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July 30, 2015 Articles

Opting In or Opting Out: Report on Consumer Arbitration Clauses

By Gary C. Norman

I am somewhere between a Luddite and a techie, finding prudence in patience when it comes to technology purchases. But since purchasing an iPhone one year ago, which has text-to-speech capabilities, I find myself wanting to obtain the next version of the so-called smartphone. The iPhone has various adaptive features, such as reading the many text-based missives I transmit out loud, not to mention paperwork involved in financial transactions. When I acquire that upgrade, I will do well to read the agreement paperwork.

How many of us, even lawyers, closely review an agreement when purchasing the latest iPhone? And yet, is that not perhaps the height of folly? Imagine this as compounded by being a lay citizen who has not sat, if painfully, through contract law and who has learned glibly about the array of doors to the courthouse, including alternative dispute resolution.

According to a statement issued in May 2015 by 58 members of Congress, which appeared on the website of the House Judiciary Committee, "Forced arbitration clauses are often buried deep within the fine print of financial products and service contracts, harming American consumers by depriving them of their day in court even when companies have violated the law."

In my experience with notifications from credit card companies, the "opt-out" option of an arbitration clause for my account disputes will result in my account being closed, should I not accept the mandatory arbitration requirement. How is that "opting out"? In reality, it means I am forced into an adhesion contract.

A recent report by the Consumer Financial Protection Bureau (CFPB), an agency established by Congress charged with protecting consumers in the financial marketplace, noted that the folly of not reading paperwork or perceiving a cultural ability to negotiate terms of agreements will likely result in a binding arbitration clause of which many people have no understanding. As a consequence, some public officials urge rulemaking.

The Lay of the Land: Important Report
In March 2015, the CFPB issued the report (equaling some 700 plus pages) in compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which mandated a report on the use of pre-dispute arbitration clauses in consumer financial contracts.

As way of backdrop, arbitration and mediation provisions have increasingly taken hold in contractual agreements. As to arbitration clauses, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), basically held that state laws deeming class action waivers in arbitration agreements unenforceable under certain conditions are preempted by the Federal Arbitration Act, such that the state must enforce arbitration agreements. Jurisdictionally or strategically, therefore, it makes addressing these kinds of clauses a question of a federal venue, namely congressional action.

In March 2015, Richard Cordray (director of the CFPB) testified before the House Committee on Financial Services:

The premise at the heart of our mission is that consumers deserve to be treated fairly in the financial marketplace, and they should have someone stand on their side when that does not happen. Since opening our doors, the Bureau's Office of Consumer Response has accepted more than 540,000 consumer complaints related to a variety of financial products and services, including mortgages, credit cards, student loans, auto loans, credit reporting, debt collection, and a number of other consumer financial products or services.

Section 1028 of the Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376, required not only the study but also authorized possible future agency action about arbitration clauses in financial agreements if in the public interest it would level the playing field in consumer financial transactions and if any such action was in accordance with the report's findings. Reports of this kind, which have no binding effect, often have a role in early momentum for rulemaking by agency appointees and their staff, especially where individual members of Congress request said rulemaking by the legislative offices of agencies.

The report found:

  • Consumer arbitration clauses are prevalent, and are particularly prevalent in the credit card context.
  • Consumers are sometimes afforded an opportunity to opt out of arbitration clauses, but they generally are unaware of this option or do not exercise it.
  • Individual consumers are more likely to bring a lawsuit in court than to pursue a dispute in an arbitration proceeding.
  • Although class action litigation resulted in changes to the consumer financial market that include tangible (monetary relief) and intangible (changes in corporate behavior) benefits, the private sector may not be doing enough to stem potentially unfair practices.
  • Most consumers are unaware of or confused about arbitration provisions; among consumers who reported knowing what an arbitration provision was, 75 percent did not know that they were subject to an arbitration clause.
  • Arbitration clauses may act as barriers to class action lawsuits.
  • Public enforcement activity was preceded by private activity 71 percent of the time; by contrast, private class action complaints were preceded by public enforcement activity only 36 percent of the time.
  • So the report has been issued, and even well-received by many Democrats and rule makers. As the fictional character the president in The West Wing stated, "What's next?"

    Whether any of the conclusions make it into rulemaking, this has to be counterbalanced by significant considerations. First, a number of months remain in this administration, making any new regulatory work, as part of the federal regulatory schedule, a likely nonstarter. And should the agency want to engage in rulemaking based on the report, it must occur posthaste. Of interest, the agency issued, as part of the Spring 2015 Unified Agenda of Federal Regulatory and Deregulatory Actions (found at 12 C.F.R.), its intention of possibly engaging in rulemaking in relation to the report. Second, even if a Republican does not win the White House, Congress may remain controlled by the Republican Party, which, as a general matter, prefers less and not more regulation. Third, notwithstanding political considerations, the report evidently foreshadows serious attempts of the federal rule makers and their allies in Congress to restrict arbitration clauses in financial and other business contractual arrangements, shifting citizens to litigation. That may well be ironic in that arbitration was supposed to have been a less complex, even fair, alternative to litigation.

    So I might not be subject to a binding arbitration clause with which I may or may not agree; it will behoove me to read the paperwork. Specifically, later versions of the iPhone allow for a scanning application that digitally captures paperwork and reads its contents in turn to the blind user. Or, nay, I might just wait on reports and federal rulemaking to protect me.

    Keywords: litigation, ADR, arbitration, accessibility, consumers, Congress, rulemaking

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