CFPB Arbitration Plan Provokes Dubious Industry Claims

Industry advocates say they oppose regulatory restrictions on arbitration clauses because arbitration is superior to litigation in resolving disputes. You might expect that they would favor arbitration in the vast majority of cases. But the evidence suggests the industry is merely out to block class-action lawsuits.

Upon the release last month of the Consumer Financial Protection Bureau's proposed restrictions, CFPB Director Richard Cordray said arbitration clauses give businesses a "free pass" to evade accountability to their customers. The clauses say that disputes will be resolved in arbitration rather than litigation, which may appear innocuous enough, but what gives them added significance is that they block the use of class actions.

Because consumer claims are often for small amounts and the cost of arguing cases is high, many consumer disputes can affordably be decided only in class actions — in which the expense of litigation can be shared by many plaintiffs. That means class actions are sometimes the only vehicle for enforcing consumer protection laws. But businesses can prevent the use of class actions by employing arbitration clauses that waive the right to bring group claims.

In short, companies can use class-action waivers to block consumer protection laws unless consumer protection laws find a way to block class-action waivers.

That way now exists. Congress gave the CFPB the power to regulate arbitration clauses in consumer financial contracts. In March, the bureau issued its study showing that litigation offers consumers significant advantages over arbitration. The industry forcefully disagreed, arguing that arbitration should not be regulated because arbitration is better for consumers than litigation. For example, last summer, the American Bankers Association and other industry trade groups submitted comments to the CFPB stating "arbitration has significant, demonstrable benefits over litigation in general and class action litigation in particular."

The trade organizations predicted that consumers would be harmed if the bureau acted. They argued that "if the Bureau were to … prohibit the use of class action waivers in such agreements, as some parties advocate, many companies are likely to discontinue offering arbitration to consumers. That outcome would harm consumers, as they would be deprived of a valuable and time-tested procedure for economically, expeditiously, conveniently, and efficiently resolving individual consumer disputes."

Last month, the bureau made public a proposal to block class-action waivers in arbitration clauses. A leading advocate for arbitration in the financial industry, Alan Kaplinsky, responded with an even clearer forecast of how the industry would respond: "We firmly believe that, should the CFPB enact its proposal to ban class action waivers, most companies will abandon arbitration with the result that arbitration will no longer be available as a quick, efficient and inexpensive way of resolving disputes."

But if the industry truly believes that arbitration is so much better than litigation at resolving disputes, shouldn't it prefer arbitration to litigation for resolving individual disputes, where there is not a threat of a class action? Or should we be shocked, shocked, to discover the industry's love of arbitration is about barring class actions?

There is not a lot of research on what businesses would do if they could use arbitration in consumer disputes but not to prevent class actions. (The CFPB proposal would still allow arbitration in individual claims, but the agency would monitor arbitrations in such cases to assess the fairness of the process.)

However, some evidence from other types of disputes suggests the industry is not as enamored with arbitration as it claims. A recent paper by Cornell Law School's Theodore Eisenberg and two other authors shows that companies are far less likely to insert arbitration clauses in business-to-business contracts – where class actions pose little threat.

Actions speak louder than words, and the actions of businesses show that they prefer litigation to resolve disputes when class actions are removed from the equation.

Jeff Sovern is a professor of law at St. John's University School of Law in New York City and co-coordinator of the Consumer Law and Policy Blog.