From my colleague, Amy Schmitz:
This summer, I reported the news that after much study, the Consumer Financial Protection Bureau (CFPB) had issued its arbitration rule barring the use of arbitration clauses to preclude class actions with respect to financial services and contracts disputes. The rule would have prohibited banks and other consumer financial companies from including mandatory arbitration clauses that block group lawsuits in any new contracts after the compliance date. The rule would not have barred arbitration clauses outright.
By restoring the ability of consumers to file or join group lawsuits, the rule would have provided companies with more incentive to comply with the law. And the deterrent effect of such cases would have more broadly influenced the business practices of other companies as well.
The new rule also would have required more transparency regarding arbitrations, in order to help the CFPB and others to better monitor arbitrations to make sure the process is fair for individual consumers.
It was considered by many to be an important step in protecting consumers with respect to credit card and financial services disputes, especially because it is generally not feasible to pursue individual arbitrations on these small dollar claims.
Well, that proposed rule has been put to rest. Vice President Pence broke the tie in the Senate to overturn CFPB’s proposed rule on arbitration.
Amy J. Schmitz
Elwood L. Thomas Missouri Endowed Professor of Law
University of Missouri School of Law
3 THOUGHTS ON “CFPB ARBITRATION RULE OVERTURNED”
The recent vote by the Senate to overturn the CFPB’s arbitration rule raises a number of interesting issues in the context of dispute resolution. One interesting issue is the role that freedom of contract has when selecting and agreeing to a particular dispute resolution process. The CFPB’s proposed rule would have actually restricted financial institutions ability to contract to a dispute resolution process of their choosing, which could raise constitutional issues regarding freedom of contract. In addition, one could argue that regardless of the CFPB’s proposed arbitration rule that was struck down, consumers still have the right to negotiate with financial institutions over the manner in which disputes will be resolved. Thus, if a consumer truly wishes to have a different dispute resolution process than binding arbitration, then the consumer could negotiate with the financial institution. Obviously, the counter-argument here is that the parties are of unequal bargaining power and, thus, the consumer would never be able to actually negotiate a different dispute resolution process with the financial institution. Rather, the financial institution would likely tell the consumer to take their business elsewhere if they fail to agree to binding arbitration provision included in the form agreements.
Another interesting issue raised by Professor Schmitz’s comment is whether allowing consumer class-action lawsuits would create more of an incentive for financial institutions to follow the law. I would argue that regardless of the particular dispute resolution process that the parties have agreed to, financial institutions still have to comply with the law to the same extent. Thus, allowing consumers the ability to utilize a different dispute resolution process (class-action lawsuits, for example) other than binding arbitration does not change the fact that financial institutions must always comply with the law. Fraud is still fraud, irrespective of whether claim of fraud is brought via a class-action lawsuit or through binding arbitration. A consumer with a meritorious fraud claim will still succeed against a financial institution in arbitration.
Ultimately, the Senate’s vote to strike down the CFPB’s proposed arbitration rule may be viewed as anti-consumer. However, for the reasons discussed above, a rule restricting financial institutions from choosing a particular dispute resolution process in their contracts with consumers may violate the constitutional principle of freedom of contract. In addition, financial institutions still have to comply with the law to the same extent regardless of the dispute resolution process specified in their contracts. The law is the law.
The senate’s vote to overturn CFPB’s rule hits on a few dispute resolution issues. I completely understand the goal of the rule. It would be great to have more control over the arbitration process and provide incentives for companies to follow the law, but would it be the best choice?
The first issue against I think of is the incentive to arbitrate. Alternative dispute resolution is generally encouraged instead of litigation. It can be quicker and cheaper to arbitrate which are features that both parties benefit from. The more in arbitration also takes more of a load off of the courts. The public policy in favor of arbitration to courts is arguably as important or more important than the slight added incentive to follow the law.
The second issue I think of is the potentially unfair restrictions put on financial institutions. Financial institutions have a freedom to contract and this restriction against them could unfairly affect their businesses. Would it be fair to single out financial institutions and take away, or at least restrict their ability to add arbitration agreements to their businesses?
What the rule is implying is that financial institutions are breaking the law behind closed doors with their arbitration practices. In general financial institutions have to follow the law, and I believe that it could be unfair to take restrict their options when drafting contracts because it is assumed that they have shady practices. Between the public policy in favor of arbitration and the potential unfairness to financial institutions, the senate may very well have made the correct choice in voting to overturn the proposal.
I was surprised to see that the Supreme Court is taking up so many cases that have implications on these arbitration cases. Although I see understand the purpose of arbitration, I foresee more challenges to the enforceability of arbitration clauses and the arbitration process.
The Federal Arbitration Act (FAA) and the National Labor Relations Act (NLRA) cannot be reconciled because they seem to give to different commands. In essence, they contradict each other and are often in conflict in purpose and in effect. The former being to enforce all employment arbitrations, and the latter to allow class actions in efforts to allow similarly situated employees to seek redress in courts collectively. I understand the efficiency reasons for both pieces of legislation, but they cause conflict.
Since arbitration is formed through contract, I find it peculiar that the supreme court does not analyze the provisions under contract theory. Indeed, I believe that some people either never asset to the exact terms and arbitration may be procedural and/or substantively unconscionable due to by the nature and process by which the agreements are signed. For example, a lot of e-commerce platforms are now allowing “one-click purchasing”. The problem with this is that with a very small link of the terms and conditions. Somewhere in the buried agreement behind the small blue link an arbitration clause may be lurking. I do not feel like that is sufficient for consumers to know exactly what it is they are agreeing to. Not everyone is a careful shopper especially during the holidays. Companies rely on impulsive consumers to buy products without actually reading or even noticing container agreements with the trend toward rapid purchases.