CFPB Finds That Class Action Waivers in Arbitration Provisions Hurt Consumers

posted by Michael R. Fortney  |  Apr 7, 2015 06:19 AM in Arbitration and Mediation

The Consumer Financial Protection Bureau (CFPB) released a report in March detailing the results of its study on arbitration clauses in consumer contracts involving credit cards, bank accounts, payday loans, private student loans, prepaid debit cards, and other similar contracts. The report focused on the stark differences in consumer relief between class action lawsuits on the one hand and arbitration on the other. 

The report was filled with findings, facts, and figures, the most interesting of which deal with class-action waivers in arbitration clauses. For instance, 90% of the arbitration provisions the study looked at contained a class action waiver, an express provision of the contract that forces the consumer to waive his right to class action relief.

While only two class arbitrations were filed during 2010-2012, neither of which resulted in relief to consumers, 160 million people were eligible for class action relief through actions filed in courts over the five-year period studied.

The recent legal history of class action waivers is interesting and set the stage for both this report and any laws or actions the CFPB proposes in the wake of its report. One of the most important modern cases is AT&T Mobility v. Concepcion where the Supreme Court ruled, in a 5-4 decision as most of its decisions are of late, that the Federal Arbitration Act (FAA) preempts states such as California from enacting legislation limiting class action waivers, because the U.S. Congress is the only entity that can alter the FAA.

Another recent case is D.R. Horton Inc. where the National Labor Relations Board (NLRB) found that forcing an employee to sign an arbitration agreement that waives class action rights violates the National Labor Relations Act (NLRA). That case made its way to the 5th Circuit Court of Appeals where it was promptly overturned using a rationale similar to Concepcion. Undeterred, and perhaps hoping for a circuit split and a trip to the Supreme Court for clarification, the NLRB applied the same rationale, albeit in a different circuit, in a very similar case, Murphy Oil, even though that rationale was rejected by the 5th Circuit.

Bringing the Concepcion argument full circle, the Supreme Court held in American Express v. Italian Colors Restaurant that the main principle of the FAA is that agreements to arbitrate are contracts, and courts cannot invalidate a contractual provision, such as a class action waiver, unless the provision in question clashes with another statute. However, by way of Concepcion, no state can make such a statute, since Congress, through the FAA, preempted the states from enacting laws in the area of arbitration.

This brings us back to the CFPB, which is an agency that presumably may be able to catch Congress's ear. Since the cases show that Congress appears to be the only way to eliminate class action waivers in arbitration clauses, the CFPB must get Congress on its side if it wants to affect any change in the world of arbitration.

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