By George H. Friedman*
[ARS Chairman of the Board Friedman posted this on his blog at the Securities Arbitration Commentator. Reposted with the permission of and thanks to SAC]
As we entered the new year, I blogged on Consumer Arbitration: Five Things to look for in 2016. Among my fearless predictions was “The Arbitration Fairness Act is still DOA; so is the Investor Choice Act.” A new, albeit more focused, candidate has emerged for my DOA list, to wit the Restoring Statutory Rights Act (“RSRA”), introduced February 4th by Senator Patrick Leahy (D-VT) and co-sponsored by Senator Al Franken (D-MN). Not only do I think there’s no chance the RSRA will be approved (I’m not alone in that view, the non-partisan GovTrack Website has calculated the RSRA’s chances of being passed as 1%), but if the bill defies the odds and is somehow enacted, I’m pretty sure it will be held unconstitutional. In other words, the RSRA is not only “Dead-on-Arrival,” but if it somehow is revived, it will be “Dead Man Walking.” Or maybe the “Walking Dead.” Read on for details….
Review of the proposed Arbitration Fairness Act and the Investor Choice Act
I’ll repeat here what I said in my new year predictions blog post. Suffice it to say these bills would amend the Federal Arbitration Act (“FAA”) to ban predispute arbitration agreements (“PDAAs”) outright in consumer, securities and employment contracts. Both the AFA and ICA were reintroduced last year and have gone nowhere. They will continue going nowhere this year. Or, as Chevy Chase used to say in that old SNL sketch, the AFA and ICA “are still dead.”
Why did I make this prediction? Quoting myself from a year ago, “several attempts were made over the years to amend the FAA to limit or ban use of mandatory arbitration in consumer contracts. These failed when the Republicans controlled the White House and Congress, and met a similar fate under Democratic control of these institutions as well. For example, in 2009 the Democrats regained the White House and control of both houses of Congress. The capital markets tanked, there were the Madoff and Stanford, and other scandals, and the economy crashed. But the Arbitration Fairness Act didn’t make it out of the House Financial Services Committee, which at the time was chaired by Barney Frank, an avowed critic of mandatory PDAAs in consumer contracts. If it didn’t happen then, it’s not going to happen in 2016 with a Republican-controlled Congress.”
The Restoring Statutory Rights Act
The RSRA, S.2506, would amend the FAA as to individuals, those bringing representative actions, and small businesses to: 1) ban PDAAs covering claims for damages – and injunctive relief – involving federal statutory rights and those derived from state Constitutions; 2) amend section 2 of the FAA to include under the “grounds as exist at law or in equity for the revocation of any contract” basis for resisting a PDAA a state or federal statute or court ruling “that prohibits the agreement to arbitrate on grounds that the agreement is unconscionable, invalid because there was no meeting of the minds, or otherwise unenforceable as a matter of contract law or public policy;” and 3) state that arbitrability issues are to be resolved by courts, not arbitrators. The RSRA thus far has picked up five more co-sponsors – all Democrats – and has been assigned to the Senate Judiciary Committee, which is chaired by Senator Chuck Grassley (R-IA). The Committee Website describes him as follows: “Now in his sixth term in the U.S. Senate, this farmer-lawmaker has developed a reputation for common-sense, fiscal responsibility, government accountability, judicious legislation and constituent services.”
What’s the problem with the RSRA?
A better question is, what are the problems with the RSRA?
Nice try, but it’s doomed to the same DOA status as the AFA and ICA: Simply put, this Congress will not vote the RSRA out of committee, let alone approve it. Here’s a telling clue: to date, not a single Republican has co-sponsored any of the three bills. To be fair, whereas the AFA and ICA take a pretty broad “no PDAAs” approach, the RSRA takes a more focused approach that tries to walk through a door opened previously by SCOTUS. To review, the Supreme Court says that, where a federal statute specifically and expressly bars arbitration, the FAA’s presumption of PDAA validity and enforcement will yield to that statute’s proscription of arbitration (see CompuCredit Corp. v Greenwood, 132 S.Ct. 665 (2012)). Congress has so spoken a few times. Section 922 of Dodd-Frank amends the Securities Exchange Act of 1934 to prohibit use of PDAAs in Sarbanes-Oxley whistleblower disputes. Section 748 amends the Commodity Exchange Act in the same way. Also, Dodd-Frank section 1414 bans outright PDAAs in residential mortgage contracts. The proposed RSRA tries to take this approach. Alas, methinks it won’t work (see “if it didn’t work then…” above).
The RSRA may be unconstitutional: The RSRA would be effective for “any dispute or claim” arising after the law is enacted. Why might this part of what I think is an ill-fated bill be unconstitutional? The RSRA would retroactively invalidate untold numbers of preexisting arbitration agreements, perhaps millions. As I wrote in my article published in the Securities Arbitration Commentator, The Arbitration Fairness Act of 2013: a Well-intended but Potentially Dangerous Overreaction to a Legitimate Concern, “a legally tenable claim might be made that this aspect of the AFA runs afoul of the Fifth Amendment’s Takings Clause, which states in pertinent part: No person shall … be deprived of life, liberty, or property, without due process of law. There are property rights associated with contracts. Predispute arbitration agreements under the FAA are contracts, which stand on their own according to the Supreme Court. Thus a statute such as the AFA that retroactively invalidated contracts such as PDAAs could be subject to challenge based on an impermissible governmental ‘taking’ absent a compelling governmental interest. While the Court in the past has allowed retroactive application of laws banning, for example, contracts containing racially restrictive covenants, I am not so sure banning PDAAs would be held in the same regard, even in the face of the AFA’s explicit language on retroactivity” (footnotes omitted).
The same Constitutional problems in my opinion are present with the Restoring Statutory Rights Act. I just don’t see the necessary “compelling governmental interest” here.
Is there any hope of PDAA relief for consumers?
The proponents of the AFA, ICA, and now the RSRA are in my humble opinion, tilting at windmills if they really think this Congress will amend the FAA to ban PDAAs. As I’ve blogged before, the most realistic route to prompt mandatory PDAA relief for consumers – and I do think they need relief –is the Consumer Financial Protection Bureau (“CFPB”).
Dodd-Frank contains language governing the use of predispute arbitration agreements in consumer financial and investor contracts. Dodd-Frank created the CFPB and charged the new federal agency with studying the use of PDAAs in contracts for consumer financial products and services and addressing PDAAs “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…” For example, the CFPB can promulgate a rule that permits PDAA use, but bans class action waivers in arbitration agreements. Securities arbitration was left to the SEC, which has yet to act.
In March 2015, the CFPB issued its Final Report to Congress, finding that mandatory PDAAs are widely used in contracts for financial goods and services, and that they can be harmful to consumers. At an October 7 “field hearing” on arbitration in Denver, the CFPB announced that it will be proposing rulemaking that will: 1) ban class action waivers in arbitration clauses; and 2) require regulated financial institutions to file customer claims and Awards with the CFPB, which it may choose to publish. This will permit the Bureau to monitor these cases and, perhaps, decide down the road if further rulemaking to ban pre-dispute arbitration agreements is warranted. As I said earlier this year, I’m certain that the Bureau in 2016 will, after collecting and analyzing consumer arbitration case filing and Awards data, start the process of banning mandatory PDAAs, and it will certainly follow through on its announced intention to ban class action waivers. And there’s already a federal law expressly authorizing them to do so, as SCOTUS requires.
Sorry to be the bearer of bad tidings to the anti-mandatory arbitration folks, but that’s how I see it. You may of course disagree with me, and we can compare notes later, but in the meantime it’s better we focus on what can actually be accomplished.
*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional.
 For an in-depth analysis on what CFPB can and should do, see Friedman, George, What’s a Regulator to do? Mandatory Consumer Arbitration, Dodd-Frank, and the Consumer Financial Protection Bureau, 20:4 ABA Dispute Resolution Magazine 4 (Summer 2014), available at http://www.americanbar.org/publications/dispute_resolution_magazine/2014/summer/what-s-a-regulator-to-do–mandatory-consumer-arbitration–dodd-f.html.