By George H. Friedman*
As I expected, the Consumer Financial Protection Bureau (“CFPB”) used a “field hearing” on arbitration on May 5th to release news that it will be moving ahead with rulemaking that will ban class action waivers (“CAWs”) in consumer financial arbitration clauses. This was not a hard call. CFPB’s previously-announced intention that it would be proposing such rulemaking, and the fact that the CFPB in the past had used field hearings to make major announcements, made it an easy call. The ink was barely dry on the proposed regulation when opponents started making noises about challenging CFPB’s plans. While the law in my opinion may favor critics if they can back up their contention that the Bureau’s own research doesn’t support its plans, I’m not weighing in on the merits here. I do, however, have views on whether the Federal Arbitration Act blocks the CFPB from banning CAWs. It does not. Read on.
CFPB to ban class action waivers, but mandatory arbitration agreements are permitted if….
In a Press Release issued just before the hearing, the Bureau announced that it is moving ahead with rulemaking banning class action waivers in predispute arbitration agreements (“PDAAs”) in contracts for financial goods and services. Said the Release: “The CFPB is seeking comment on a proposal to prohibit companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it.” The proposed rule will not ban mandatory PDAAs but they are not unaffected. “Under the proposal, companies would still be able to include arbitration clauses in their contracts. However, for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposal would provide the specific language that companies must use.”
The Bureau cites three main benefits: 1) a day in court for consumers; 2) deterrent effect; and 3) increased transparency. On the latter, the Release says the proposed rules will also require business using PDAAs “to submit any claims filed and awards issued in arbitration to the CFPB. The Bureau would also collect correspondence from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to adhere to the arbitration forum’s standards of conduct. The collection of these materials would enable the CFPB to better understand and monitor arbitration. It would also provide insight into whether companies are abusing arbitration or whether the process itself is fair.”
Authority is derived from Dodd-Frank
To review, Dodd-Frank section 1028 directs the CFPB to study the use of PDAAs in contracts for consumer financial products and services and later report to Congress, and ban, limit or impose conditions on their use if such action “is in the public interest and for the protection of consumers.” What would be covered? CFPB Director Richard Cordray said that the rules if approved “would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well.” Specifically, the statute says:
Authority to restrict mandatory pre-dispute arbitration
Study and report
- The Bureau shall conduct a study of, and shall provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.
- The Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service 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 findings in such rule shall be consistent with the study conducted under subsection (a).
- The authority described in subsection (b) may not be construed to prohibit or restrict a consumer from entering into a voluntary arbitration agreement with a covered person after a dispute has arisen.
In March 2016 the Bureau issued its Final Report to Congress. Having accomplished the requirement set forth in section 1028(a), the CFPB has now moved on to exercising is section 1028(b) authority to develop regulations banning, limiting, or conditioning PDAA use. Specifically, it is attempting to establish a condition for continued PDAA use: PDAAs are permitted as long as certain conditions – including not using CAWs and being clear about this in the PDAA – are met.
The FAA allows this
Media reports surfaced almost immediately in the wake of the May 5th CFPB announcement saying that business group opponents are vowing to challenge the proposed reg because it runs afoul of the Federal Arbitration Act as interpreted and applied by the Supreme Court. To which Professor Friedman says “No it doesn’t.” A brief review of three key SCOTUS decisions demonstrates the point:
- Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983): Although the core issues in this case did not concern arbitration, dicta in Justice Brennan’s majority opinion have come to define the case. Specifically, Justice Brennan stated that by enacting the FAA, Congress established “a liberal federal policy favoring arbitration.” Fair enough, but what if there’s a potentially conflicting federal statute?
- Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991): The Court addressed in this case the issue of arbitration of claims arising out of federal statutes, this one the Age Discrimination in Employment Act  (“ADEA”). In upholding arbitration of ADEA claims, the Court laid out a three-prong test:
- Congressional intent: The burden is on the resisting party to prove that Congress did not intend these disputes to go to arbitration. Nothing in the ADEA seemed to preclude arbitration.
- Fairness of process: The Court at length reviewed the NYSE’s arbitration process, and concluded that it was “fair” (fair process, right to counsel, right to pick arbitrators, fair panel, fair amount of discovery, written award).
- Effective vindication of rights: Parties must have the opportunity to recover the same relief in arbitration that they might otherwise be able to obtain in court. The Court here said Gilmer had in the NYSE arbitration system a “fair opportunity” to recover what he might have in litigation.
In the end, the Court says that if the three-prong test is met, then the issue is reduced to “forum shifting,” meaning the employee is merely being required to resolve his/her dispute in another forum, with the same procedural fairness and outcome possibilities as in court. Fair enough, but how does a party satisfy the “Congress did not want arbitration of claims under this statute” prong?
- CompuCredit Corp. v. Greenwood, 132 S.Ct. 665 (2012): The Court in this case focused specifically on the first prong of Gilmer, i.e., the burden is on resisting party to prove that Congress did not intend these disputes to go to arbitration. The federal statute in question was Credit Repair Organizations Act (“CROA”), which contained language banning waiver of rights and also providing that injured parties can go to court to enforce their rights under the law. This, the Court held, was not enough to show Congressional intent that disputes under the CROA not be arbitrated. Instead, the Court ruled that statute must expressly bar arbitration of claims. The Court’s 8-1 decision found that the statute’s anti-waiver of rights language precludes waiver of substantive, not procedural rights, and the right to go to court is procedural. Referring to PDAAs, the Court said, “Had Congress meant to prohibit these very common provisions in the CROA, it would have done so in a manner less obtuse than what respondents suggest.”
What do these cases mean? The Supreme Court says that where a federal statute expressly bars arbitration, the FAA’s presumption of PDAA validity and enforcement will yield to that statute’s proscription of arbitration. It turns out 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, and section 748 amends the Commodity Exchange Act in the same way. Also, Dodd-Frank section 1414 bans outright PDAAs in residential mortgage contracts. Absent such an express prohibition, however, PDAAs are fair game.
The bottom line for me this this: 1) Yes the FAA established a strong federal policy in favor of arbitration; 2) However, the FAA will yield to a federal statute that expressly bars PDAA use; 3) Dodd-Frank expressly bars certain kinds of arbitration (Sarbanes-Oxley whistleblower disputes and PDAAs in mortgages, for example), but it does not expressly bar use of mandatory arbitration agreements in consumer financial contacts; 4) In fact, Dodd-Frank expressly allows CFPB to impose conditions and limitations on PDAA use if their research shows “such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers” and is consistent with the study conducted…” Therefore, as long as CFPB’s proposed class action waiver ban is supported by its research, the FAA is OK with it.
*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.
 Speaking of media reports on the proposed CFPB rule, I cannot begin to express how irritating it was to see several stories with headlines saying the CFPB was attempting to ban mandatory arbitration. As a public service, let me reiterate that the CFPB expressly is not seeking to ban mandatory arbitration agreements! The sloppy reporting is just so irritating. I think my tombstone will read “Very Slow to Really Anger, but Oh So Easily Irritated!”
 15 U.S.C. §§ 1679 et seq., available at http://www.law.cornell.edu/uscode/text/15/chapter-41/subchapter-II%E2%80%93A.
 A topic for another day!