Wednesday, July 26, 2017

Take-It-or-Leave-It Arbitration: Banning Consumers from the Court

Jonathan Foxx
Managing Director
Lenders Compliance Group


Recently, there has been quite a lot of weeping and gnashing of teeth against the big, bad Bureau, the dragon with the scary name, Consumer Financial Protection Bureau (Bureau). The dragon slayers, such as banks and nonbanks, are fighting the dragon on its most recent fiery huffing and conflagrant puffing on a new rule involving arbitration clauses.

The ire of the dragon slayers is limitless due to the fact that the dragon has issued a “disgraceful,” “egregious,” “outrageous,” and “shameful,” final rule that bans companies from using arbitration clauses to bar consumers from filing class action lawsuits. The dragon slayers have formed a conclave consisting of banks, nonbanks, credit card companies, and sundry other companies to fight the good fight. They are even threatening to storm the dragon’s redoubt by pitching at it the magical incantations of the Trump administration, mustering up in their cause a bevy of like-minded acolytes, disciples, groupies, hangers-on, oodles of assorted politicians and other baby-kissers.

On July 10, 2017, the Bureau announced the release of its anticipated Arbitration Rule, which opens the door for more consumer class actions against financial institutions concerning financial products and services.[i] Many consumer contracts, such as credit card and bank agreements, contain mandatory arbitration clauses. These clauses typically require consumer disputes to be arbitrated rather than litigated in court, with the goal to prevent class action lawsuits from being filed. But consumer advocacy groups have long complained about such clauses, pointing out that individuals are unlikely to be able to handle the costs of arbitration to resolve what are typically low dollar value cases. Their position is that if consumers were able to band together and file class action lawsuits, consumers would be more apt to challenge allegedly unlawful conduct against financial institutions, and companies would be held accountable.

The Bureau’s position is really rather simple: it notes the incontrovertible fact that mandatory arbitration clauses that ban class action litigation happen to stop consumers from seeking judicial remedies in disputes over small fines and other charges. Let’s call this kind of arbitration clause the “Take-It-or-Leave-It” clause.

Put another way, many consumers are unable to pursue small dollar settlements disputes, given the not erroneous belief that the payout would not be worth the trouble. So, the Bureau contends, not incorrectly, that allowing companies to use the Take-It-or-Leave-It clause enables them to wrong consumers, but face no consequences for doing so.

Under the final rule, the companies would no longer be allowed to put the Take-It-or-Leave-It clause in their arbitration provisions. The result of this rule, then, would be to put consumers into the position of banding together in group lawsuits, consisting of fellow sufferers with similar legal concerns.

To quote the Bureau’s Director Richard Cordray, the fire-breathing top dragon mounty himself:

“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong. These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up.”[ii]

Notice I did not indicate that arbitration clauses are themselves banned. That is because the rule does not ban arbitration clauses! Companies can still work out binding legal settlements with consumers by means of arbitrators paid for by the company.