A Midyear Assessment of My 2017 Arbitration Predictions: Look, Mom. Straight “A” Grades So Far
By George H. Friedman*
Chairman of the Board – Arbitration Resolution Services
Toward the end of last year, I authored a blog post, Consumer and Employment Arbitration: Six Things to look for in 2017. I updated my prognostications around Inauguration Day in Trump in Charge – What Does It Mean for Arbitration? As I’ve said many times before, one of the nice things about predicting future events is that, while people can disagree with you, they cannot state categorically that you are wrong, unless they claim to be time travelers. Also, it takes dedication and a good memory to wait a long time and then go check to see how the predictions turned out. I, however, was a fan of the late Ed Koch, former mayor of New York City, who constantly would ask “How am I doing?” Channeling Mayor Koch, let’s see how I’m doing so far. Spoiler Alert: As Larry David says, “Pretty, pretty, pretty, pretty good.
Here were my views on what was coming in 2017, and how they are turning out so far as we hit the year’s midpoint. Core predictions are in bold/italic:
- We Will Have a President Who Likes and Uses Arbitration!
What I wrote: As I’ve blogged before, President Trump believes in arbitration and uses the process. In 2012, he won $5 million in a dispute with a former Miss USA contestant who defamed the pageant, which he owned. President Trump in 2015 filed an arbitration claim against NBC after the network cancelled a contract to televise the Miss USA and Miss Universe pageants. He also won an Internet domain name arbitration, back in 2010. And I read in the Indisputably blog that even Mr. Trump’s agreement with campaign volunteers had a PDAA giving the campaign the unilateral right to require arbitration of disputes.
What I Predicted: Look for Executive Orders expanding use of arbitration by the federal government, and EOs undoing President Obama’s anti-arbitration directives. Nothing that has transpired since the election has caused me to change my views. In fact, as demonstrated by my updates below, I have no doubts at all about this prediction. I wouldn’t be surprised if some of President Trump’s pro-arbitration EOs are signed before this blog post is published. For example, President Obama in July 2014 signed Executive Order 13673, barring companies with federal contracts valued at over $1 million from mandating arbitration of Title VII or sexual harassment or assault claims. That one is a goner for sure.
What happened: Spot on! See below, where I discuss regulatory developments and Justice Gorsuch’s nomination and confirmation. Also, the Trump Administration Department of Justice has been switching sides in some court cases, taking positions against those taken by federal agencies. In PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (D.C. Cir. 2016), the DOJ’s Amicus Brief filed last March ahead of the en banc oral argument held May 24th took a position against the Consumer Financial Protection Bureau (“CFPB”). Also, the Acting Solicitor General on June 15th filed an Amicus Brief siding with the employers and against the National Labor Relations Board (“NLRB”) in Epic Systems Corp. v. Lewis, 137 S. Ct. 809 (2017), three cases pending at the Supreme Court involving whether the Federal Arbitration Act prevails over the National Labor Relations Act when it comes to enforcing class action waivers in employment arbitration agreements. The case is set for oral argument next Term and, like the CFPB, the NLRB will now have to represent itself, reminding me of a scene from “Blazing Saddles.”
- All the Anti-Arbitration Legislation is Really DOA
What I predicted: These anti-arbitration bills will die when this Congress fades to black the end of this year. And there is zero chance they will be enacted in the new Congress. And if any of them are reintroduced and by some miracle enacted, President Trump will surely veto the legislation, with no chance at an override.
What Happened? As predicted, all these bills went nowhere and died when the last Congress adjourned. The Democrats have introduced several anti-arbitration bills in the new Congress, as described in my blog post, Baseball Season is Here! You Can’t Tell the Anti-Arbitration Bills Without a Scorecard. As I said, the lone bill I think has a chance at enactment is the Justice for Servicemembers and Veterans Act (S. 646; H.R. 2631), not only because it is narrowly focused, but also because the last iteration of bill actually garnered Republican support – unlike any of the other anti-arbitration bills introduced in the last Congress. I think a bill perceived as protecting servicemembers will have bipartisan appeal, and President Trump clearly supports the military. Thus, this bill might have a chance at becoming law. I say, ‘perceived as’ immediately above, because I don’t agree with the premise that arbitration is an inferior form of justice. After all, SCOTUS requires that claimants in arbitration be able to effectively vindicate their statutory rights.
- SCOTUS’ Support for Arbitration Will Continue Unabated
What I wrote: With the current Supreme Court vacancy and because some of the major cases involving arbitration were 5-4 decisions, a Clinton victory might have portended a shift away from the Court’s long-standing support of arbitration and the FAA. For example, potential Clinton nominee Senator Elizabeth Warren has been a long-term critic of mandatory arbitration. Any Warren nomination is now off the table, as is Judge Merrick Garland’s nomination.
What I Predicted: While at this point it’s hard to suggest a single name – who may or may not come from the list compiled by candidate Trump – it’s a safe assumption in my view that whoever it is will be supportive of arbitration. Also, it’s a sure bet SCOTUS will grant certiorari in one of the four cases involving whether the Federal Arbitration Act trumps (sorry) the National Labor Relations Act when it comes to enforcing arbitration agreements. Also, the Court in late October granted certiorari in another preemption case, this one involving an arbitration agreement in a nursing home admission agreement signed by an attorney-in-fact. The case on appeal is Extendicare Homes, Inc. v. Whisman, 478 S.W.3d 306 (Ky. 2015), reh. den. (2016). The petition for cert. was granted without explanation in an Order dated October 28th (see case no. 16-32, sub nom. Kindred Nursing Centers v. Clark, page 1). I predict that SCOTUS will reaffirm the preemptive effect of the FAA over state laws limiting arbitration.
What Happened? Spot on! 1) President Trump nominated and the Senate confirmed the pro-arbitration Justice Neil Gorsuch; 2) SCOTUS granted certiorari in Lewis; and 3) the Supreme Court held 7 – 1 in Kindred that a Kentucky rule of law requiring that a power of attorney specifically authorize nursing home agreements to arbitrate was preempted by the Federal Arbitration Act.
- Expect Dodd-Frank to be Repealed and Replaced
What I Wrote: On September 9, Financial Services Committee Chairman Jeb Hensarling (R-TX) introduced the Financial CHOICE Act, H.R. 5983. If enacted, the 513-page legislation would have had far-ranging impact. Dodd-Frank would have been essentially repealed and replaced. For example, a Committee Release from last June announcing the plan to introduce the CHOICE Act promised to “fix the Dodd-Frank-Volker Rule… Concocted in 2010, the rule was designed to prevent banks from engaging in proprietary trading. Of course, not one of the 450 institutions that failed in 2008 and 2009 failed due to proprietary trading.”
What I Predicted: While this bill will not be enacted in 2016 because of the certainty of a presidential veto, look for something like it to reintroduced in 2017 and likely enacted. The current law’s authority for SEC and CFPB to possibly develop regulations banning, limiting, or conditioning predispute arbitration clauses will not make the cut, in my view… On balance, I think President-elect Trump will fulfill his campaign promise to repeal Dodd-Frank and replace it with another statute that will incorporate some features of Dodd-Frank.
What Happened: Another “A” grade (so far). On June 8th the House of Representatives by a 233–186 strictly party-line vote approved the Financial CHOICE Act. Not a single Democrat voted “Yea” and only one Republican – Rep. Walter Jones (NC) – voted “Nay.” To review, among other things, the 602-page Act (H.R. 10) would repeal and replace Dodd-Frank, and would eliminate the authority granted to both the CFPB and SEC to limit or eliminate predispute arbitration agreements, or set conditions for their use. Also, the Act would rename the Consumer Financial Protection Bureau the Consumer Law Enforcement Agency and transform it into an executive agency with a Director terminable at will by the President.
- Expect Less Regulation – Starting with the CFPB
What I Wrote: President-elect Trump promised there will be less regulation, starting on January 20 when he intends to issue Executive Orders rolling back many of President Obama’s EOs, and declaring a temporary moratorium on new regulations. Regulatory burdens not assailable by EOs will be addressed by orders to the new agency heads to initiate corrective rulemaking.
What I Predicted and What Happened:
- Department of Education: The DOE in late October issued final regulations that would have banned mandatory predispute arbitration agreements and class action waivers in college enrollment agreements for schools receiving federal financial aid for student borrowers.
What I Predicted: I see the reg going back to the drawing board.
What Happened: The Department of Education published a Notice on June 16 announcing that it was postponing indefinitely the planned July 1 effective date of the regulation.
- Centers for Medicare and Medicaid Services: The agency issued a final regulation on September 28th banning nursing homes and long-term care facilities receiving federal funds from using mandatory predispute arbitration agreements.
What I Predicted: This regulation has already been enjoined, and now comes word that CMS is appealing. The very brief January 5th Notice of Appeal states that the agency and individual representative Defendants “hereby appeal to the United States Court of Appeals for the Fifth Circuit from this Court’s Order of November 7, 2016 (Docket No. 44), which granted the plaintiffs’ motion for a preliminary injunction.” No matter; one can bet that President Trump will direct the agency to drop its opposition.
What Happened: On June 2nd, CMS dropped its appeal and on June 5 published in the Federal Register an amended regulation eliminating the ban on predispute arbitration agreements and establishing fairness requirements for PDAA use.
- Department of Labor – Employment Contracts: President Obama signed the Fair Pay and Safe Workplaces Executive Order 13673 in July 2014 barring companies with federal contracts valued at over $1 million from mandating arbitration of Title VII or sexual harassment or assault claims; a slightly revised Order was issued last August. The Department of Labor issued Final Guidance and the Federal Acquisition Regulatory Council published the Final Rule a day later. In late October, implementation of the rules was enjoined.
Prediction: Look for the Obama EOs to be rescinded and the agency to drop its opposition to the injunction.
What Happened: Exercising its authority under the Congressional Review Act (“CRA”), 5 USC §§ 801-808, the House of Representatives on February 2nd passed House Joint Resolution 37, to invalidate the Fair Pay & Safe Workplaces rule issued on August 25, 2016. It was then passed by the Senate on March 6, and signed by President Trump on March 27th, along with several other nullifications. The rule is now rescinded and a like regulation in “substantially the same form” cannot be promulgated thereafter unless specifically authorized by Congress. Moreover, disapproval under the CRA is retroactive; subsection (d) provides: “Any rule that takes effect and later is made of no force or effect by enactment of a joint resolution … shall be treated as though such rule had never taken effect.” A Statement of Policy issued February 1 by the White House says: “The rule would bog down Federal procurement with unnecessary and burdensome processes that would result in delays, and decreased competition for Federal government contracts…. The Administration is committed to reducing onerous regulatory burdens on America’s businesses and using existing authorities to continue enforcing the Nation’s workplace laws.”
- Department of Labor – Fiduciary Standards: The Department in April 2016 approved a fiduciary standard rule for those providing investment advice in connection with retirement accounts. The regulation allows for use of a Best Interests Contract (“BIC’) with investors containing a predispute arbitration agreement, but class action waivers are not
What I Predicted: Hard to see where President Trump will land on this one, but the Reg is viewed as anti-business, so I don’t think it’s long for this world.
- What Happened: Several courts denied applications seeking an injunction asserting that DOL exceeded its authority under the Administrative Procedure Act. President Trump on February 3rd ordered the Secretary of Labor to undertake a review of the DOL’s fiduciary rule, that had been scheduled to go into effect in phases starting April 10 for those offering advice on retirement accounts. The DOL announced on April 4th that it was delaying for 60 days the rule’s implementation. However, the first phase of the fiduciary standard rule went into effect starting June 9th for those offering retirement investment advice. Other aspects of the rule become operational in January 2018. The DOL’s rule is still under the review ordered February 3 by President Trump. Also, the SEC has taken the first steps on moving ahead with its own rule, as authorized by Dodd-Frank section 913(g)(1). Chairman Jay Clayton’s June 1 Statement, announcing that the SEC is seeking public comments on developing a consistent approach to investment advice standards, expressed the Commission’s willingness to work with DOL on a consistent approach.
- Consumer Financial Protection Bureau: 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 to 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? Any regulation “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.”
After issuing the required Report to Congress in March 2015, the CFPB in May 2016 issued a proposed rule that would: 1) ban class action waivers in predispute arbitration agreements in contracts for consumer financial goods and services; and 2) require regulated financial institutions to file customer claims and awards data with the CFPB, which the Bureau may choose to publish.
What I Predicted: I believe President Trump will terminate Director Cordray, acting under authority of the PHH case. The new CFPB Director I suspect will be much more arbitration-friendly, and I believe the reg will go back to the drawing board.
What Happened: As discussed above, the PHH case was reheard en banc in late May, but no decision has yet been rendered. In that now-vacated original decision, a divided D.C. Circuit had held that the CFPB’s structure, which has a single Director with virtually unlimited, unchecked authority, was unconstitutional. The Court had directed that the CFPB be restructured to make the director terminable-at-will by the President. The CFPB received over 50,000 comments on the proposed arbitration rule, and was intending to finalize it last February. However, no final rule has issued, and Director Cordray still has his job. We’ll see what the rest of the year brings, but of this I am certain: if the CFPB issues its final arbitration rule, it will be subjected to Congressional disapproval and nullification.
- Financial Arbitration – New Love for FINRA Arbitration?
What I Wrote: DOL acted favorably – at least neutrally – about PDAAs in Best Interest Contracts for ERISA accounts when all these other federal regulatory agencies were taking hostile action. Perhaps the Department sees the securities business as a case apart? Right now, CFPB, DOL, and SEC/FINRA have a consistent approach to the financial arbitration area: PDAAs are OK but class action waivers are not. I point out here that this is precisely the approach FINRA has taken for years in Rule 2268(d), and Rule 12204(d). The latter provides that an industry party “may not enforce any arbitration agreement against a member of a certified or putative class action with respect to any claim that is the subject of the certified or putative class action until: the class certification is denied; the class is decertified; the member of the certified or putative class is excluded from the class by the court; [or] the member of the certified or putative class elects not to participate in the class or withdraws from the class …”
What I Predicted: I’ve said for years FINRA has very consumer-friendly rules. Given the new political landscape, I believe opponents of arbitration will give up the anti-arbitration ghost and instead focus on ensuring a fair process incorporating the many consumer protections in FINRA’s arbitration rules [examples provided]. I now think that the Commission probably will finally act in 2017 by doing a study of FINRA arbitration using FINRA’s follow-up activity on the Dispute Resolution Task Force’s 51 recommendations to improve the process. On the other hand, it may be just as likely that the SEC will not act on section 921 in 2017 until the Republicans move ahead on their plans to repeal and replace Dodd-Frank.
What Happened: Not much. The anti-arbitration forces introduced a flurry of anti-arbitration bills, but of interest is that some bills focus on fairness, rather than outright PDAA bans. Now that the Financial CHOICE Act has been introduced, I suspect the SEC will hang on and see what transpires.
So Far, so good. As I wrote last year, the arbitration world is constantly changing, and will evolve yet again in the rest of 2017. Doubtless there are some things that will happen this year that I just didn’t see coming (example, DOL’s fiduciary rule surviving, so far). And of course, some of my predictions may not come to pass, at least not yet. We will again compare notes at the end of the year. In the meantime, see you in the future!
*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 and is a Contributing Legal Editor 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.
 The NLRB issued a Statement on June 16th stating that the Acting Solicitor General had given the Agency authority to represent itself.
 No, not that scene!
 Based on a very limited sampling, Chief Judge Garland also seemed to be pro-arbitration.
 See Friedman, G., Supreme Court Nominee Gorsuch Seems to be Pro-Arbitration! (February 2017).
 See American Health Care Association v. Centers for Medicare, No. 3:16-CV-00233 (N.D. Miss. Oct. 17, 2016), which sought an injunction, asserted that CMS exceeded its statutory authority and that the regulation runs afoul of the Federal Arbitration Act. On November 7th Judge Michael Mills issued a 40-page decision granting the request for an injunction.
 A CMS Factsheet leads with news that the prohibition on PDAAs is out, and then states the proposed regulation adds several requirements for PDAA use.