The War Against Pre-Dispute Arbitration Clauses Rages On


By: John H. Goselin, II and Benjamin Keck

On March 10, 2015, the Consumer Financial Protection Bureau (CFPB) released a 728-page “Arbitration Study.” According to the CFPB’s Arbitration Study, which primarily focused on credit card contracts, consumers are generally unaware of whether or not their credit card agreements include arbitration clauses. CFPB concluded that most consumers, subject to arbitration clauses, wrongly believe they can participate in class action lawsuits, despite the fact that nearly all arbitration clauses now include provisions prohibiting the consumer from participating in such actions.

In the class-action cases involving credit cards, corporate defendants filed motions to compel arbitration in about 2/3 of the cases. In contrast, the arbitration clauses are invoked in under 1% of individual cases. Most arbitration clauses have “carve-outs” for small-claims cases, which are far more likely to be filed by the company than the other way around.

CFPB’s study was mandated by Congress when this new agency was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The CFPB’s regulatory focus is primarily on consumer lending products such as mortgages, credit cards, student loans, and auto loans, but also appears to reach such products as prepaid wireless phones. The CFPB’s findings seem to support what many consumer advocates have been arguing for years: that the primary purpose of mandatory arbitration clauses in consumer contracts is to shield corporate defendants from class-action lawsuits.

The Securities and Exchange Commission (SEC) remains the primary regulator for broker-dealers and investment advisors, but the SEC was also directed by the Dodd-Frank Act to study the impact of mandatory arbitration clauses in the financial sector. After five years, the SEC still has not issued a report. The Public Investors Arbitration Bar Association (PIABA), the trade group for plaintiff’s lawyers who sue broker-dealers and investment advisors, wants the SEC to follow the CFPB’s lead and make negative findings against mandatory arbitration.

The big question going forward is whether the CFPB study and the pending SEC study will result in any substantive changes in the way business is conducted. The battle lines are drawn regarding whether mandatory arbitration continues as a viable method for corporate America to contain the costs of litigation or whether consumer advocates will get their way and open the doors for more litigation in state and federal courts.  The studies are just the early rounds in the ongoing battle of wills. Stay tuned!