Tuesday, October 3, 2017

Arbitration Rule - Preserving Consumer Access to Courts

Chairman & Managing Director
Lenders Compliance Group

The US Chamber of Commerce and prominent financial industry groups (collectively, “Chamber”) have now gotten into the act of trying to deprive consumers of their day in court.[i] The Chamber’s view is that the Consumer Financial Protection Bureau (“Bureau”) has promulgated an “unconstitutional and illegal” arbitration rule (“Arbitration Rule”) that supposedly blocks companies from forcing consumers to go to arbitration instead of filing class action cases.

There are eighteen plaintiffs in the Chamber’s suit, filed on September 29, 2017. They want to set aside the Arbitration Rule as invalid, alleging the measure was based on a “fundamentally flawed” study and is the “tainted” product of an agency structure that is itself unconstitutional.

So, now comes this lawsuit, filed in the Northern District of Texas, seeking to enjoin the Bureau from enforcing the new Arbitration Rule that prohibits most financial service providers from requiring consumers to sign mandatory arbitration agreements that bar class action lawsuits. This lawsuit is brought both by the Chamber and a coalition of corporate business lobbying groups. In the complaint for declaratory and injunctive relief, these plaintiffs argue the Arbitration Rule is invalid and must be set aside.

The claims are lined up in a section of the lawsuit, which I outline as follows:
First, the Rule is the product of, and is fatally infected by, the unconstitutional structure that Congress gave the CFPB when it created the Bureau in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act").
Second, the Rule violates the Administrative Procedure Act ("APA") because the CFPB failed to observe procedures required by law when it adopted the conclusions of a deeply flawed study that improperly limited public participation, applied defective methodologies, misapprehended the relevant data, and failed to address key considerations.
Third, the Rule also violates the APA for the related reason that it runs counter to the record before the Bureau and fails to take account of important aspects of the problem it purports to address, making it the very model of arbitrary and capricious agency action.
Fourth, the Rule violates the Dodd-Frank Act because it fails to advance either the public interest or consumer welfare: it precludes the use of a dispute resolution mechanism that generally benefits consumers (i.e., arbitration) in favor of one that typically does not (i.e., class-action litigation).” (My emphases and change of format.)

Unless the federal court provides the plaintiffs' requested relief or federal lawmakers choose to act on the issue, the Bureau’s new Arbitration Rule is set to become effective on October 18, 2017.

As you may know, for the most part, I have taken the opposite point of view than the plaintiffs. For a detailed understanding of my position, please read my article Take-It-or-Leave-It Arbitration, Banning Consumers from the Court.[ii] You can download it HERE from the Articles section of our Lenders Compliance Group website.

In particular, I object to this construal in the plaintiffs’ claim:

“Such a regulation, which eliminates a demonstrably effective method of dispute resolution while making it impossible for businesses to pass on the cost savings achieved through use of arbitration, neither advances the public interest in general nor protects consumers in particular.”