Arbitration Provisions Mauled by Consumer Watchdog

In what may arguably be its most sweeping rulemaking proposal to date, on May 5, the Consumer Financial Protection Bureau (CFPB) announced its long-awaited proposed rule that would prohibit most consumer financial services providers from requiring consumers to waive class action rights in binding pre-dispute arbitration agreements. It would also require these companies to turn over information regarding private arbitrations that they do conduct to the CFPB for tracking, analysis and publication. A key issue clouding this proposed rule is whether it would strengthen protections for consumers, or rather, whether it would merely provide a windfall for the class action plaintiffs’ bar. Whether consumers stand to benefit is not merely academic, as the legality of the proposed rule hinges upon it. In this alert, we discuss the background surrounding the proposed rule; the CFPB’s proposed requirements; and some of the gaps in the CFPB’s methodology for its theory regarding consumer benefit. We conclude by suggesting steps companies should consider in the immediate term, in light of this pending development.

Background for the CFPB’s Proposed Rule

The U.S. Congress, in Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), requires the CFPB to study pre-dispute arbitration agreements. If warranted by the findings of this study, the Dodd-Frank Act authorizes the CFPB to issue regulations that either restrict or prohibit the use of arbitration agreements, provided such regulations are in the public interest and for the protection of consumers. See 12 U.S.C. § 5518.

Following its mandate, the Bureau took these key steps leading up to its proposed rule:

On December 12, 2013, the CFPB published a 168-page preliminary report, Arbitration Study Preliminary Results: Section 1028(a) Study Results To Date, in which it signaled its antipathy toward the use of arbitration agreements in contracts between financial services providers and consumers.

On March 10, 2015, the Bureau issued a 728-page final report, Arbitration Study: Report to Congress Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a). Here, the CFPB hardened its position that, compared to class actions, the pre-dispute arbitration system is unfair to consumers, finding that consumers rarely avail themselves of arbitration, but instead, are foreclosed from pursuing class action remedies and suffer as a result.

On October 7, 2015, the CFPB announced that it was considering a proposed rule that would prohibit companies from requiring consumers to waive class action rights in pre-arbitration agreements, and would require companies that use arbitration clauses to report information to the CFPB about claims filed and awards issued.

On May 5, 2016, the CFPB released its proposed rule, aligning with the October 7 preview.

Quite ironically, the CFPB’s proposal comes only several years after a seminal U.S. Supreme Court decision that stood for the exact opposite proposition. In 2011, the Court, in ATT Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) held that a California Supreme Court decision that invalidated class action waivers in arbitration agreements (referred to as the Discover Bank rule) is preempted by the Federal Arbitration Act, 9 U.S.C. §§ 1-16, and thus invalid. The Court affirmed the federal policy favoring arbitration over class-wide relief, citing that “the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate morass than final judgment.” Id. at 1751.

While the CFPB’s proposed rule mentions this Supreme Court holding, it avoids the inconvenient topic of the justification for its proposal’s marked departure from what is settled law and public policy. A review of both the preliminary and final reports shows that the Bureau was conducting its research and review of arbitration at and after the time of the Concepcion decision.

The Proposed Rule

At the heart of the proposal, the CFPB would ban consumer financial services providers from requiring consumers to waive class action rights in connection with pre-dispute arbitration clauses. (In a minor victory for the industry, the CFPB has not outright banned pre-dispute arbitration agreements—at least not yet.)

In connection with this substantive requirement, the CFPB has proposed a disclosure that covered companies must deliver to consumers, whenever such companies use pre-dispute arbitration agreements. The draft disclosure is very broad and requires companies to pledge that they will not stop consumers from being part of a class action case in court AND that they will take steps to prevent “anyone else” from using the arbitration agreement to prevent participation in class actions. The CFPB explains that “[r]equiring a provider’s arbitration agreement to contain such a provision would ensure that consumers, courts, and other relevant third parties, including potential purchasers, are made aware when reading the agreement that it may not be used to prevent consumers from pursuing class actions concerning consumer financial products or services covered by the proposed rule.” Thus, courts would be precluded from following the Supreme Court’s guidance in Concepcion and its progeny if anyone attempts to enforce a class action waiver in a consumer contract governed by the proposed rule.

Download: Arbitration Provisions Mauled by Consumer Watchdog