Do you take the time to read customer agreements before accepting them? Many, if not most, people do not. And those that do read them, do not likely understand the terms they’re agreeing to. For example, many of these agreements have included arbitration clauses that eliminate the customer’s right to join a class action suit. The effect of such a clause on consumers can be substantial. If a consumer purchases a faulty product or service and has signed such an agreement, instead of being able to seek relief with a bigger population of consumers with the same or similar grievances (a “class”), individual consumers would have to go through arbitration or file a suit themselves, and on behalf of only themselves. This thought is daunting enough to dissuade many consumers from seeking any recourse when they’ve been damaged and, even if they choose to push forward, according to a 2015 report by the Consumer Financial Protection Bureau (“CFPB”), consumers who went through individual arbitration or did not fare as well as members of class action lawsuits.
The Dodd-Frank Wall Street Reform Act (“Dodd-Frank”) gives the CFPB power to study arbitration clauses and to take action if it finds those clauses to be harmful to consumers. Because the results of its study shows that arbitration clauses do, in fact, harm consumers, the CFPB is now working on a proposal to ban “forced arbitration” clauses that prohibit customers from seeking relief through class action lawsuits in financial agreements.
Because these arbitration clauses are common in financial agreements (such as signing up for a credit card,) financial industry trade groups are lobbying against CFPB’s proposal, alleging that it would hurt financial firms without benefitting consumers. The industry asserts that the proposed rule would open the door to “unfounded” class actions, which they allege would raise costs for credit as lenders and other firms adjust to a predicted increase in litigation costs. Additionally, over 80 House Republicans sent a letter to the CFPB alleging the arbitration clause study it relied upon was flawed and that the CFPB should re-open it.
Recent Supreme Court decisions may determine whether the CFPB is ultimately allowed to enact the proposed rule. The Court held in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) that mandatory arbitration clauses are free to include class action bans, a ruling that was strengthened by American Express Co., et al. v. Italian Colors Restaurant, et al., 570 U. S. ____ (2013). On the other hand, the Court’s ruling in CompuCredit Corp., et al v. Wanda Greenwood, et al. 565 U. S. ____ (2012), found that Congress had the jurisdiction to give power to an agency to make rules that would limit contractual provisions, which is effectively what Dodd-Frank does. The ultimate outcome of this issue will have a significant impact on consumers and businesses. We will keep you updated on this blog as the issue is determined.
The legal team at SFMS has substantial experience litigating consumer protection matters. If you have any questions regarding this subject or this posting, please contact Chiharu Sekino (email@example.com) or Alec Berin (firstname.lastname@example.org). We can also be reached toll-free at (866) 540-5505.
Shepherd, Finkelman, Miller & Shah, LLP is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, Pennsylvania and Wisconsin. SFMS also maintains affiliate offices in London, England and Milan, Italy, and is an active member of Integrated Advisory Group (www.iaginternational.org), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.
Arnold, Chris. “Feds May Order Financial Firms to Allow Class Action Lawsuits.” Law360. Last modified October 7, 2015.
Weinberger, Evan. “Coming CFPB Arbitration Rules Face Multiple Legal Fights.” Law360. Last modified October 7, 2015.