The Disputed Landscape of Arbitration Clauses in Consumer Contracts

April 21, 2017

In May 2016, the Consumer Financial Protection Bureau (CFPB) proposed a rule that would ban mandatory arbitration clauses from consumer financial companies’ contracts. The CFPB proposal would apply to most consumer financial markets that involve lending money, storing money, and moving or exchanging money.

The proposed rule stems from a study on arbitration clauses in agreements between consumers and their financial services providers that the CFPB conducted at Congress’ request under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The results of CFPB’s study were released in March 2015. They revealed that most consumers never bring suit or even consider bringing individual action against their financial service providers. The study also found that class actions bring hundreds of millions of dollars in relief to millions of consumers annually and provide a catalyst for altering a company’s legally questionable conduct.

Based on its findings, the CFPB rolled out the proposed rule for the purpose of eliminating arbitration clauses that waive class-action litigation while collecting additional data on the use of arbitration clauses in consumer financial contracts. To meet those objectives, the proposed rule:  (1) adds an exclusion which provides that, unless another law would prohibit a class from being certified, an arbitration clause in a consumer financial contract cannot be used to bar class actions; (2) inserts a disclaimer in any contract that has an arbitration clause to preclude any doubt; and (3) requires financial institutions that include arbitration clauses in their agreements to submit data to the CFPB regarding arbitration proceedings.[1]

Can Class Waivers in Arbitration Agreements Be Enforced?

Because recent decisions of several appellate courts are split on the issue, the Supreme Court has been asked to rule on whether class waivers in arbitration agreements violate the National Labor Relations Act (NLRA). The controversy stems from the fact that the Federal Arbitration Act (FAA) allows for arbitration clauses within employment contracts, while the NLRA prohibits employers from barring workers from engaging in collective action. Epic Systems and Ernst & Young, the two companies involved in the recent litigation, are pitching the question to the Supreme Court after the Fifth Circuit handed down a ruling that conflicts with rulings issued by Ninth and Seventh Circuits.[2]

The Ninth and Seventh Circuits held that a collective and class action waiver in a contract between a company and its employees violated the NLRA. The Second, Eighth and Fifth Circuits, on the other hand, have reached the opposite conclusion and held in recent cases that such waivers are legal and enforceable. Adding to the issue’s allure for the Supreme Court is that the agreement at issue in the Ninth Circuit’s recent decision is the same agreement on which the Second Circuit reached the opposite conclusion in January 2015.[3]

What’s Next?

In back-to-back hearings on Capitol Hill that began on April 5, 2017, CFPB Director Richard Cordray defended the agency’s existence, and his role as Director, against backlash from House Republicans calling for his dismissal and the agency’s dismantling. The American Financial Services Association also recently called on representatives to remove the CFPB’s supervisory authority, limit its enforcement authority, ban the agency’s use of its consumer complaint database, and stop the arbitration rules from proceeding. In short, the CFPB’s future is in flux, as is that of the proposed rule.




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