Business Groups Aim to Strong-Arm CFPB on Arbitration

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in India and other parts of Asia researching a book about artisanal textile workers but also writes regularly about law, political economy, and regulatory topics for various consulting clients and publications. She also writes occasional travel pieces for The National (

Business interests have launched a pre-emptive broadside against the Consumer Financial Protection Bureau’s (CFPB) long-awaited regulations covering the use of forced arbitration clauses in consumer financial contracts.   Financial institutions use such clauses to require consumers to use arbitration procedures to resolve a dispute, rather than allowing them  bring class action or other types of lawsuits.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the CFPB study the use of such clauses. This task was one of many slowed by the two-year stalemate over confirmation of CFPB director Richard Cordray. The CFPB arrived at its proposed rule after extensive study of the issue, first releasing public preliminary results in December 2013 and culminating in its May 2015 Arbitration Study. The bureau published its rule in May and solicited public comments. Now the bureau must wade through the more than 13,000 largely duplicative comments received before the comment period closed last week.

The rule contains two key parts. The first would prohibit financial companies from using an agreement that would bar a consumer from participating in a class action concerning a financial product or service covered by the agreement. The second would introduce a modicum of greater transparency into arbitration proceedings, and require financial firms to submit records of arbitration proceedings to the bureau.

Consumer advocates and others concerned about openness have long considered arbitration proceedings problematic as there’s little transparency, records are not made public, past decisions have little precedential value, and there are limited grounds for appeal. In addition, since parties on one side of transactions tend to be repeat customers, this pattern may skew decisions to one side. The lack of transparency in the system means it is impossible to evaluate how fair an arbitration system is.

The CFPB notes that although tens of millions of consumers enter into agreements using such clauses, little empirical research has been conducted on the subject. Nearly all the arbitration clauses it examined disallow class arbitration; 75% of consumers it surveyed were unaware that their consumer and financial contracts contain such clauses; and fewer than 7% of consumers understand that these clauses eliminate any right to litigate.

About 50%  of credit card debt is subject to such clauses, as is 44% of insured deposits, and upward of 85% of other types of financial contracts (e.g.,  mobile wireless services, prepaid cards, payday loans, and private student loans).

The American Banker quotes a joint letter from the U.S. Chamber of Commerce, the American Bankers Association, the Financial Services Roundtable and 26 other national and state industry groups calling for the CFPB to withdraw the proposed rule, claiming this proposal “would have the practical effect of eliminating the availability of low-cost, efficient, and fair arbitration programs for consumers.”

Various consumer groups support the proposal, including Public Citizen and Americans for Financial Reform.

Class Action Lowdown

Class actions get a bad press, partly due to the extensive efforts that have been made by business interests to tout the defects of the US legal system, especially laws, regulations, and procedures that allow consumers to recover for harms they have suffered.  From the perspective of potential plaintiffs, class actions allow pooling of resources, making it economically viable  to bring claims that individually may be too small to pursue.  From the perspective of courts, class actions allow numerous similar claims to be combined and thus save court resources as claims are litigated together rather than separately. And from a systemic perspective, class actions allow private actors– entrepreneurial plaintiffs’ attorneys, incentivised by the large potential fees they can reap from contingent fee arrangements, to act as private attorneys general. In what can be called a regulation by litigation model, these lawsuits impose de facto constraints on dangerous, fraudulent, or predatory behaviour that in other national systems might be controlled by effective upfront regulation by the nation state (and at one time in the US, were addressed by some public regulators).

Supreme Court and Arbitration Clauses

The use of arbitration clauses in consumer financial contracts has been on the increase since the 1990s. Financial institutions like such clauses because they limit their potential exposure to large jury awards.  And over this period, the business-friendly Supreme Court has generally interpreted the Federal Arbitration Act of 1925 (FAA) to allow enforcement of standard form pre-dispute arbitration clauses in consumer, employment and other types of contracts.

The CFPB’s pending rule-making would supersede the Supreme Court’s 2011 AT&T Mobility v. Concepcion decision holding that the FAA pre-empted state law that would have prohibited the enforcement of a consumer arbitration clause with a “no-class” provision.  Prior to this decision, courts were split on the issue of state law challenges to the enforceability of no-class provisions in arbitration clauses. The Supreme Court extended this decision  later that year in American Express v. Italian Colors Restaurant , upholding an arbitration agreement that checked merchants from bringing class action lawsuits against the company.

Constraints on Class Actions

Over the last couple of decades, the US class action system has been significantly constrained, partly by political decisions, but also by a series of judicial opinions.  Let’s start with the political actions. Many of the same business interests arrayed behind the latest attempted squeeze on the CFPB were architects of the so-called ‘legal reform’ or ‘tort reform’ movements, such as the 1994 Contract With America. Both houses of Congress in 1995 passed the Common Sense Legal Reform Act, which, among other provisions, would have imposed “loser pays” rules and limitations on punitive damages; this legislation was vetoed by President Bill Clinton. Another bill, the Private Securities Litigation Reform Act, was ultimately enacted in 1995, over a Clinton veto, and made it more difficult to bring securities fraud claims (and in the opinion of some, made “bubble-era” abuses possible). Consumer advocates largely opposed such measures. In addition, trial lawyers, who at times have been the Democratic Party’s single largest source of campaign funds, also opposed the initiatives.

Moving forward a decade, in February 2005,  the Senate passed the Class Action Fairness Act, with votes from 53 Republicans, one independent, and 18 Democrats– including then-Senator Barack Obama. The House had previously passed the bill and President George W. Bush signed it into law. This legislation helped make it more difficult for plaintiffs to prevail in consumer class action lawsuits. The bill shifted most class actions from state to federal courts, the latter of which are usually considered to be less open to creative class action claims. Similar legal reform measures were also mounted at the state level, and these included state statutory changes, as well as efforts to elect Republican state attorneys general (or others supportive of similar pro-business measures). The 2005 federal legislation eased procedures for a defendant to appeal against an unfavourable class certification decision, and one intended effect, now especially apparent a decade later, has been to relax pressure on (corporate) defendants to settle, out of fear of losing a class action trial.

Another major impediment to class actions has been a series of decisions the Supreme Court has made that restrict the award of punitive damages on constitutional grounds. Beginning with BMW v. Gore and including State Farm v. Campbell and Philip Morris v. Williams, these cases have steadily ratcheted down the amount of overall damages plaintiffs can hope to recoup..

These Court decisions are not as widely known as they should be. But they have had a major effect in reducing class action lawsuits because of the way such lawsuits are financed and developed. Plaintiffs’ attorneys frequently function as entrepreneurs in pioneering new areas of legal recovery. To develop successful such lawsuits can take years, and cost millions of dollars.

Plaintiffs’ attorneys usually bear the upfront costs of what can often be speculative litigation, with recovery uncertain; they in turn, are largely compensated by contingency fee arrangements.  Such fees can seem exorbitant–  they may stretch to as much as 1/3 of the total costs of a successful judgement or settlement. But the situation is more complicated than it appears on its face. Fees are contingent on success and are only earned if the lawyers recover money. In the event of a loss, plaintiffs’s attorneys receive nothing.  It requires investment of considerable money up front to develop these claims to the point where plaintiffs’  attorney have leverage to secure a settlement (for virtually none of these cases ultimately goes to trial). Not every case results in a win or settlement, and if the expected benefits were not outsize when money is actually recovered,  these attorneys would have insufficient incentives to bring claims in the first instance.  (Just how outsize these fees need to be to achieve these results should of course be a topic for discussion and debate.)

The U.S. Chamber of Commerce is one group that has spotlighted the level of attorneys’ fees, especially relative to the amounts that the class action plaintiffs themselves ultimately receive. Some courts have also increased their scrutiny of consumer class action settlements. Judge Richard Posner of the United States Court of Appeals for the Seventh Circuit in 2014 authored three opinions overturning district court’s approval of settlements, over objections, of consumer class actions. Posner examined issues relating to attorney’s fees, and also examined the collusive effects of some typical settlement structures, which lower settlement costs for class action defendants.

Posner’s decisions are only legally binding as precedent in the Seventh Circuit. While they attracted substantial commentary, the impact of these decisions outside of the Seventh Circuit has been muted.  Courts will continue to lean toward approving such settlements, except in the most extreme cases, as these reduce pressure on court resources.

But there’s a larger point that these critics miss. If the major benefit of class actions is their deterrent effect on the behaviour of corporate defendants, then the distribution of monetary rewards between plaintiffs and their attorneys is beside the point. Regardless of who receives what proportion of a successful judgement or settlement, a robust class action system imposes real costs on businesses, as partly demonstrated by the intensity of their lobbying efforts against the class action system.  The net effect of tilting the class action playing field in a business-friendly direction is only to reduce pressure on firms to police their behaviour.

The current private litigation system overwhelmingly relies on entrepreneurial plaintiffs’ attorneys to bring lawsuits against corporate defendants that engage in practices that hurt consumers.  If these attorneys are not incentivised to bring private lawsuits, few lawsuits whatever will be brought. We’ve certainly seen the sad reality of an overwhelming lack of  effective Department of Justice enforcement actions against corporate defendants, especially financial institutions, during the Obama administration. The CFPB lacks resources to enforce consumer rights effectively and is dependent on private enforcement mechanisms. And so overriding existing legal precedent and thereby making it possible for attorneys to bring class actions is one of the limited tools the CFPB has at its disposal to shape the practices of financial institutions.

Such a move will not be unopposed. If the CFPB follows through and implements its proposed  class action-friendly agenda, the U.S. Chamber of Commerce and its allies have already served notice that they will mount a legal challenge to the new rules. The Chamber sent a 103-page comment letter to the CFPB outlying some of the legal challenges it will raise. And depending on the electoral result, Congress, and maybe the incoming president, may make their own attempts to reign in the CFPB.

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  1. grizziz

    If this is how modern justice and tort law has evolved it is time for an extinction event.
    I would suggest giving a salary to all attorneys appearing in a court of law. Then as cases are taken up by the court attorneys are picked at random to represent each side. The attorneys then are given one week to prepare and one day to argue before the court.
    I know this ridiculous and without precedent, but I cannot believe that society would be any less well served by a more random system. Our current system purports to be reasoned and subject to a market rationale and that the better argument will prevail and society will benefit. Justice looks to be competitive in principle while on the field and as it is practiced, the court is dominated by the rich over the poor.

    1. Portia

      The “law” that means more to me than any other is “caveat emptor”. Perhaps it will get so abusive that people will think many times before going into any kind of debt in future. I drastically changed my life, cut up all my cards, and made a 3-year plan to get out of debt once I became an “empty-nester” (I fostered a lot of stray animals). I felt better immediately. My circle of friends did change, though.

      1. Ike

        If individuals took responsibility for everything they did, and include everything else that ‘it’ implies, than you would have a societal breakdown. A consumer based society that preaches the skies the limit and the world is your oyster does not equate within our finite planet. Our world needs sheeple.

        I truly do wish “caveat emptor” was practiced to a greater degree by all. But when our leaders and “professional class” no longer take the responsibilities they are so supposed to uphold, it only means “CEREBUS has left the building”.

        1. Portia

          I find your ‘our world needs sheeple’ comment and your justification preceding it hilarious. Have you ever read Casteneda’s “The Active Side of Infinity?” There’s a fascinating part near the end that shows him the “foreign installation” which mankind is bred to feed, like chickens in a coop.
          Funnily enough, my Mom once said to me that if everyone was like me, the U.S. economy would collapse. I asked her if I should let the current flea population trying to take over my house go and give them all the blood they required. Noop, fleas, people; all bloodsuckers will be cut off in my life. I did not agree to be food for the parasites.

      2. Jeremy Grimm

        I believe you are thinking too narrowly about torts. Consider for example the “court case about environmental pollution that took place in Woburn, Massachusetts, in the 1980s.” This was the basis for the book and later movie “A Civil Action”. “Caveat emptor” is difficult to apply in this — as in many torts. And how do you apply caveat emptor in cases of malpractice — medical or legal?

        1. TheCatSaid

          Those are good points related to governance and public engagement with same. I understood from Portia that what she’s doing is choosing to actively withdraw her support of those activities that are not in alignment with her values–particularly the rampant, destructive financialization driving many activities and choices in current “developed” societies.

          This withdrawal of participation from things we do not support will help society change and evolve, one individual at a time.

    2. Ike

      To reiterate from connected posts, being rich is helpful because it buys lobbyists that provide political connections and especially, the salaries of arbitrators who are retired judges that frankly have no accountability any longer and appear to be easily paid off . $$ than gets you access as well as influence. In a truly democratic society that holds liberty and the pursuit of happiness as an absolute, these issues of influence and access would theoretically be found to be anathema to principals of law.

      IMO, Democracy relies on the good will of human nature to win out over the long run. However, with Ayn Randian (Objectivism) philosophies abounding in Western Halls,corporations with unchecked $$, and dictatorships elsewhere, it seems that greed is the order of the day. So logically speaking, everything appears to be in order.

      Let us hope the CFPB prevails. If not, than add another straw to the camel’s back of our next revolution.

    3. Jeremy Grimm

      The criminal justice system in my state has a system like that you described. Most offenders cannot afford an attorney and receive a Public Defender assigned from the pool of public defenders paid by the state and working for the public defense office. Of course these public defenders aren’t well paid and they a heavily overloaded with cases. Just to make things fair the prosecutor can pile on charges and come up with a very long long sentence they will push for if a case goes to trial. Many offenders — even the innocent — and their overworked public defenders — who with the prosecutors are most anxious to clear cases — will plead to an offer tendered which greatly reduces the long long sentence in return for a guilty plea. Equal justice for all and we are very “tough on crime”.

      Of course there is one caveat — even simple paperwork takes considerably longer than a week to make its way through the Justice System’s Castle. You must allow some time for the defense attorney to receive discovery from the prosecutor — several months at least.

  2. Alex morfesis

    Tens of millions did not “enter” into these arbitration agreements…these agreements were imposed without the benefit of council…there was no “meeting of the minds”…simply arbitrary imposition and more often than not, sent at a later date with unilateral adjustments, which would never hold water in a “business to business” transaction…

    UCC regs do not allow such “reformations” yet all these “agreements” are simply unilateral “rule” changes…

    But one point that gets lost in the Powell memo/letter scheme of coercive constitutional adjustments against the commonweal…

    Ruduce the strain on judicial resources…

    major institutions have worked hard to reduce constitutionally mandated funding to our court systems…thus allowing questionable corporate behaviour to flourish knowing the average citizen will almost never get the access to attentive jurists the constitution requires…

    this is a constitutional crisis of the highest magnitude but the corporatists are able to move the playing field on this long lost 1925 faa dead letter legislation which was virtually overturned by the courts after its enactment, but all those “rulings” were wiped away, in theory, by the creation and enactment of the ucc and its private corporate “editorial board”…

    Of the four horseman of the legal apocalypse commonly know as the ucc, only gilmore in his 1974 “the death of contract” was honest enough to lay out what an abomination the legal process has become…

  3. pdxjoan

    Mandatory arbitration is necessary to keep the wheels of the extraction machines moving smoothly. Back in the late 90’s, I asked my regional “Baby Bell” telephone company to install an additional phone jack in our family room. There was no mistaking that this was a residence, not a business. There wasn’t even a desk in the room. So, I get my bill, and I notice that I was over-charged. They classified the work as business instead of residential. The dollar difference was not significant, but I caught what I thought was an honest mistake, and called their customer service line to request an adjustment to my bill. After listening to elevator music for 50 minutes, I hung up the phone because I decided that it wasn’t worth it. That was the ah-ha moment for me. If they systematically over-charged residential customers, even by small dollar amounts, then those little over-charges would add up to big bucks for the phone company. I realized that this probably wasn’t a bug in the system, it was by design.

    1. RepubAnon

      That’s right – all these little charges and not-so-little charges can be imposed, even if they’re illegal, because there’s no way to effectively object. It’s like “tort reform”, where those with resources to fight can impose whatever they want on those without the resources to resist. Ask Gawker Media how that works…

    2. John Firestone

      I think some of the airlines do even better, for example, Lufthansa. They recently charged me an outsized fee they do not list anywhere, did not mention at the time of booking and did not include on the passenger receipt. When I asked their customer relations department about getting the charge removed, I was told they could do nothing about the fee: by taking the flights, I had accepted it, the fee was programmed into the system, the fee was necessary for issuing the tickets, the fee was needed to cover their costs, and that reversing fees was outside their area. They made far too many mistakes over the flights to suppose this was a fluke.

      Lufthansa has offered general arbitration as a concession to their striking employees. I wonder if under some circumstances it could be an improvement.

  4. Neil Pyper

    Thanks for a really comprehensive and well informed piece. It seems that the law is stacked against consumers in much, if not all, of the world!

  5. schmoe

    Such a shame that the the choice is either allowing businesses carte blanche to rip off consumers, or creating a pile of “junk” class actions where .01% plaintiff’s lawyers face-off against $1,100/hour defense lawyers, and at the end of the case the underlying plaintiff’s get a coupon for $5.50.

    1. H. Alexander Ivey

      Well, no. That is not what the posting said. The posting said that the present US legal system is systematically stacked against the private consumer. And, while in olden days — 20 yrs ago — class action lawyers were a deterrent to bad corporate behaviour, today they aren’t.

      The world today is not two, not-nice, actors fighting it out, leaving scraps for the underdog, it is one not-nice actor seeking total domination of the underdog.

  6. Bill Michtom

    “Consumer Financial Products Bureau”

    Isn’t that Consumer Financial Protection Bureau?

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