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July 22, 2018 Articles

The Convergence of Agency Action and Administrative Review in Regulating Arbitration

How many of us—even lawyers—peruse, or even carefully study, the "fine print" of important agreements of financial transactions, such as credit card agreements?

Considering the rise of inclusion of arbitration clauses, which some such as the Consumer Financial Protection Bureau (CFPB) argue are "one-sided" in these agreements, we fail in reading such fine print at our financial risk. These clauses arguably favor arbitration over plaintiff-related litigation, such as seeking redress via causes of action pursued as class actions. To this point, a final Rule published in the Federal Register in 2017, and then withdrawn by a congressional review tool also in late 2017, sheds further light on the propriety of such arbitration clauses, more highlighting what I view as interesting administrative law issues and other questions. (If you are able, it may be worth reading the hundreds of pages of the rulemaking and the related reactions to the rulemaking.) This article briefly notes the final rule and the Congressional Review Act leveraged as a response to the final rule, and then notes what I view as the implications of this clash of the regulatory state with, what is unlikely to disappear across differing administrations, the withdrawal of federal regulations by Congress.

The Facts of the History of the Final Rule and of the Congressional Response

Agency action. In July 2017, the CFPB published the final rule in the Federal Register as follow-up to a national, if involved, study of arbitration clauses. Arbitration Agreements, 82 Fed. Reg. 33, 210 (July 19, 2017). It issued the final rule in accordance with section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule sought to prohibit and eliminate bans against class actions that had become a staple of arbitration clauses in consumer financial transactions, such as in credit card agreements and in student loan agreements. Before discussing the final rule more, it seems worth mentioning briefly the extensive process for arriving at a final rule of this kind.

At the simplest of levels, a final rule will be issued only after the following steps have been taken:

  1. A rule is first proposed internally at an agency, such as the CFPB, by a subject matter expert after significant internal clearance often in consultation with an executive secretariat. Sometimes this may also involve the Federal Register, as did this final rule, where input is solicited from the public.
  2. A proposed rule is published in the Federal Register in accordance with certain notice and comment requirements under the Administrative Procedure Act.
  3. Along the way, the Office of Management and Budget, a sub-agency of the West Wing, is involved as a clearing authority.
  4. In accordance with a range of requirements in the Administrative Procedure Act—among them, a need to address the comments that have been received from the public—a final rule or interim final rule is published.

Administrative Law,

Among other portions of the preamble, I found the discussion of arbitration interesting. The final rule on arbitration agreements experienced all these levels as part of the process to arrive at the Federal Register. In the preamble, the CFPB stated that the final rule imposes two sets of limitations on the use of pre-dispute arbitration agreements by covered providers of consumer financial products and services. According to the preamble, the final rule, if implemented, will prohibit providers from using a pre-dispute arbitration agreement to block consumer class actions in court and will require most providers to insert language into their arbitration agreements reflecting this limitation.

The CFPB stated, if perhaps argumentatively, that the final rule is based on its findings—which are consistent with the study—that pre-dispute arbitration agreements are widely used to prevent consumers from seeking relief from legal violations on a class basis and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief. According to the preamble, the final rule will require providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral and court proceedings to the CFPB. The CFPB will use the information it collects to continue monitoring arbitral and court proceedings to determine whether there are developments that raise consumer protection concerns warranting possible further action.

Note: The final rule applies to providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money, including, subject to certain exclusions specified in the final rule, providers that are engaged in, among others, credit-related transactions, such as credit cards.

Despite the multiple steps to issue a final rule, that is not the final stop.

Congressional review. In July 2017, the House of Representatives quickly passed Joint Congressional Resolution 111, initiating the Congressional Review Act, so that the proposed final rule could be withdrawn. In October 2017, the Senate passed the resolution by a narrow vote of 51 to 50 with two notable Republicans joining Democrats. Republican Senators Graham and Kennedy joined Democrats in voting against the withdrawal of the final rule. Considering that the final rule would not come into effect, pending congressional review, until September 2017, these legislative actions occurred quickly. The vice president assumed his constitutional role as president of the Senate, casting a vote to withdraw the CFPB action. See Kelsey Ramirez, "Vice President Pence Casts Tie-Breaking Vote to Kill CFPB Arbitration Rule," HousingWire, Oct. 25, 2017.

As far as I am aware, administrations since that of President Clinton have explored how to reform the regulatory state. In its campaign, the Trump administration avowed that, in "making America great again," it would rebalance the role of the regulatory state in terms of whether the regulatory state is a hindrance to economic growth. In spring 2017, the Trump administration issued several executive orders related to reducing regulations and paperwork burden. Whether one favors the reduction of federal regulations or not, the Trump administration has remained true to this promise, notably advancing a deregulatory agenda within the government since the issuance of the executive orders. See Sam Batkins, "The Congressional Review Act in 2017," Am. Action Forum, May 10, 2017. The administration has claimed that, in its first 11 months, it has delayed or canceled 1,500 proposed regulatory actions to a net economic benefit of the people. Laurent Belsie, "Trump's Deregulation Drive Is Epic in Scale and Scope.  And Yet . . . ," Christian Sci. Monitor, Jan. 5, 2018.

In November 2017, the president signed the joint resolution, passed by both houses of Congress under the Congressional Review Act, instituting Public Law 115-74. It nullified the final rule.

Congressional Review Act Concisely Noted
Passed in March 1996, the Congressional Review Act is one of a range of laws that itself regulates the nature of federal rulemaking. Despite its interesting intent of redirecting the regulatory state back to congressional oversight of rulemaking, it has not been a regular part of that oversight process until the current administration. See Stephen Dinan, "Congress Overturns Anti-Arbitration Rule as GOP Flexes Legislative Muscle," Wash. Times, Oct. 24, 2017. By all accounts, it has been used 15 times since February 2017.

In November 2016, the Congressional Research Service, an arm or sub-agency of the Library of Congress, issued a list of more than 50 "major" rules finalized on or after June 13, 2016, that are subject to removal by the 115th Congress. "Major rule[s]" are defined as having an "annual effect on the economy of $100 million or more," comprising an increase in costs or prices for consumers, for federal, state, or local government agencies, or for geographic regions.

The Congressional Review Act, 5 U.S.C. § 801 et seq., basically provides a kind of "cooling-off period" for major rules. The act provides for procedures to review and even nullify rulemakings.

Generally, Congress has 60 working days—legislative days in the House, and session days in the Senate—from the time at which a rule is submitted to Congress and published in the Federal Register—to nullify that rulemaking. Section 801(d) of the act provides that, if a rule is submitted to Congress fewer than 60 working days before it adjourns its session sine die, a new period for congressional review opens for the incoming session of Congress. Congress then operates as though the rules had been submitted to Congress and the Federal Register on the 15th working day of the incoming Congress, at which point a new 60-day review period is opened. If a resolution of disapproval is signed into law, the act prohibits that rule from coming into effect and prohibits that federal agency from "reissuing" the same regulation in the future or promulgating a regulation that is "substantially" similar." Moreover, the act limits or eliminates judicial review. 5 U.S.C. ch. 8

In one of many valid points in the November 2017 commentary by Scott McCleskey ("Mandatory Arbitration Is Bad Policy and Bad for Business," Thomson Reuters Reg. Intelligence, Nov. 27, 2017), the Congressional Review Act (leveraged as a tool in withdrawing the final rule and many rules moving forward likely) has its flaws—at least in terms of deliberation. He stated, "This abandonment of principle is compounded by Congress rushing the resolution through without the same level of consideration and analysis that is invariably demanded of new regulations (the CFPB spent five years studying the issue before issuing its rule)."

Despite its orientation toward a narrow review window, I am not opposed to the Congressional Review Act when used properly and non-politically as a check and balance.

My Brief Reaction
As an arbitrator and mediator, I view the final rule and its withdrawal via the Congressional Review Act of interest. All these regulatory and legislative happenings implicate, in my view, a series of issues, if not a continued need for conversation.

1. What is the best door in a multi-door courthouse for resolving our conflicts? Arbitration? Class action litigation? A process in between? In perusing the preamble, I am not sure if this broader question was not somewhat lost in the process.

2. Federal rulemaking is a complicated process that involves a range of multiyear steps. I fret that our public policy process in all its complexity is often simplistically discussed in the media under the current climate. The Congressional Review Act is one of a range of laws that regulate that process. The preamble is an example of the unwieldy nature of proposed agency actions in the Federal Register and where tools, such as the act, are not unreasonable when used wisely. But how do we create law capable of implementation, and who is best equipped for that—Congress? Agencies, such as the CFPB?

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