Page 8 - Litigation

S8 | TUESDAY, JULY 5, 2016 | Litigation
| NYLJ.COM

Arbitration Clauses
Mandatory both sides of the debate: for the companies, a

general counsel for a large, multi-national cor-
poration is quoted saying that class actions
In Consumer Contracts are “nuclear weapons aimed at companies”
that are only “about plaintiff’s lawyers”; and
for the consumers, state judges are quoted
that class action bans are a “get out of jail
free card” for the corporations.1
And CFPB’s Proposed Rules
A plethora of actions ensued. The cases
regarding the enforceability of the mandatory

arbitrations and class action bans were decid-
ed both ways until two U.S. Supreme Court
cases in 2011 and 2013 appeared to resolve
any question whether mandatory arbitration
agreements with class action waivers would
be enforced. In AT&T v. Concepcion,2 the U.S.
Supreme Court held that California’s uncon-
scionability doctrine, which invalidated arbi-

tration agreements with class action waivers,
was pre-empted by the FAA. The other shoe
dropped when the Supreme Court decided
American Express v. Italian Colors Restaurant3
holding that class action waiver provisions in
arbitration agreements are fully enforceable,
and they cannot be struck because the cost of
proceeding on an individual basis outweighs
any potential recovery.

The issue appeared settled in favor of
enforcing the clauses, but the Dodd-Frank
Wall Street Reform and Consumer Protection
Act of 2010 made sweeping changes in the
American inancial regulatory environment in
the wake of the inancial crisis of 2007-2008.
Not only did the Dodd-Frank Act establish the
CFPB, but it prohibited arbitration agreements
in the residential mortgage market, the largest

market overseen by the CFPB.
The Dodd-Frank Act also mandated that
the CFPB conduct a study on the use of pre-
dispute arbitration clauses in consumer
inancial markets. The CFPB also received
the power to issue regulations on the use of
arbitration clauses in consumer inancial mar-
kets consistent with the result of the study if

it found that doing so would be in the public
interest and for the protection of consumers.
That study was released in March 2015, ind-
ing that arbitration agreements limit relief for
consumers. Accordingly, on May 5, 2016, the
CFPB proposed rules prohibiting defendants
from relying on arbitration clauses in defense
against class actions.
The CFPB proposed regulations that would
CK
apply to a variety of providers that are in STO
the “consumer financial markets of lend- I
ing money, storing money, and moving or
exchanging money.”4 The CFPB considered that arbitration may be less expensive and resolution and, they argue, the statistics show
whether to deine consumer credit under BY EMILY MADOFF
less time-consuming than litigation if sophis- that without the option of being a class mem-
either Equal Credit Opportunity Act and its AND MATTHEW INSLEY-PRUITT
ticated parties voluntarily agree to arbitrate ber, most consumers elect not to proceed with
implementing regulation, Regulation B, or the before a dispute arises. Almost a century later, an action. Consumer advocates argue that
Truth in Lending Act and its implementing The battle lines over mandatory arbi- the Consumer Financial Protection Bureau regardless of whether the action is individual
regulation, Regulation Z, but determined the tration clauses with class action bans (CFPB) is considering the appropriateness of or class, arbitration necessarily beneits the

Equal Credit Opportunity Act and Regulation in consumer finance contracts were foreclosing class actions and mandating arbi- more powerful litigant because it is a private
B are more inclusive since, for example, they drawn about 15 years ago. The war rages tration to resolve disputes between inancial affair with no discovery or appeals. In about
do not have exclusions for credit with four or on over requiring arbitration to settle dis- companies and their customers.
2000, the use of mandatory arbitration clauses
fewer installments and no inance charge. This putes between corporations and individuals, On the one side, consumer inance provid- with class action waivers in consumer con-
may relect an intention by the CFPB to widen and preventing consumers from iling class ers contend arbitration beneits consumers tracts proliferated and, with that, litigation
the proposal’s application. While the CFPB actions.
because disputes are decided quickly and, about their legitimacy.
repeatedly attempted to ground the proposed In 1925, Congress enacted the Federal they argue, the statistics show consumers The disputes focused particularly around
rules in established regulations with which Arbitration Act to allow corporations with recover more money per claim than they the issue of the class action ban. In Octo-

providers and courts are familiar, the pro- equal bargaining power to enforce agreements would as members of a class. They further ber 2015, The New York Times published an
posal parts with the Electronic Funds Transfer between themselves privately, considering
contend class actions beneit only the attor- article about an extensive study it had con-
Act by not including prepaid electronic fund neys, who earn large fees while the class mem- ducted, investigating the impact of the use of
transfers and store gift cards. The proposed bers receive a pittance. On the other side, arbitration clauses with class action waivers
rules exclude creditors that have fewer than EMILY MADOFF and MATTHEW INSLEY-PRUITT are consumer advocates contend consumers are in consumer contracts. Two quotes from that
25 customers in a year or are primarily a non-
partners at Wolf Popper in New York.
disadvantaged by the privatization of dispute
article demonstrate the strong feelings on