By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as scribbles occasional travel pieces for The National.
The Consumer Financial Protection Bureau (CFPB) has yet to take action against the widespread use of mandatory arbitration clauses in consumer contracts. These clauses require consumers to submit to mandatory arbitration in the event of a dispute– and crucially, waive their right to pursue class action litigation, an admittedly flawed mechanism that occasionally and erratically forces corporations to pay some price for abuses they’ve committed against consumers.
I discuss this issue at greater length in this post from last year, Business Groups Aim to Strong-Arm CFPB on Arbitration, which outlines the general problem.
I have no special insight into what, if anything, CFPB director Richard Cordray is going to do about issuing the long-delayed rule that was expected either to eliminate or circumscribe the use of mandatory arbitration clauses, and I instead refer interested readers to this recent post In Ballard Spahr’s Consumer Finance Monitor, Will he or will he not issue the arbitration rule?, which lays out some key issues,
If the CFPB were to issue a new rule at this time, Republicans in Congress would almost certainly invoke the Congressional Review Act (CRA) to scupper it– and when Trump would inevitably approve that action– future rule-making in this area would be precluded. I’ve discussed how this mechanism works in various posts discussing the CRA, including Trump and Congress Use Congressional Review Act to Roll Back 14 ‘Midnight’ Rules; More to Follow?:
the CRA allows rules finalized during the past 60 session days to be overturned, by a simple majority vote in both houses on a CRA resolution of disapproval, using expedited procedures, followed by a presidential signature. If the president vetoes the CRA resolution, the regulation could still be rescinded if a 2/3 majority in each house votes to override the presidential veto. Crucially and importantly, once the regulation has been successfully voided, the regulatory agency is barred from reviving the rule in “substantially the same form”– forever–in the absence of new legislative authority.
The CRA was originally intended to prevent an outgoing administration from enacting a flurry of last-minute measures that would constrain a new administration and/or Congress, but there is no reason it cannot be used by Congress to overturn agency rule-making of which it does not approve.
As I’ve written is occurring in other policy areas, state actions may be the major game in town for reining in corporate excesses for the duration of Trump administration– especially given Trump’s well-known business-friendly bias and the anti-regulation predilections of the Cabinet he’s installed (see, for example, EPA, Agencies to Rescind Clean Water Rule and States Launch New Joint Probe into Company Sales and Marketing Practices for Opioids).
On the arbitration front, the Consumer Finance Monitor reports, California anti-arbitration law nears passage:
California’s legislative effort to allow consumers to sue financial institutions for fraud even though they have agreed to arbitrate such disputes passed the Assembly Judiciary Committee this week and is expected to pass the full Assembly later this summer. The bill, which passed the state Senate in May, would amend California’s civil procedure rules governing arbitration to prohibit courts from granting a motion to compel arbitration made by a financial institution which seeks to apply an otherwise valid arbitration agreement to a purported contractual relationship fraudulently created by the institution with the consumer’s personal identifying information and without the consumer’s consent.
Unfortunately, that same source concludes that even if the California measure is passed:
[it] will be preempted by the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable.” For example, the U.S. Supreme Court has held that states are prohibited from creating categorical exceptions to the FAA that Congress did not authorize.
I think this analysis is correct, and given precedents and the Supreme Court’s composition, state anti-arbiratration initiatives will likely count for nothing. So, unlike in other areas where state policies can be important, absent some federal action, mandatory arbitration clauses are here to stay– for the moment at least
Which sucks for consumers.
Some Democrats Take on Mandatory Arbitration
Five Democratic Senators– Richard Blumenthal, Al Franken, Patrick Leahy, Edward Markey, and Ron Wyden– wrote a letter to AT&T in June, requesting information on deals and promotions that the company offers to its customers, as well as its use of mandatory arbitration clauses in consumer contracts.
This letter referred to:
[a] recent CBS News investigation revealed that over the past two years, over 4,200 AT&T customers have made complaints against AT&T and AT&T-owned DirecTV alleging that the company is not honoring its deals and promotions, resulting in subscribers being overcharged for services (citation omitted).
Allow me to quote at greater length from the Senators’ letter regarding the problems raised by forced arbitration, as it well-summarises that system’s flaws from the perspective of consumers:
Forced arbitration provisions in telecommunications contracts erode Americans’ ability to seek justice in the courts by forcing them into a privatized system that is inherently biased in favor of providers and which offers virtually no way to challenge a biased outcome. Forced arbitration requires consumers to sign away their constitutional right to hold providers accountable in court just to access modern-day essentials like mobile phone, internet, and pay- TV services. Also, forced arbitration provisions frequently include a class action waiver; language which strips consumers of the right to band together with other consumers to challenge a provider’s widespread wrongdoing.
As reported by the New York Times, most consumers lack the means or will to fight a powerful corporation alone in arbitration. This is particularly troubling in the telecommunications context when consumers can be overcharged for relatively small amounts of money, but when multiplied over a large base of affected customers, can amount to millions of dollars.
What’s ATT’s response?
Let’s allow a ATT a free and fair opportunity to set forth its position. According to their June 30, 2017 Letter to the Senators:
At the outset, no AT&T customer is ever ‘forced’ to agree to arbitration. Customers accept their contracts with AT&T freely and voluntarily; no one ‘forces’ them to obtain AT&T wireless service, DirecTV programming, or other products and services.
Now that I’ve stopped chortling. Ahem. Strictly speaking, that may be true. No one pops out of a dark alley, gun in hand, and says: “Sign up for AT&T now– or else.”
But, what’s the reality?
Allow me to turn to this Ars Technica report, AT&T: Forced arbitration isn’t “forced” because no one has to buy service, for an answer:
While AT&T is correct that no one is forced to sign up for AT&T service, there are numerous areas of the country where AT&T is the only viable option for wired home Internet service. Even in wireless, where there’s more competition, AT&T rivals Verizon and Sprint use mandatory arbitration clauses, so signing up with another carrier won’t necessarily let customers avoid arbitration. One exception is T-Mobile, which offers a way to opt out of arbitration.
So, if you’re in a part of the US where AT&T is the only game in town and you must sign up for their service or forego the benefits of being wired, what does that mean? Again, from Ars Technica:
The terms of service for AT&T Internet and DirecTV require customers to “agree to arbitrate all disputes and claims” against AT&T. Class actions and trials by jury are prohibited, although individual cases in small claims courts are allowed. AT&T doesn’t offer any way to opt out of the arbitration/small claims provision, so the only other option is not buying service from AT&T. By contrast, some home Internet and TV providers such as Comcast offer a method for opting out.
That sound like forced arbitration to me. I wonder what readers think, and encourage you to weigh in in comments.
What Do the Senators Think?
Even after a little poking around, the only answer I found came from Senator Franken. While I note that The Hill has covered the issue, in AT&T, senators spar over customers’ right to sue, please allow me to turn again to the Ars Technica account, which includes the detail that Naked Capitalism readers crave– and indeed, have come to expect:
Franken was not convinced by AT&T’s response. In a statement provided to Ars, he continued using the phrase “forced arbitration” to describe the AT&T customer contract clause. AT&T claimed that its arbitration clause is “customer-friendly,” but Franken said, “There’s nothing ‘friendly’ about AT&T’s take-it-or-leave-it contracts that eliminate consumer choice and take away Americans’ ability to resolve legal disputes with their telecom provider in a court of law. Further, forced arbitration agreements that prohibit customers from banding together as a class deter consumers from seeking justice and allow widespread wrongdoing by powerful corporations to go unchecked.”
An arbitration clause can only truly be customer-friendly if it “is entered into voluntarily after a dispute has arisen—and after a customer has fully considered their options—to ensure that Americans are not deprived of their constitutional rights,” Franken said.
Franken has introduced legislation to bar forced arbitration clauses. I don’t expect this proposal will go anywhere soon– given that Republicans control Congress, Trump is President, and even the nominally independent CFPB has failed to confront the problem, despite years of mulling both it and the appropriate response.
But I do want to note Franken’s proposal is on the table, and perhaps would be part of future legislative program– or the agenda for a future CFPB uncowed by worries about a CRA overturn– if we turn the corner and can move to a more progressive future.
Small beer perhaps, but maybe something to consider.