Class Waivers in Consumer Arbitration Agreements

A "class waiver" is a contract clause requiring disputes to be resolved individually rather than in a class action. The Consumer Financial Protection Bureau plans to prohibit class waivers in consumer financial services arbitration agreements. Adding fuel to this fire is yet another NY Times article portraying aggressive businesses preying on vulnerable consumers and then depicting the class action as the only practical redress for consumers -- squelched by the dreaded arbitration clause.

The most recent article: "By inserting arbitration clauses into the fine print of consumer contracts, they have found a way to block access to the courts and ban class-action lawsuits, the only realistic way to bring a case against a deep-pocketed corporation."

Supreme Court Rules for DirectTV in Class Arbitration Case

The full text of DIRECTV, INC. v. IMBURGIA ET AL addresses whether a California choice of law clause chose California law on arbitral class waivers over federal law on them.

Commentary on the case by Georgetown Law professor Greg Klass says "all the opinion says is that when a state court is messing around with preempted state law, it should be really, really clear that it understands that in the end federal law always wins"

Arbitration Clauses in Credit Cards Not Antitrust Violation

The US Court of Appeals for the Second Circuit affirmed the trial court's ruling that the card issuers' "final decision to adopt class-action-barring clauses was something the issuing banks hashed out individually and internally", not collusively.

Chamber of Commerce Pushes Back Against CFPB on Arbitration

Today's NY Times reports:

The U.S. Chamber of Commerce and others have said the [CFPB]’s findings do not support its proposed rules. “By ignoring its own data that clearly shows major deficiencies with court-based litigation and disregards the real-world advantages of arbitration, the C.F.P.B. has demonstrated its bias for trial lawyers over average Americans,” Mr. Webb, of the chamber’s Institute for Legal Reform, said.

Considerable sums of money are at stake. Late last month, the bond-rating firm Moody’s Investors Service warned that if enacted, the bureau’s proposed rule might leave companies more vulnerable to class actions that could “force changes to company practices that cut into revenues” or “draw regulatory scrutiny.”

Separately, the NY Times writes "the Justice Department issued a proposal to protect military service members from arbitration requirements. Earlier this month, Senator Al Franken, Democrat of Minnesota and a longtime opponent of arbitration, renewed his push for Congress to pass a bill he introduced this year that would prevent companies from requiring employees to go to arbitration."

NY Times Critical of Religious Arbitration

NY Times explains "For generations, religious tribunals have been used in the United States to settle family disputes and spiritual debates. But through arbitration, religion is being used to sort out secular problems like claims of financial fraud and wrongful death."

Some examples: "Customers who buy bamboo floors from Higuera Hardwoods in Washington State must take any dispute before a Christian arbitrator, according to the company’s website. Carolina Cabin Rentals, which rents high-end vacation properties in the Blue Ridge Mountains of North Carolina, tells its customers that disputes may be resolved according to biblical principles. The same goes for contestants in a fishing tournament in Hawaii."

Good commentary on the NY Times articles by North Carolina Law Professor Mark Weidemaier

NY Times Keeps Criticizing Adhesive Arbitration Agreements

Today's criticism goes beyond yesterday's criticism in arguing that the process of arbitration is biased in favor of businesses and against individual consumers and employees.

The Times asserts that arbitration’s “rules tend to favor businesses, and judges and juries have been replaced by arbitrators who commonly consider the companies their clients.” That’s quite a strong allegation and one that I think most arbitrators would dispute. Arbitrators are supposed to be neutral and a ground for vacating an arbitration award is evident partiality of the arbitrator.

Good commentary on the NY Times articles by North Carolina Law Professor Mark Weidemaier

NY Times Attacks Adhesive Arbitration Agreements as Defeating Class Actions

Today's article describes the "soaring number of" arbitration clauses in consumer and employment contracts as the "center of a far-reaching power play orchestrated by American corporations"" "to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices."

Gee, I thought no longer doing business with companies that displease me was another option that's been working well.

Seriously, class actions seem to me a mixed bag for consumers, especially consumers who don't realize they're being damaged by sometimes-complex "illegal or deceitful business practices," so I'm skeptical of both progressives who say class actions are the only thing protecting us from disaster and businesses who say class actions are a disaster.

I don't believe the Times article cites any data suggesting consumers fare worse in arbitration than in individual (as opposed to class) litigation.

More on arbitration and class actions

Good commentary on the NY Times articles by North Carolina Law Professor Mark Weidemaier

Consumer Financial Protection Bureau Director Criticizes Arbitration Clauses Reducing Class Actions

CFPB Director Richard Cordray said pre-dispute arbitration clauses “are often buried deeply in the fine print of many contracts for consumer financial products and services, such as credit cards and bank accounts. Companies use them, in particular, to block class action lawsuits, providing themselves with a free pass from being held accountable by their customers in the courts. Companies have been able to use these obscure clauses to rig the game against their customers to avoid group lawsuits.”

Alan Kaplinsky responds: “the data in the CFPB’s arbitration study ... demonstrates that most consumers derive no benefit from class action litigation.  The threat of a class action (presumably the ‘leverage’ Director Cordray is referring to) adds nothing but a huge layer of expense in defending these largely meritless lawsuits, benefiting only plaintiffs’ attorneys.”

Consumer Arbitration Case before the US Supreme Court

In DIRECTV v. Imburgia, the California Court of Appeal rejected DIRECTV’s efforts to compel arbitration. The case will be argued in the US Supreme Court October 6. Vikram David Amar expects the SCT to reverse the California court.

American Bar Ass'n Arbitration Competition Open for Registration

The ABA Law Student Division Arbitration Competition promotes greater knowledge in arbitration by simulating a realistic arbitration hearing. Participants prepare and present an arbitration case, including opening statements, witness examinations, exhibit introductions, evidentiary presentations, and summations. Experience what it is to be a professional, competent, and ethical advocate.

To learn more about the competition

The Politics of Arbitration Law and Centrist Proposals for Reform

The Politics of Arbitration Law and Centrist Proposals for Reform is a new paper of mine, just posted. I welcome comments and suggestions to ware@ku.edu

The abstract:

Arbitration law in the United States is far more controversial when applied to individuals than to businesses. While enforcement of arbitration agreements between businesses sometimes raises legal issues that divide courts, those issues tend to interest only scholars, lawyers, and other specialists in the field of arbitration. In contrast, enforcement of arbitration agreements between a business and an individual (such as a consumer or employee) raises legal issues that interest many members of Congress and various interest groups — all of whom have taken positions on significant proposals for law reform. The Consumer Financial Protection Bureau has extensively researched and reported on consumer arbitration agreements and is expected to issue a rule regulating, or even prohibiting, such agreements.

This Article both explains how issues surrounding consumer and other adhesive arbitration agreements became divisive along predictable political lines and introduces a framework to understand and compare various positions on them. This new framework arrays on a continuum five positions on the level of consent the law should require before enforcing an arbitration agreement against an individual. Progressives generally would require higher levels of consent than arbitration law currently requires, while conservatives generally defend current arbitration law’s low standards of consent.

This Article proposes an intermediate (or centrist) position. It joins progressives in rejecting conservative-supported anomalies that enforce adhesive arbitration agreements more broadly than other adhesion contracts on the three important topics: contract-law defenses, correcting legally-erroneous decisions, and class actions. Once these anomalies are fixed though, adhesive arbitration agreements should — contrary to progressives — be as generally enforceable as other adhesion contracts. In other words, this Article joins conservatives in defending general enforcement of adhesive arbitration agreements under contract law’s standards of consent. The Article briefly concludes with the language of a rule the CFPB could adopt to enact into law the reforms advocated in this Article

CFPB Timetable for Possibly Regulating Arbitration

Ballard Spahr's Bowen Ranney reports Consumer Financial Protection Bureau Director Richard Cordray said that the CFPB was “moving ahead” with rulemaking efforts that would address pre-dispute arbitration agreements in consumer financial products or services and “in due course” the CFPB would convene “a small business review panel as the first step” in the rulemaking process.

Arbitration Fairness Act of 2015

The Arbitration Fairness Act would prohibit pre-dispute arbitration agreements in a range of consumer, employment and other contracts. It has been introduced in Congress over many years and again in 2015. Plaintiffs' lawyer Jere Beasley discusses.

Uber Arbitration Agreement Held Unconscionable

Uber was sued by its drivers and sought to compel arbitration of that suit. A California federal court refused to enforce the delegation clause (which said questions concerning the enforce-ability of the arbitration clause would be resolved by the arbitrator) and then held the arbitration clause substantively unconscionable because: it eliminates plaintiffs’ right to bring certain claims in any forum; has an impermissible fee-shifting clause; and “permits Uber to litigate the claims most valuable to it in court . . . while requiring its drivers to arbitrate those claims. . .they are most likely to bring against Uber,”

Employment Arbitration Growing to Defeat Class Actions

The Wall Street Journal reports "The percentage of companies using arbitration clauses to preclude class-action claims soared to 43% last year from 16% in 2012, according to a survey of nearly 350 companies conducted by management-side law firm Carlton Fields Jorden Burt LLP." "Lawyers agree that a 2011 Supreme Court case, AT&T Mobility v. Concepcion, gave employers confidence that courts would uphold class-action waivers." The Wall St. Journal suggests the arbitral class waivers are lowering employers' litigation costs: "Class-action suits from workers cost employers $462.8 million in 2014, down from $598.9 million in 2011." The Journal article also suggests one issue in many of these cases is whether the employees are in fact employees are actually independent contractors. One lawyer for employees/contractors, Shannon Liss-Riordan, "is trying to wear down Arise by bringing claim after claim from different contractors. An arbitrator in Texas ruled in favor of one Arise worker in February, awarding her full damages and requiring Arise to pay her legal fees. Ms. Liss-Riordan hopes the company will decide facing dozens of individual cases is no longer
in its interests."

NYTimes Accuses Arbitration of Screwing the Troops

As the Times puts it:

Sergeant Beard had no redress in court: His lawsuit against the auto lender was thrown out because of a clause in his contract that forced any dispute into mandatory arbitration, a private system for resolving complaints where the courtroom rules of evidence do not apply. In the cloistered legal universe of mandatory arbitration, the companies sometimes pick the arbiters, and the results, which cannot be appealed, are almost never made public.

Strange that the article says "arbiter" rather than "arbitrator." More substantively, what would be the plus of evidence rules? What stops a party from making his or her arbitration award public? What example does the article give of "companies sometimes pick the arbiters"?

Indian Tribes Aid Payday Lenders' Arbitration Escape From Bankruptcy Court

Several Indian tribes have formed tribal lending entities (TLE) that lend over the Internet to consumers nationwide, usually on terms that are unlawful under the internal laws of the states where the borrowers reside, according to a well-written piece by Hilary B. Miller in Business Law Today.

While states may be powerless to regulate TLEs, the Consumer Financial Protection Bureau has asserted publicly that it has authority to regulate tribal payday lending, according to Miller.

TLEs will certainly argue that they should not fall within the ambit of the Act. Specifically, TLEs will argue, inter alia, that because Congress did not expressly include tribes within the definition of "covered person," tribes should be excluded (possibly because their sovereignty should permit the tribes alone to determine whether and on what terms tribes and their "arms" may lend to others). Alternatively, they may argue a fortiori that tribes are "states" within the meaning of Section 1002(27) of the Act and thus are co-sovereigns with whom supervision is to be coordinated, rather than against whom the Act is to be applied.

The relevance of this to arbitration is that the CFPB has the power to regulate, or even ban, arbitration clauses in consumer financial services contracts.

The Fourth Circuit recently enforced an arbitration clause by a TLE, despite the borrower's bankruptcy.

The Loan Agreement provided, however, that it was "governed by the Indian Commerce Clause of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe" and that "no United States state or federal law applies to this Agreement."

The Loan Agreement also provided that any disputes relating to it were to be resolved by arbitration, "which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative" (emphasis added), and it gave Moses the right to designate either the American Arbitration Association or JAMS "to administer the arbitration" in accordance with its rules and procedures "to the extent that those rules and procedures do not contradict either the law of the Cheyenne River Sioux Tribe or the express terms of this Agreement to arbitrate." ... Courts that have considered loan agreements similar to the one at issue here have found that the Cheyenne River Sioux Tribe has no laws or facilities for arbitration and that the arbitration procedure specified is a "sham from stem to stern." 

One judge wrote "I do not hesitate to observe the odiousness of CashCall's apparent practice of using tribal arbitration agreements to prey on financially distressed consumers, while shielding itself from state actions to enforce consumer protection laws."

Moses v. Cashcall  is a complex case because it involves tension between the Federal Arbitration Act and the Bankruptcy Code, as well as issues of tribal sovereignty. Courts often find that the FAA yields to bankruptcy when the claim in question is a "core" bankruptcy matter but the arbitration agreement is enforced with respect to non-core claims.

The complexity of this case Moses v. Cashcall, is suggested by the fact that no pair of the three circuit judges agreed with each other. One judge wanted to enforce the arbitration clause with respect to both claims, another judge wanted to enforce the arbitration clause with respect to neither claim, and the third judge wanted to enforce the arbitration clause with respect to the non-core claim but not the core claim, which ends up being the ruling of the court.

So the “who decides?” issues include both whether to send the core and non-core claim to different adjudicators and whether a claim that could be sent to functioning arbitration should not be sent to Cheyenne River Sioux arbitration because as Judge Niemeyer wrote, “the Cheyenne River Sioux Tribe does not authorize arbitration and consequently has no authorized arbitrators or consumer dispute rules.”

CFPB Study of Consumer Arbitration

Today, the Consumer Financial Protection Bureau released a study indicating that arbitration agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions. The report found that, "in the consumer finance markets studied, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements."

Other findings:

"in the credit card market, card issuers representing more than half of all credit card debt have arbitration clauses"

"Consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits per year on average in the markets studied"

"it is rare for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to block class actions"

"The CFPB found no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses"

New Regulations on Consumer Arbitration Agreements

The Consumer Financial Protection Bureau is expected to announce new policies on consumer arbitration this Tuesday March 11.

The Washington Post writes "The CFPB’s report, ordered under the Dodd-Frank Wall Street Reform and Consumer Protection Act, is widely expected to lead to new rules limiting how companies can use mandatory arbitration clauses, consumer advocates say. The timing of the release of the report was confirmed by people familiar with the matter who spoke on condition of anonymity because the research has not yet been made public."

Religious Arbitration

Arbitration's Counter-Narrative: The Religious Arbitration Paradigm by Pepperdine Law Professor Michael Helfand argues that religious arbitration "holds the hope of unlocking the transformative potential of arbitration, enabling parties to employ arbitration not simply as an expedient venue for resolving disputes, but as an alternative forum that can breathe life into mutually shared values." That is because in religious arbitration parties "select religious authorities to resolve disputes in accordance with religious law. And, as a result, these forms of arbitration are embraced not solely as a utilitarian mechanism to resolve a dispute, but because they enable parties to resolve a dispute in accordance with shared religious principles and values."

I agree and see this as an example, a particularly powerful example, of privatizing law, i.e., parties opting out of the law provided by government and using privately-created law. I have written that this privatizing potential of arbitration is widespread and believe it occurs outside just religious arbitration.

New Mexico Court Declines to Enforce Consumer Arbitration Clause

The New Mexico Court of Appeals decision is linked and praised by Paul Bland of Public Justice who points out that the arbitration clause carved-out (for litigation, rather than arbitration) claims likely to be brought by the business drafting the clause.