The Consumer Financial Protection Bureau (CFPB) recently issued a study analyzing the use of pre-dispute arbitration in connection with consumer financial products or services. In the 728-page report, the CFPB criticized the use and effect of pre-dispute arbitration provisions in credit card agreements and other contracts for consumer financial products and services, particularly when compared to class-action lawsuits. In the coming months, the CFPB will likely use this report as the basis for regulations restricting, and potentially banning, the use of pre-dispute arbitration clauses in connection with consumer financial products and services. In the face of this potentially game-changing regulatory effort, industry representatives have quickly raised questions about the data underlying the CFPB’s report to undermine the agency’s conclusions, and will undoubtedly continue to scrutinize the report’s data and highlight any flaws as the CFPB considers issuing arbitration-related regulations.
Many contracts for consumer products and services include a “pre-dispute arbitration clause” that requires any related dispute to be resolved through private arbitration rather than litigation in court. In addition, many arbitration clauses include “class action waivers” that prohibit consumers from banding together with other similarly situated persons to file claims as a class, and instead require disputes to be resolved on an individual basis. While the United States Supreme Court has found that pre-dispute arbitration clauses in consumer contracts are enforceable under the Federal Arbitration Act, consumer advocates have challenged such clauses as unfairly restricting basic constitutional rights, including the first amendment right to “petition the government for a redress of grievances” and seventh amendment right to a trial by jury. On the other hand, industry representatives have argued that arbitration represents a fair, better, faster, and cheaper means of resolving disputes than litigation in court.
The Dodd-Frank Act requires the CFPB to study and provide Congress with a report on the use of pre-dispute arbitration clauses in contracts for consumer financial products and services. The Dodd-Frank Act further authorizes the CFPB to issue regulations prohibiting or imposing conditions on the use of pre-dispute arbitration provisions in connection with consumer products or services, provided that such regulations are in the public interest and consistent with the findings of the CFPB’s study.
The CFPB’s recently released study is based on an empirical assessment of 850 consumer financial product or service agreements, including credit cards, checking accounts, general purpose reloadable prepaid accounts, private student loans, storefront payday loans, and mobile wireless third-party billing, along with over 1,800 consumer finance arbitrations and over 550 consumer finance class action lawsuits filed in federal or state courts. The CFPB highlighted the following key findings from its survey:
The CFPB’s study attempts to compare aggregate arbitration outcomes with aggregate class action outcomes. Specifically, the CFPB’s final report concludes that, over a five-year period, at least 160 million consumers were eligible for relief in consumer class actions, and that settlements in those cases totaled $2.7 billion in cash, in-kind relief, expenses and fees. In contrast, over a two-year period, consumers obtained relief in only 78 arbitrations (out of 1,060 surveyed), and obtained less than $400,000 in aggregate in relief and debt forbearance in those cases.
The CFPB highlighted a few additional findings bolstering its overall conclusions regarding the use of arbitration clauses versus class actions:
In the weeks since the CFPB issued its final report, both CFPB representatives and consumer advocates have used data from the study to compare arbitration unfavorably with class action litigation. At a March 10, 2015 field hearing announcing the results of the study, CFPB Director Richard Cordray criticized pre-dispute arbitration clauses for “restrict[ing] consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year.” At the same time, the CFPB focused on favorable features of class actions, such as significant aggregate monetary recoveries and non-monetary relief, including unquantifiable benefits stemming from changed practices and their deterrent effect, while ignoring other aspects of class action litigation that do not fit its overall conclusion, including the coercive effect of class actions and the minimal recoveries individual consumers usually receive from class action lawsuits. Meanwhile, consumer advocates have called on the CFPB to use the report as a basis to ban pre-dispute arbitration provisions, which they have characterized as a tool companies use to insulate themselves from class-action liability. While many of the consumer advocates’ arguments focus on the use of arbitration clauses by the financial services industry, some critics have also challenged arbitration more broadly, including by arguing that since arbitration decisions are confidential, common law doctrines are not being developed based on judicial application of the law to various facts and circumstances, and thus the law’s growth is being stunted.
The consumer financial services industry generally favors pre-dispute arbitration agreements, arguing they offer both consumers and companies a more efficient and less expensive alternative to the judicial system. The CFPB’s data shows that arbitration proceedings are indeed faster, typically lasting only a few months, while class actions typically last one to two years. And while the data focuses on the gross amount of consumer redress awarded by banner class actions settlements, it does not identify the relatively small monetary relief individual consumers usually obtain from large class action settlements. Nor does it identify the number of frivolous or weak class action claims that end up being dismissed, abandoned, or settled for nuisance value on an individual basis, and the significant costs companies incur in defending those cases.
The CFPB’s report has wide-ranging implications for the consumer finance industry, as it sets the stage for the CFPB to issue regulations restricting or prohibiting pre-dispute arbitration clauses in consumer financial services contracts. Based on the CFPB’s report and the tenor of its public comments, the agency likely will conclude that pre-dispute arbitration clauses (or at least class arbitration waivers) have a very limited place—or no place at all—in consumer financial services contracts. As any arbitration regulations the CFPB issues must be “consistent with” this study, its depth and extensive citation to empirical evidence give proponents of pre-dispute arbitration clauses a high bar to challenge any future regulations.
We expect the consumer financial services industry to diligently advocate for a limited approach to pre-dispute arbitration regulations and to strongly oppose an outright ban on pre-dispute arbitration and class-waivers. Industry will likely attempt to develop new data and analysis comparing the individual consumer outcomes of arbitration and class actions, including quantification of each mechanism’s costs and benefits. Depending on the evidence industry can develop, there may be some opportunity for compromise. For example, enhanced disclosures and opt-out requirements might soften the impact of pre-dispute arbitration clauses by making them optional and bolstering consumer comprehension of arbitration agreements. Some might argue that the real value of pre-dispute arbitration clauses is in their typical requirement for individual dispute resolution, so if the CFPB were to permit pre-dispute arbitration but ban class action waivers, the industry would have won the battle but lost the war. Finally, depending on how the CFPB crafts any proposed regulations on pre-dispute arbitration provisions, those regulations could come into conflict with the Federal Arbitration Act (FAA) and the liberal federal policy favoring arbitration, which the Supreme Court strongly affirmed in AT&T Mobility LLC v. Concepcion.
While arbitration is not yet listed on the CFPB’s regulatory agenda, industry and consumer groups will likely meet with the CFPB’s regulations division, led by CFPB Assistant Director Kelly Cochran, to influence the agency’s perspective as it formulates its proposed regulations. If the CFPB finds that the regulations being contemplated “will have a significant economic impact on a substantial number of small entities,” it must convene a panel of small business representatives to assess the proposal’s impact on small business and consider alternative approaches before proposing a regulation. Once a regulation is proposed, the public will have an opportunity to file written comments, including any studies or data that might serve to balance the CFPB’s view of arbitration. The CFPB will then issue a final regulation that addresses the substantive issues raised in the public’s comments. Given the significant interest in this issue, we expect a large number of consumer and industry group to file comments with the CFPB, and the CFPB to diligently consider those comments, so it should be a significant period of time before any final regulations regarding pre-dispute arbitration clauses become effective.
Jonathan M. Lloyd is a partner in Davis Wright Tremaine’s Seattle office. His practice focuses on commercial litigation and arbitration, with a particular focus on representing financial institutions in individual and class action lawsuits and arbitrations, as well as regulatory inquiries, investigations and enforcement actions.
Adam D. Maarec is an associate in Davis Wright Tremaine’s Washington D.C. office. He counsels banks and other financial institutions on regulatory compliance matters in connection with the offering of credit cards, prepaid cards, deposit products, and other consumer financial products and services.