Originally published by Barry Barnett.
Action by the Bureau will raise the potential stakes for disputes involving consumer finance. Lawyers on both sides of the “v.” should take note.
The Bureau and its authority
The CFPB describes itself as “a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.” The Bureau’s prime mover — Senator Elizabeth Warren of Massachusetts — liked to compare consumer finance with toasters, noting that as of the early 21st century far more safety rules protected consumers against defective toasters than against defective financial products like mortgages, credit card accounts, and payday loans.
Section 1028 of Dodd-Frank provides the CFPB with “Authority to Restrict Mandatory Pre-Dispute Arbitration.” Subsection (a) requires the agency to conduct a study of pre-dispute arbitration agreements and to report the results to Congress. Subsection (b) provides that the “Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”
Impact of arbitration clauses on class actions
The CFPB published its report on the study in March 2015. The study found, among other things, that consumers “are generally unaware” their contracts with lenders often include arbitration clauses barring them from suing in court, that credit card issuers moved to compel arbitration in two-thirds of the cases that consumers filed, and that courts granted half of all motions to compel arbitration in cases that consumers brought as class actions.
The outcome of a case that I tried as a class action several years ago illustrates the effect of arbitration clauses that prohibit class actions. The defendant in that case, a telephone company, had lost a trial over the enforceability of its arbitration clauses under California law. But the trial court in the class case I handled granted the defendant’s motion to compel arbitration as to consumers who lived in other states. The jury awarded about $16 million in damages for the California consumers’ share of the defendant’s nationwide overcharges. But for the arbitration clause, the verdict would have applied to all United States customers and would have cost the defendant closer to $160 million.
The arbitration clause saved the company — and cost its customers — $146 million!
The Bureau’s proposal
In its Outline of Proposals Under Consideration and Alternatives Considered, the Bureau gives notice that it may “prohibit[] the application of arbitration agreements as to class cases in court” and “requir[e] submission to the Bureau of arbitral disputes (i.e., claims in arbitration) and awards and potentially also publication of those disputes and awards on the Bureau’s website.” The agency notes that it “is not considering at this time a proposal that would prohibit entirely the use of pre-dispute arbitration agreements.” The CFPB also points out that the proposals “would not affect the ability of consumers and companies to agree to arbitrate disputes after they arise.”
The new rule would apply broadly to firms that provide consumer credit products and services. Although the Bureau could extend the rule to companies that extend credit for purchases from them (e.g., wireless voice and data service providers), it chose not to consider doing so, at least for now.
The kinds of entities that the rule would govern include the following:
[B]anks, credit unions, credit card issuers, certain auto lenders, small-dollar or payday lenders, auto title lenders, installment and open-end lenders, private student lenders, providers of other credit in certain other contexts, loan originators that are not creditors, providers of credit in the form of deferred third-party billing services, providers of certain auto leases for at least 90 days, servicers of covered credit and auto leases, remittance transfer providers, providers of domestic money transfer services or currency exchange, general purpose reloadable prepaid card issuers, certain providers of virtual currency products and services, check cashing providers, credit service/repair organizations, debt settlement firms, providers of credit monitoring services, and debt buyers.
Partial roll-back of Supreme Court decisions
The Supreme Court has issued a series of pro-arbitration decisions enabling companies to use arbitration clauses to prevent class treatment of consumer claims, whether in court or in arbitration. In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., (2010), the Court held that arbitrators may not construe an arbitration clause to permit class arbitration unless the contract shows the parties intended to allow it. In AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011), the Court ruled that the federal Arbitration Act (FAA) pre-empts state law against bans on class treatment of claims). In Am. Express Co. Italian Colors Restaurant, 133 S. Ct. 2304 (2013) (post here), the majority concluded that the FAA requires enforcement of a class action ban even if it makes vindicating the claimants’ rights so costly that no rational person would attempt to vindicate them.
The Bureau‘s rule will allow its beneficiaries to avoid the effects of Concepcion and Italian Colors but not Stolt-Nielsen, although the agency reserved its authority to require class treatment of claims in arbitration.
Take-aways
Lawyers who represent banks and other providers of products and services relating to consumer credit will need to help their clients add to arbitration clauses language that the clauses do not affect consumers’ right to bring or participate in a class action. They should also counsel their clients about the greater risk that will attach to their breaches of contract and violation of consumer protection and other laws — including antitrust law prohibiting price-fixing and monopolization. Defense lawyers ought in addition prepare to oppose class certification on the (procedural) merits of the motion to certify under federal Rule 23 and its state-law counterparts.
Lawyers who represent consumers will note that claims that made no economic sense to bring individually now do make sense as a result of the ability to aggregate the claims of many consumers in one action.
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
from Texas Bar Today http://ift.tt/1R7oCQ9
via Abogado Aly Website
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