How Arbitration Swallowed up Consumers' Ability to Bring Lawsuits
Ideological split in arbitration field will lead to confrontation between SCOTUS and CFPB
Reprinted with permission from the February 12, 2016 issue of the New Jersey Law Journal. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
Not unlike our current political landscape, the arbitration field is now split by ideology. For two generations now, dating back to the U.S. Supreme Court's 1967 decision in Prima Paint, which carved out the way for modern arbitration law, the virtues of arbitration as a means of "alternative" dispute resolution have been extolled. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). No messy discovery fights, no appeals, experienced arbitrators—essentially a "one and one" means of resolving disputes.
So it was said and so it largely remains for business-to-business disputes. But a funny thing happened on the way to arbitration's popularity: it became a means of swallowing up consumers' ability to bring any lawsuits. In a one-two punch that has been wholly upheld by three U.S. Supreme Court opinions in a row, commercial interests have succeeded in (1) inserting arbitration clauses into their commercial contracts, and then (2) prohibiting class actions from being arbitrated. The only suit a consumer can bring is over her specific grievance. Since, as Justice Breyer aptly put it in a dissent to one of these cases, "only a lunatic or fanatic sues for $30," the result is the effective elimination of consumer lawsuits. AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1761 (2011) (quoting Carnegie v. Household Int'l, 376 F.3d 656, 661 (7th Cir. 2004)).
This did not go unnoticed. In the fall of 2015, the New York Times devoted a three-part front-page series to the issue, featuring snapshots of individual consumers left without a remedy. Taking a similar line, the Consumer Financial Protection Bureau (CFPB) issued a study criticizing the alleged abuses spawned by the prohibition on class action bans, and on Oct. 7, 2015, announced that it is considering a rule that would bar consumer financial companies from prohibiting consumer class action litigation.
No sooner did the Times series run and the CFPB make its announcements that the Supreme Court struck again. Unfazed by any alleged outcry about consumer rights, the Supreme Court this past December issued the third of what may be called the "anti-class action trilogy." Assuming the CFPB proceeds with its proposed rulemaking, it will be heading into a judicial buzz saw. The upcoming confrontation is likely to shape arbitration contracts, in the Third Circuit and elsewhere.
The Supreme Court Trilogy
The Federal Arbitration Act (FAA) provides that an agreement to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. §2. As commercial interests started inserting arbitration clauses and then (as the case law developed) class action bans into those arbitration clauses, the "save upon such grounds" language developed as an area in which to attack those clauses.
Three times since 2011 these attacks were launched, and three times rebuffed. First, in AT&T Mobility v. Concepcion, the Supreme Court held that a California state law that prohibited arbitration class action waivers was itself invalid since it was pre-empted by the FAA. Next, in American Express v. Italian Colors Restaurant, 133 S. Ct. 2304, 2307 (2013), the Supreme Court rejected an argument that imposing the class action ban would render it practically impossible for the plaintiff to hire an expert economic witness. The plaintiff had argued that its inability to retain this witness would preclude the "effective vindication" of the plaintiff's right to bring an antitrust action. Most recently, in DIRECTV v. Imburgia, 136 S. Ct. 463 (2015), the court found that the FAA pre-empted a state court's invalidation of a class action ban where the state court had projected that enforcement of the ban would violate the "law of the state."
The Third Circuit has understandably toed the SCOTUS line. In Opalinski v. Robert Half Int'l, the Third Circuit adopted the Supreme Court's view in Concepcion that "[a]rbitration is poorly suited to the higher stakes of class litigation," and that classwide arbitration "is not arbitration as envisioned by the FAA." Id. at 334 (quoting Concepcion 131 S. Ct. at 1750, 1751-53). After DIRECTV, the Third Circuit in January 2016 held that "[t]he legislative history of the FAA … contains nothing that contemplates the existence of class arbitration." Chesapeake Appalachia v. Scout Petroleum, No. 15-1275, 2016 U.S. App. LEXIS 42, at *46-47 (3d Cir. Jan 5, 2016).
The Consumer Rights Dissent, In and Out of the SCOTUS
The phone bill at issue in Concepcion was $30.22, prompting the above dissent from Justice Breyer about how only lunatics or fanatics sue over such small amounts. Justice Breyer cut to the heart of the economics of litigation consumer suits: consumers will not bring them on their own and lawyers will not take them unless they can be consolidated. "The realistic alternative to a class action is not 17 million individual suits, but zero individual suits." Concepcion, 563 U.S. at 365 (quoting Carnegie, 376 F.3d at 661). Justice Kagan was equally blunt in dissent in Italian Colors, stating that the majority had made pursuit of antitrust rights in that case "a fool's errand," and the majority found this "too darn bad." Italian Colors, 133 S. Ct. at 2313. Justice Ginsburg's DIRECTV dissent alleged that the trilogy and its progeny "have predictably resulted in the deprivation of consumers' rights to seek redress for losses, and, turning the coin, they have insulated powerful economic interests from liability for violations of consumer-protection laws." DIRECTV, 136 S. Ct. at 477. This echoed the New York Times allegation that "companies [have] devised a way 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 practice." N.Y. Times, Nov. 1, 2015, p. A1, col. 5.
The CFPB's Proposal
In the midst of this came the CFPB. It announced that it is considering a rule prohibiting consumer financial companies from banning class actions. The CFPB announced further that it is relying for this authority on authorization provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act, in which Congress created the CFPB and gave it authority over financial products such as credit cards, bank accounts, money transfer services, auto loans and private student loans.
In section 1028 of Dodd-Frank, Congress required the CFPB to report on, and issue regulations about, "conditions or limitations on the use of an agreement … providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers."
The CFPB embraced this invitation and issued a report in March 2015. In a passage far more Ginsburg than Scalia, the CFPB found that "arbitration clauses restrict consumers' relief for disputes with financial service providers by allowing companies to block group lawsuits." "CFPB Considers Proposal to Ban Arbitration Clauses that Allow Companies to Avoid Accountability to Their Consumers" (CFPB Oct. 7, 2015).
That foreshadowed the CFPB's own two-step punch. With the study issued, the CFPB announced on Oct. 7, 2015, that it would consider a proposal that would "ban consumer financial companies from using 'free pass' arbitration clauses to block consumers from suing in groups to obtain relief." The CFPB's proposal would require arbitration clauses "to say explicitly that they do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court."
The Looming Showdown
The CFPB's forthcoming rules will likely head to a showdown with the trilogy that will itself have to be resolved by the SCOTUS. The probable scenario would be: (a) consumer sues in court; (b) commercial entity moves for dismissal based on arbitration clause; (c) arbitration clause is struck down in lower courts based on CFPB rule; and (d) commercial entity challenges that strike down as contrary to the trilogy.
To date, the arbitration battles have been fought on the frontiers of contract law and federalism. The CFPB rulemaking battle will open a new legal front: administrative law. The CFPB will likely take the position that since it acted pursuant to Congress' directive under Dodd-Frank, any such formal rulemaking action would be entitled to deference under the Chevron standard. Chevron, U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 843-44 (1984) (entitling agency to deference even under ambiguous statutory authority). This position finds support in Section 1022 of Dodd-Frank, which reiterates the CFPB's authority "as if the Bureau were the only agency authorized to apply, enforce, interpret, or administer the provisions of such Federal consumer financial law."
Opponents will likely argue that the CFPB exceeded its Chevron mandate by acting in a manner expressly contrary to SCOTUS precedent. If Congress wants to attack class action bans, then it can amend the FAA, not circumvent its application through rulemaking. Opponents are also likely simply to argue the merits of class action bans as providing efficiency in dispute resolutions. See Letter from Senator McHenry et al to Richard Cordray, CFPB (June 17, 2015) available atwww.aba.com/Tools/Ebulletins/Documents.
Since the CFPB has not yet issued a notice of proposed rulemaking, this resolution will not play out for several years. The Third Circuit may be a waystation on the journey to the confrontation between trilogy and agency. Meanwhile, class action bans in arbitration clauses will remain enforceable. If the ultimate rulemaking provides for "grandfathering" then entities doing business with consumers are advised to write these in now more than ever.
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