In 2010, in response to perceived abuses in the consumer financial services industry, Congress passed the Dodd-Frank Act creating the Consumer Financial Protection Bureau (CFPB). The Act directed the CFPB to conduct a study on the use of pre-dispute arbitration clauses in consumer finance agreements and to regulate or prohibit the use of such clauses if it determined that so doing was "in the public interest and for the protection of consumers." This represented a potential carve-out to the overriding federal policy in favor of arbitration established by the Federal Arbitration Act.
The CFPB Report
The CFPB issued preliminary findings in 2013, based in part on a review of AAA consumer arbitrations from 2010 through 2012. The CFPB issued its final report (CFPB Report, or Report) in March 2015 (without updating its data or considering online arbitrations). The Report addressed the following topics:
Section 2 How prevalent are pre-dispute arbitration clauses and what are their main features?
Section 3 What do consumers understand about dispute resolution systems?
Section 4 How do arbitration procedures currently differ from procedures in court?
Section 5 What types of claims are brought in arbitration and how are they resolved?
Section 6 What types of claims are brought in litigation and how are they resolved?
Section 7 Do consumers sue companies in small claims courts?
Section 8 What is the value of class action settlements?
Section 9 What is the relationship between public enforcement and consumer financial class actions?
Section 10 Do arbitration clauses lead to lower prices for consumers?
The Report was based on a telephone survey of credit card holders. It found that most consumers were not especially familiar with the dispute resolution provisions in their contracts and, not surprisingly, that factors such as rates and fees were the most important factors in customers' selection of a credit card company. Most customers, faced with what they believed was an inaccurate credit card charge (of an unspecified amount) said their remedy would be to change vendors. This is an unacknowledged but very practical check on unscrupulous business practices.
Interestingly, the CFPB made no effort to evaluate arbitration as a dispute resolution mechanism, or to compare it to litigation for individual claims not appropriate for class action treatment. (Given the FTC's earlier report criticizing litigation as a dispute resolution mechanism in consumer financial disputes, one could argue this evaluation would be warranted in a study that might serve as the basis for channeling all consumer finance disputes to litigation.) This could have been done either by surveying consumers who used arbitration and litigation to resolve their complaints, or by reviewing cases actually decided by arbitrators or judges to see if they were accurately and fairly adjudicated. Pro-arbitration commentators who have analyzed the CFPB data argue that arbitration appears to be a cheaper and faster method of dispute resolution and, importantly, is so simple that it is more practical for consumers to proceed without an attorney (which might operate to increase the net amount retained by the consumer).
The CFPB Report also mentioned recently implemented AAA consumer due process protections, but it made no effort to determine whether those protections were effective in ensuring arbitrator neutrality. This could have been done by reviewing decisions of individual arbitrators to see if they tended to side with one side or another substantially more than others, which might confirm or cast doubt on their impartiality. Nevertheless, given the substantial percentage of arbitration cases in which consumers prevailed, even in cases where they proceeded without an attorney, there seems to be no evidence that arbitration is not a fair and efficient process for individual consumer disputes in the financial arena. Similarly, there seems to be no evidence that an across-the-board ban on pre-dispute arbitration clauses would protect consumer interests.
Of note, in its October 2015 notice of proposed rulemaking (October Notice, or Notice), the CFPB did not propose an across-the-board ban on pre-dispute arbitration clauses. However, one of the proposals in its Notice was to condition the use of pre-dispute arbitration agreements on the submission of claims and awards to the CFPB so that the CFPB could monitor the fairness of the arbitration process and also, possibly, post the claims and awards on its website for consumer access. Presumably, this would allow consumers to make more informed decisions among financial services vendors.
The Class Action Waiver Issue
Whether restricting the use of pre-dispute arbitration clauses serves the "public interest" is more problematic. This is especially so because most consumer arbitration clauses require consumers to waive their rights to participate in class action proceedings. The October Notice contained a proposal that would preserve consumers' ability to pursue class actions, even if the agreement contained an arbitration clause. This would reverse the decision of the Supreme Court in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) which upheld a class action waiver in a cell phone service contract.
In evaluating this issue, it is useful to understand the source of the so-called "right" to a class action. Many commentators have categorized it as a substantive or even constitutional right. In fact, it is merely a procedural device, established under Rule 23 of the Federal Rules of Civil Procedure or analogous state statutes, to allow plaintiffs in cases where there are common issues of law and fact to represent all similarly situated potential plaintiffs, provided certain conditions are met. Historically, class actions have been criticized as vehicles for plaintiffs' lawyers to recover substantial attorneys' fees awards without providing significant benefit to individual class members. In 2005, the Class Action Fairness Act was passed to address some of these concerns by subjecting proposed settlements to greater scrutiny.
In any event, agreements to arbitrate inherently involve waivers of state and federal court procedural rights, including the right to extensive discovery, the right to a jury trial, and the right to appeal. Moreover, many consumer contracts contain disclaimers of warranties or limitations of liability that are favorable to the company offering the product or service. Query whether barring consumers from waiving the right to pursue class actions will lead to other challenges to such contractual provisions, notwithstanding our legal tradition favoring freedom of contract. Alternatively, one might ask what all the fuss is about. Are class actions a superior way of resolving consumer complaints about financial services? If so, why?
The CFPB Report included some data concerning class actions in the financial services area. In their comments, the U.S. Chamber of Commerce and the financial services industry argue that the data shows that class actions yield minimal financial recoveries for class members, and principally benefit the law firms who are in the business of pursuing class actions. Unfortunately, the comments did not address whether class actions, even if they served compensatory purposes poorly, may have effectively promoted greater compliance with the law.
The CFPB Report did not address this issue either. Some of the questions that might have been asked, but were not, include:
• Did the class actions assert substantive claims, such as the imposition of unauthorized fees, or technical violations such as imperfectly worded collection notices? In short, does the typical class action involve important consumer rights or relatively trivial legal technicalities?
• Were the class action claims meritorious, or did plaintiffs make frivolous claims to attract nuisance value settlements? (Defendants, unlike plaintiffs, generally cannot recover attorneys' fees if they prevail, so frivolous claims may not be adequately deterred.)
• Was there any difference in the level of compliance between financial services companies with and without class action waiver clauses in their contracts? This might be reflected in the number or type of complaints received by the CFPB regarding financial services companies.
• Even if class actions do serve deterrent purposes, are they the most efficient method of enforcing applicable statutes and regulations or would enforcement actions by the CFPB, based on information submitted to it by consumers through its complaint mechanism, be a more efficient approach and yield greater recoveries to consumers or better legal compliance by businesses?
• If preservation of class actions is desirable, is an arbitration clause not containing a class action waiver but providing for class action arbitration adequate to protect the public interest? (Of note, AAA and JAMS both have specific rules for the administration of class action arbitrations.)
In sum, while the Federal Arbitration Act established a national policy in favor of arbitration, the Dodd-Frank Act carved out a potential exception in the area of consumer finance agreements. Since arbitration agreements provide a vehicle for businesses to insulate themselves from class actions, concerns over the elimination of class actions as a method for enforcing claims and deterring non-compliance have prompted the reexamination of arbitration as a method for resolving individual consumer complaints. In my view, these issues should be untangled. Evidence suggests that the consumer due process protocols established by the AAA and other ADR purveyors do guarantee a fair and efficient hearing on the merits. If class actions are viewed as an essential enforcement tool—an issue which has not yet been adequately studied or illuminated by factual data—then the CFPB should consider letting the parties decide whether they should take place in court or in arbitration.
Key words: litigation, alternative dispute resolution, adr, Dodd Frank Act, Consumer Financial Protection Bureau, CFPB, class action, waiver, arbitration, consumer due process
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