Mandatory Arbitration and the Consumer Financial Protection Bureau - What Comes Next

Mandatory arbitration clauses in consumer contracts have been – by most accounts – a boon for the corporations that draft those contracts and a bane for consumers (and litigators on both sides of the aisle). The perception is that mandatory arbitration decreases consumer access to the courts by reducing or eliminating the availability of the class action, that arbitrators used in consumer actions are often not truly “independent” and that fee splitting provisions, limits on recovery and other procedural devices often result in customers not proceeding with their grievances even when the amount at issue would otherwise justify an individual claim.

To what extent this either prevents or dissuades consumers from being able to enforce their legal rights against the corporations with whom they do business has been a matter of ongoing debate, with consumers and their advocates coming down largely on one side and corporations and the Courts – most particularly the U. S. Supreme Court in AT&T Mobility v. Concepcion, American Express Co. v. Italian Colors and other recent cases – coming down on the other. While this Court has proven perhaps a touch less socially conservative than critics feared, they have been every bit as anti-consumer and pro-business as imagined. For better or worse, SCOTUS appears willing continue this kind of neo-Lochner hands off approach to consumer contracts and, because of the preemptive effect of the Federal Arbitration Act, state legislative protections are rendered largely meaningless.

Enter the recently legitimized Federal Consumer Financial Protection Bureau, which last month released the preliminary results of their study on the effect of arbitration clauses, specifically in the context of financial institution transactions (banks, credit card issuers and payday lenders). The CFPB’s white paper is largely just a data dump at this point, not reaching many conclusions. The data they aggregate however, would suggest that arbitration clauses do at least appear to dissuade consumers from seeking to enforce their legal rights and that the device is even more effective in discouraging those from less affluent and less educated households. It will be interesting to see what the CFPB ultimately concludes, what actions they take and how those actions are greeted by legislators and the federal courts.

Some financial services defense side folks are predicting that this is the “death knell” for arbitration clauses. Michael Mallow and Michael Thurman at the law firm Loeb and Loeb recently wrote that “The logical conclusion to be drawn from these findings is that the CFPB is laying the foundations for rulemaking that will prohibit or severely limit the availability of pre-dispute arbitration clauses in consumer agreements.” [] That remains to be seen. As does whether the CFPB can do so in a manner that does not result in a decade of litigation over the interplay between their rulemaking and various state and federal statutes. Whether consumers or corporations come out the ultimately come out the winner of the now decades long debate over mandatory arbitration clauses remains to be seen. The more clear winner, almost ironically given the tone of the above cited piece, are the lawyers who will bill tens of thousands of billable hours redrafting policies, arguing against the application or legality of the new rules and defending whatever new single plaintiff or class cases arise therefrom. Sometimes the grass is greener on both sides.

The Consumer Financial Protection Bureau Arbitration Study Preliminary Results can be viewed in their entirety here.


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