-notices are potentially transformative because they serve to lower the cost of notice while increasing reach rates in time and space. With the support of empirical data, I demonstrate that cases making use of technological noticing serve to compensate members more efficaciously than those who rely upon traditional noticing (mail, newspaper notices), with a distribution (or take-up) rate of 69%.

Tinder's Diabolical RETROACTIVE Arbitration Clause

by Jeff Sovern

One of my students told me about Tinder's new retroactive arbitration clause which, of course, includes a class action waiver. As with many such contracts, consumers accept it by using the service, regardless of whether they have read it or not--and we know few consumers actually read such things.  The arbitration clause, in paragraph 16, provides that it applies to past claims against Tinder, including those which are the subject of pending class actions. The clause refers by name and docket number to four class actions already brought against Tinder, charging various forms of discrimination, and states that Tinder users who accept the contract will lose the ability to participate in those class actions.   It does give existing Tinder users the right to opt out of the arbitration clause, but only if they email Tinder within thirty days, something that we know few consumers have bothered to do in the past, to the extent that consumer opt-out rates have become public (new users apparently don't have a right to opt out). No doubt Tinder concluded that there was no downside in the specificity because consumers won't read or understand the terms anyway.  I wonder how the judges before whom the class actions are pending will react to this. If you will forgive the expression, Tinder is screwing its customers.

Horton Empirical Study of How Arbitrators and Judges Decide Differently on Whether to Allow Class Actions

David Horton of California, Davis has written Clause Construction: A Glimpse into Judicial and Arbitral Decision-Making, Duke Law Journal, Vol. 68, Forthcoming. Here is the abstract:

For decades, the U.S. Supreme Court has insisted that forcing a plaintiff to arbitrate — rather than allowing her to litigate — does not affect the outcome of a dispute. Recently, the Court has invoked this “parity principle” to expand arbitral jurisdiction. Reasoning that it does not matter whether an arbitrator or a judge resolves a particular issue, the Justices have allowed arbitrators to decide important questions about the arbitral proceeding itself.

The parity principle has proven impossible to test. First, cases that are arbitrated differ from those that end up in the judicial system, complicating efforts to compare outcomes from each sphere. Second, arbitral awards are rarely published, and thus remain shrouded in mystery.

However, one important topic defies these limitations. Jurisdictions are divided over whether courts or arbitrators should perform a task known as “clause construction”: determining whether an arbitration clause that does not mention class actions permits such procedures. As a result, both judges and arbitrators have been weighing in on the same question. Moreover, because class members are entitled to notice of rulings that impact their rights, the American Arbitration Association requires arbitral clause construction awards to be available to the public. For once, then, it is possible to assess how the two decision-makers resolve the identical issue.

The Article capitalizes on this opportunity by analyzing a dataset of 134 recent judicial and arbitral clause construction decisions. Its logit regression analysis concludes that the odds of class actions being allowed increase nearly 27 times when an arbitrator, rather than a judge, resolves the issue. The Article then uses its findings to propose a solution to the circuit split over clause construction and inform the broader debate over the boundaries between judicial and arbitral power.

Arbitration Opt-Outs Hit a New Low: Now They Are Undeliverable

by Jeff Sovern

Some arbitration clauses permit consumers to opt out of arbitration and class action waivers provided the consumer acts within a stated period. For example, Asana provides in § 13.8 of its Terms of Service for a 30-day opt-out. Those wishing to opt out are instructed to send "written notice of your decision to opt out to dispute-notice@asana.com with the subject line, 'ARBITRATION AND CLASS ACTION WAIVER OPT-OUT.'" But there's only one problem, as Gregory Gauthier discovered. Emails sent to that address are returned as undeliverable. Apparently Asana has listed that email address since at least its April 27, 2015 Terms of Service  (though the arbitration clause in those terms did not include an opt-out).  But maybe it doesn't matter because (1) few consumers read such terms of service; (2) few consumers understand arbitration clauses; (3) few consumers opt out, probably because of (1) and (2); if few consumers opt out, there won't be enough consumers to participate in a class action anyway. Companies undoubtedly adopted opt-outs to help them argue that arbitration clauses are not unconscionable without actually exposing the companies to class actions. Apparently Asana has taken things even further. 

Sad Report from The Hill: Trump to sign repeal of consumer bureau arbitration rule

Here. The report is based on a statement by an unidentified White House aide.  The signing is to take place tomorrow.

Senate Could Vote on CRA Resolution to Block Arbitration Rule Tonight . . .

by Jeff Sovern

. . .  or  it could come later in the week. Or not. My speculation is that the Senate leadership will call the vote if they think they have the votes to pass the resolution but otherwise they will let it go until closer to the deadline. So the real question is how many votes they have.