Supreme Court Gives Banks a Win on Arbitration, But Will CFPB Trump It?

WASHINGTON — A Supreme Court decision limiting class-action lawsuits was a win for banks and other corporations on Wednesday, but the victory may prove to be short-lived.

In a 5-to-4 decision, the high court ruled that businesses may require customers to sign binding arbitration agreements that prohibit them from joining class-actions.

While the decision was a relief to the banking industry, along with the rest of the business world, a provision in the Dodd-Frank Act allows the Consumer Financial Protection Bureau to revisit the issue, and potentially decide to limit arbitration agreements in the future.

"I think consumer advocates will certainly turn to the CFPB in the wake of the ruling," said Jo Ann Barefoot, a co-chair with Treliant Risk Advisers and a former deputy comptroller at the Office of the Comptroller of the Currency, who said the CFPB has substantial leeway under the regulatory reform law. "Mandatory arbitration has been a top complaint of consumer groups for years and they clearly hope the bureau will curtail or regulate the practice."

At issue are mandatory arbitration agreements, which are often used for credit cards, auto financing, installment loans and even checking and deposit accounts.

In the case of AT&T Mobility v. Concepcion, a California couple complained about being charged $30 in taxes for what they thought was free cellphone service. California courts found that they were entitled to join in a class-action claim, despite a binding arbitration agreement in their contract.

But the Supreme Court overturned that decision and found that federal arbitration law preempts state laws prohibiting class-action waivers in consumer arbitration agreements.

While such a decision might normally put the issue to rest, the Dodd-Frank Act requires the CFPB to study and provide a report to Congress concerning the use of mandatory arbitration agreements in connection with consumer financial products. It also allows the agency to issue rules that may "prohibit or impose conditions" on the use of arbitration agreements if the study finds that it would be in the public interest and would protect consumers.

The distinction is critical, because while the Supreme Court case said arbitration clauses are binding once they are part of a contract, the CFPB may still be able to prohibit their inclusion in a contract to begin with.

"What it begs is the question of whether a regulator can prohibit the use of a mandatory arbitration clause," said Andrew Sandler, a partner in BuckleySandler LLP. "What this says is when [the clause] is in the contract, it's effective and you can't have class action. Now the question is can a regulator mandate that you're not allowed to put these clauses in a contract. So that's the next issue probably."

The provision would not allow CFPB to prohibit or restrict a consumer from entering into a voluntary arbitration agreement with a business after a dispute has arisen.

A CFPB spokesperson declined to comment on the decision.

Some banking lawyers said they do not think the CFPB has much room to change the law.

Alan Kaplinsky, a partner at Ballard Spahr who filed an amicus curiae brief in the Concepcion case on behalf of several banking industry groups, said any decision to limit or prohibit arbitration agreements would have to be based on the study, not on anecdotal evidence.

"The problem for them, assuming that philosophically they'd like to get rid of arbitration, is that the empirical data is already out there … on the fairness of arbitration," Kaplinsky said.

Those studies, he said, show that arbitration costs less, takes less time and provides greater rewards for consumers than a class action.

"I am optimistic that if they conduct a fair study — and that's going to depend a lot on who the director is — if they do a fair study they're not going to be able to prohibit or restrict in any material way the use of arbitration, because arbitration has helped consumers, it hasn't hurt them," Kaplinsky said.

But Deepak Gupta, a Public Citizen lawyer who argued the case for the plaintiffs, said the CFPB has the power to trump the Supreme Court decision.

"Congress always has the authority to overturn a decision, but Congress has delegated the authority to ban arbitration in certain contracts in this instance," Gupta said. "So there is nothing unusual about an administrative agency exercising authority delegated to it by Congress."

Gupta also rejected the notion that arbitration is better for consumers.

"All of the consumer advocates, all of the civil rights advocates, argue that mandatory binding arbitration is being used as a get-out-of-jail-free card," he said. "The only people arguing the opposite are the Chamber of Commerce and the banks. I think that shows you that you have to almost think the consumer advocates and civil rights activists are just crazy, or are just completely wrong on the evidence."

Whether arbitration agreements hurt consumers remains a hot-button topic. The Supreme Court acknowledged that at least in the case of the Concepcion, an arbitration decision was preferable to a class-action settlement.

Kaplinsky and Sandler said the decision is a vindication for banks that use arbitration in a fair way.

Over the past decade, many banks have shied away from the use of arbitration agreements as the issue was fought out in the courts, Kaplinsky said. Class actions exert enormous pressure on banks to settle because of the risk of litigating the case, he said.

"I've received calls already from I would say a dozen of my clients who were standing on the sidelines and not using it, they're now interested in potentially looking at the issue again, because the Supreme Court has really breathed new life into this issue," Kaplinsky said.

He was careful to say the decision would not permit unfair arbitration agreements that would, for example, saddle the consumer with exorbitant fees or limit their ability to initiate arbitration.

Sandler said he wouldn't view the case as a victory for banks over consumers, but rather a reaffirmation that arbitration is the preferred method for resolving disputes under our legal system.

"The Supreme Court has spoken as to what the law of the land is," Sandler said. "What we should expect from the bureau is a focus on making sure that contract arbitration requirements establish an arbitration process that is fair for the consumer as well as the company."

Industry groups praised the high court's decision.

"It's a great way for individuals to resolve disputes in an informal and speedy manner," said Gregory Taylor, a vice president and senior counsel at the American Bankers Association. "I think the court got it exactly right."

Richard Hunt, the president of the Consumer Bankers Association, said in a press release that the decision was "a win for both American consumers and companies."