FAIR Act: Will Congress Finally Complete the Project the CFPB Fumbled and Ban Mandatory Arbitration Clauses?

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.

The Consumer Financial Protection Bureau (CFPB) did not cover itself in glory even before the hostile Trump became President and started actively opposing its efforts. In fact, under its first director, Richard Cordray, the bureau fumbled its biggest opportunity, its attempt to ban pre-dispute mandatory arbitration agreements. After withering and dithering, in 2017 the CFPB adopted the Arbitration Agreements Rule “[banning] companies from using mandatory arbitration clauses to deny groups of people their day in court.”

Alas, the agency’s delay in promulgating the rule until well into the Trump administration  meant it was soon overturned under the provisions of the Congressional Review Act (CRA), as I wrote in RIP, Mandatry Arbitration Ban:

On Wednesday, Trump signed into law H.J.Res. 111, thereby nullifying the Consumer Financial Protection Bureau’s (CFPB) Arbitration Agreements Rule, prohibiting the use of a pre-dispute arbitration agreement to prevent a consumer from filing or participating in certain class action suits.

The CFPB’s mandatory arbitration ban was perhaps the most consumer-friendly action that agency had taken to date, and its overturn represents a major setback for the agency.

Many financial services companies require their customers to consent to use mandatory arbitration procedures to settle subsequent disputes, thereby  “voluntarily” giving up any right to file or participate in class actions. Courts right up to and including the Supreme Court have generally upheld such agreements.

Tort Reform’: The Corporate Agenda

Mandatory arbitration is one so-called ‘tort reform’, heavily promoted by U.S. corporate interests, and just one of many reasons why ‘little people’ plaintiffs fail to prevails often as they might otherwise do  in court. First off, they lack the resources of corporations – such the ability to finance lawsuits, and longstanding access to top legal talent.

But legislative and jurisprudential trends have been far from kind to them over the last decades. The United States Supreme Court has largely signed off on the mandatory arbitration trend, where such clauses have sprung up like mushrooms in many types of contracts. covering consumer products and services, and employment. I should mention  it was the pre-Trump version of the Supremes, which handed down these decisions, largely declining to overturn .increasingly onerous mandatory arbitration clause as well as class action waivers.

Miracle Dictu: Congress May Ban Mandatory Arbitration Clauses in Several Categories of Contracts

During the last session of Congress, the Democratic-majority House of Representatives in September 2020 passed the Forced Arbitration Injustice Repeal Act (FAIR) Act , which died when the Republican-controlled failed to take it up (see the GovTrack summary, S. 610 (116th): Forced Arbitration Injustice Repeal Act).

Prospects for the measure, which reportedly enjoys Biden’s support, have improved this year. The House has already revived the legislation and the Subcommittee on Antitrust, Commercial, and Administrative Law of the Judiciary Committee conducted a hearing on the topic on February 11. (Jerri-Lynn here: I have yet to watch the House hearing, but I include the video here for any reader who might be interested.)

The measure would ban mandatory pre-dispute arbitration clauses in various categories of contacts, covering antitrust, civil rights, consumer products and services, and employment. Consumers would be able to sue on claims including fraud, privacy infringement, and product liability. Moreover, the legislation  would require employers to litigate workplace disputes in court. The legislation would no doubt be drafted so that large corporations could still include such clauses in contracts among themselves.

In addition, the bill would also ban another pro-corporate ‘tort reform’ – class action waivers in employment contracts. In a 2018 decision in Epic Systems v. Lewis, the Supreme Court  upheld the use of class and collective action waivers in employment contracts. By incorporating such clauses into their employment contracts, employers can thereby require employment claims to be resolved via arbitration on an individual basis, thus effectively escaping potential exposure to class action employment lawsuits.

Now, while requiring claims to be arbitrated rather than tried so as to reduce the costs and burdens of litigation sounds good in theory – especially for consumers and employees who have fewer resources to draw on than do corporations.

Yet in practice, arbitration tends to produce smaller recoveries, and pro-defendant – aka pro-corporate – results. Mandatory arbitration clauses tend to benefit employers at the expense of their employees. Why is this? Well many corporations appear multiple times in front of the same arbitrators, who tend to see things in the same terms. Even when they rule for the plaintiff, the recoveries they award are fall smaller than a jury would opt for. As an aside, I’ll mention, that if these clauses didn’t serve corporate interests, corporations would be unlikely to insist on their incorporation into common consumer and employment contracts, given the large relative advantage in resources available to corporations compared to ordinary plaintiffs for cases that do end up going to trial.

Now, the class action lawsuit system is far from perfect. Successful lawyers do tend to make out well, and often receive up to 1/3 of the recoveries when they win a case, whereas many plaintiffs end up with bupkis. That’s a key point: attorneys must win or they don’t get paid. They must also fund the up-front costs of litigation.

The only way even the most successful  can afford to do this is if they get paid well when their client prevails on a claim. Which is by no means a foregone conclusion, given legislative reforms such as the Class Action Fairness Act (2005); tightened class certification and pleading requirements; and trends in Supreme Court jurisprudence, especially but not limited to constitutional limitations on the amounts of damage awards

What’s going on now? Have Democrat Congresscritters, as well as Biden, become much more sympathetic to the interests of the little people, compared to corporations? Well, perhaps. But to that I retort, how are things going on that stimulus bill?

I have another explanation, arising from the observation that trial lawyers tend to be major contributors to Democrats.

COVID legal liability immunity – the cherry at the core of the nursing home scandal in which New York governor Andrew Cuomo currently finds himself entangled – threatens the economic interests of trial lawyers. No lawsuits, no payday. Passing the FAIR Act puts would launch a full smorgesbord of gravy trains for these attorneys. Those contributions should start flowing even more freely if the legislation is passed.

But they are not the only supporters of this legislation. Google employees, who successfully forced the company to eliminate its mandatory arbitration policy, are solidly behind the revived FAIR ACT. As MarketWatch reports in FAIR Act is being revived in Washington, raising hopes for end to forced arbitration:

“I really think we have a shot this year,” Tanuja Gupta, a Google employee who helped organize the Google Walkout in 2018 and later helped form Googlers for Ending Forced Arbitration, told MarketWatch. “This is one of those rare issues where the parties can get behind the same change even if for different reasons. And a little bipartisanship would go a long way right now.”

Googlers for Ending Forced Arbitration said in a blog post Thursday that the need to end forced arbitration has become “increasingly relevant during COVID as we watched employers and nursing homes evade accountability with forced arbitration clauses.” More than 50% of U.S. workers are subject to forced arbitration, according to the Economic Policy Institute.

Google employee Vicki Tardiff said in the post: “We are inspired by the stories of sacrifice and charity during this pandemic, but forced arbitration means we may never know how many people gave their lives because they did not have adequate PPE or were forced to work while ill. Instead the stories will be locked under NDA [nondisclosure agreements] or never allowed to be told at all.”

We shouldn’t underestimate the forces arrayed in opposition to the FAIR Act, including the  U.S. Chamber of Commerce, via its Institute for Legal Reform. Nor do I think Biden’s support can necessarily be counted on – see his record on those $2000 checks, and student loan forgiveness. He’s been a longstanding water carrier for corporate interests and while  I hope for the best, I remain to be convinced.

Will the Supremes Get to Serenade Us Again?

Once the FAIR Act is passed, will there be a Constitutional challenge? Likely. Will it succeed? Probably not. Reason: Any decision would turn on interpretation of the Contract Clause – which is widely considered to be dead. Will the Trump court leave it unexhumed? I guess we’ll just have to wait and see.

Print Friendly, PDF & Email


  1. Zephyrum

    I participated in one arbitration proceeding, as a witness for the plaintiff seeking accident compensation from a large insurance company. After giving testimony we witnesses were allowed to stay in the room during further discussion, in case they needed us again. I looked over at the young plaintiff’s attorney and he had a big grin and looked like the cat that ate the canary. Later I learned that the plaintiff was awarded exactly the same amount as the insurance company’s original settlement offer. That arbitrator works for that same insurance company all the time, and only for the plaintiff once. And I’m certain the greaseball plaintiff’s attorney was paid off. You’d have to be crazy to accept this–if you have an option.

  2. Kevin Carhart

    Compulsory arbitration is an outrage, and I hope this passes. Thanks for the great coverage. The arbitration clauses are deeply important in the 1099 misclassification theme, for one. The clauses are in all the agreements that the embedded, sham-contractors sign.

    I’m concerned about the Institute for Legal Reform and things like it. We know they’re coming- they always do. If it passes, can it work? How can we get sharper about the bestiary of multi-level attack dogs? I haven’t looked up their whitepapers (there’s no longer a TP shortage at the moment) , but I’m sure they’ll do something with their cliches along the lines of flexibility, freedom, lower prices, or arbitration as experimentation with new forms of justice systems. Judges who hear class actions are really jealous incumbents whose jobs are too sheltered. And the slow, boring courtroom form needs disrupting by ArbiSource and Juuj. I wish it was just a bad joke.

Comments are closed.