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Arbitration Clauses in Consumer Contracts: Is There Change Afoot?

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Arbitration Clauses in Consumer Contracts

The 1925 Federal Arbitration Act (FAA) was intended to govern disputes among businesses. Today, however, it is invoked more often in consumer/business disputes. Arbitration clauses, which require contractual disputes to be handled by private arbiters rather than courts and juries, are now buried in form contracts for consumer products and services as diverse as credit cards, nursing home care, employment contracts, and web site purchases. Often, these contracts bar consumers from collective action or class action suits. Under a series of U.S. Supreme Court decisions, the FAA applies to such consumer/business contracts; affected consumers must take their claims to the arbitration forum, not the courts. So, too, the FAA preempts state laws granting consumers private rights to act individually or as classes in the courts.

Studies reveal that arbitration clauses have become pervasive over the past 10 years – especially since the 2011 Supreme Court decision in Concepcion. In the consumer financial space alone, for example, the Consumer Financial Protection Bureau found that “hundreds of millions” of consumers use financial products or services subject to arbitration agreements, such as credit cards, checking accounts, prepaid cards, and payday loans.

Arbitration Clauses Injure Consumers

Arbitration clauses seriously harm many consumers. Yet it is nearly impossible to avoid signing them, if a person wants or needs to use the internet, phone, credit cards, loans, medical or long-term care services, and so on. Some reasons forced arbitration harms consumers are:

  • Consumers are denied court hearings and jury trials
  • Case outcomes are usually kept private. This means neither the general public nor other, similarly-injured consumers will learn about them.
  • Business entities are “repeat players.” They may appear repeatedly before the same arbitration company, or even the same individual. Systemic biases favor them — for example, the arbiter might fear losing lucrative income by ruling against the entity, or may be swayed by ongoing, friendly relationships with company representatives.
  • Individual arbitrations can be very costly to consumers, who may be forced to act pro se in small-dollar, single-case injuries.
  • Unjust Enrichment? When a corporate wrong-doer faces a handful of individual arbitrations rather than a public class action, the business retains virtually all the financial gains from its wrong-doing. Only few injured consumers recover anything at all.

Changing Tides?

Lately, many state and federal government representatives, judges, politicians, and interest groups have been speaking up about arbitration. Some have publicly pulled away from upholding universal “forced arbitration.”


Federal Agencies:

Many federal agencies have issued actual or proposed rules for the entities they regulate, “chipping away” at the universal prevalence of arbitration. These include:

  • Congress explicitly required the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) to study arbitration issues in the consumer financial space, and authorized the Bureau to issue rules based on its findings, if in the “public interest and for the protection of consumers.”
  • The CFPB has proposed a new rule preserving consumer financial class actions and requiring that financial providers regularly report arbitration-related documents and information. (The 13,000 public comments from all sides related to the proposed rule make for interesting reading!)
  • The Department of Education’s March, 2016 proposal would require schools that receive federal funding to issue contracts permitting class actions in court.
  • Recent military lending rules for short-term, small-dollar loans (payday loans, car title loans) bar mandatory arbitration.
  • The Financial Industry Regulatory Authority (“FINRA”) rule requires broker/dealers agreements not to bar class actions in court.
  • The DHHS Centers for Medicare & Medicaid Services propose restricting mandatory arbitration as to nursing homes and other long-term care facilities.
  • The National Labor Relations Board (“NLRB”) interprets Section 7 of its founding Act as protecting collective worker activity, and thus as barring arbitration clauses that prevent class actions.
  • The Department of Labor’s “fiduciary rule,” which requires financial advisors to act disinterestedly in a client’s “best interest,” requires arbitration clauses not to bar court class actions.


Politicians, Research, and Polls:

Bloomberg BNA’s Class Action Litigation Report of August 12, 2016 suggests the “current political moment” may mark a political and legal “mood” more hostile to arbitration clauses and class-action bans. One factor encompasses changes in the Supreme Court composition, as well as Circuit court splits on forced arbitration. Another is growing public awareness of how these clauses impact consumers, spurred by a lengthy New York Times series of articles in November 2015, a congressionally mandated study of consumer financial arbitration recently issued by the CFPB, and rules issued or proposed by agencies limiting forced arbitration. As evidence, a national poll cited by pro-consumer blog “” shows Republicans as well as Democrats favor class action rights against financial providers by a margin of 3 to 1; many Senators and House members, state attorneys general, state legislators, law professors and scholars, The Military Coalition, and numerous consumer groups support restrictions on mandatory arbitration.

An Uncertain Future

Individual arbitration clauses are now on the radar of many attorneys, judges, politicians, regulators, journalists, and consumers. It is too soon to tell whether the new or proposed regulations and rules preserving court trials and permitting class actions for consumers will be upheld or overturned.

There is a very imminent possibility that another arbitration-related case will reach the Supreme Court. When Scalia’s vacant seat is filled, what will the Court decide? To uphold Concepcion’s interpretation of the FAA on stare decicis grounds? Or, instead, to backstop the new agency rules?

The CFPB’s proposed rule is especially important because of the tremendous number of contracts it might alter and its degree of controversy. It would provide consumers the right to file class actions in the courts and permit the Bureau greater information about the “black box” of arbitration. Industry players will likely challenge the new rule. We believe the rule stands on firm ground, because, among other things, the CFPB conducted its study and rule-making activities subject to an explicit Congressional mandate in the Dodd-Frank Act, and took a middle-ground position by preserving class actions in court without disturbing mandatory arbitration for individual claims.

Arbitration will continue to be a hot button political and legal topic in the months and years to come. We will continue to monitor and report on any changes in the world of arbitration—good or bad—that may impact consumers and consumer advocates.

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