In 2016, despite contracts that mandate one-on-one arbitrations, consumers will likely gain the right to bring claims against banks, credit card issuers, and other lenders in class actions. The new rule, which the Consumer Financial Protection Bureau announced on October 7, 2015 it will probably issue next year, will partially reverse a string of recent Supreme Court decisions that made class-banning arbitration clauses broadly enforceable.
The action by the Bureau will vastly raise the stakes for disputes involving practices affecting large numbers of consumer finance customers.
Impact of arbitration clauses on class actions
An arbitration clause can have dramatic impact. The outcome of a case that I tried as a class action several years ago provides an illustration.
The defendant in that case, a telephone company, had lost a trial over the enforceability of its arbitration clauses under California law. But the trial court in the class case granted the defendant’s motion to compel arbitration as to consumers who lived outside the Golden State. The jury awarded about $16 million in damages to the California consumers, who represented about 10 percent of the defendant’s nationwide overcharges. But for the arbitration clause, the verdict would have cost the defendant closer to $160 million.
The arbitration clause saved the company — and cost its customers — $146 million!
Similarly, in antitrust litigation against American Express, the vast majority of merchants who accept American Express cards lost the right to seek damages in court for Sherman Act violations — violations that a district court in New York found the company to have committed after a trial earlier this year. In Am. Express Co. Italian Colors Restaurant, 133 S. Ct. 2304 (2013) (post here), a 5-4 majority concluded that the federal Arbitration Act requires enforcement of a class action ban even if it makes vindicating the claimants’ rights so costly that no rational person would attempt to vindicate them. That decision alone may have saved American Express hundreds of millions in damages — all at the expense, of course, of the merchants.
Consumers have no idea. According to the CFPB’s report, which it published in March 2015, consumers “are generally unaware” that their contracts with lenders often include arbitration clauses or that the clauses surrender their right to sue in court. The study also found that credit card issuers moved to compel arbitration in two-thirds of the cases that consumers filed and that courts granted half of all motions to compel arbitration in cases that consumers brought as class actions.
No one knows how much that saved wrongdoers — or how much it cost their victims. But it’s safe to say that it’s a lot.
The Bureau and its authority
The CFPB describes itself as “a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.” The Bureau’s prime mover — Senator Elizabeth Warren of Massachusetts — liked to compare consumer finance with toasters, noting that as of the early 21st century far more safety rules protected consumers against defective toasters than against defective financial products like mortgages, credit card accounts, and payday loans.
Section 1028 of Dodd-Frank provides the CFPB with broad “Authority to Restrict Mandatory Pre-Dispute Arbitration.” Subsection (b) provides as follows (with my italics):
The Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.
The Bureau’s proposal
In its Outline of Proposals Under Consideration and Alternatives Considered, the Bureau gives notice that it may “prohibit the application of arbitration agreements as to class cases in court” and may also “requir[e] submission to the Bureau of arbitral disputes (i.e., claims in arbitration) and awards and potentially also publication of those disputes and awards on the Bureau’s website.”
The agency notes that it “is not considering at this time a proposal that would prohibit entirely the use of pre-dispute arbitration agreements.” The CFPB also points out that the proposals “would not affect the ability of consumers and companies to agree to arbitrate disputes after they arise.”
The new rule would apply broadly to firms that provide consumer credit products and services. Although the Bureau could extend the rule to companies that extend credit for purchases of their own goods and services (e.g., wireless voice and data service providers), the agency chose not to consider doing so, at least for now.
Roll-back of Supreme Court decisions
In the last half decade, the Supreme Court has issued a series of pro-arbitration decisions that have enabled companies to use arbitration clauses to prevent class treatment of consumer claims, whether in court or in arbitration. In AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011), for instance, the Court ruled that the federal Arbitration Act (FAA) pre-empts state law against bans on class treatment of claims). The same majority ruled in the Am. Express Co. v. Italian Colors Restaurant case that the FAA trumps the Sherman Act.
Under the new CFPB rule, neither case will stand in the way of class litigation.
The new rule will allow consumers (and their counsel) to aggregate small-dollar claims that would make no economic sense to bring individually. Lenders may want to invest more in their compliance departments. Because once the rule takes effect, they will no longer have the ability to derail class actions by citing the class-banning arbitration clauses that they inserted into the standard-form contracts they require customers to enter into.
Consumers can also hope that the Bureau’s example will encourage Congress to enact an across-the-board ban on arbitration clauses that prohibit class actions.