By George H. Friedman*
Toward the end of last year, I authored a blog post here, The Elections are over: what it means for Consumer Arbitration – Five things to look for in 2015. As I’ve said 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 Ed Koch, let’s see how I did a year ago.
Here were my views on what was coming in 2015, and how they tuned out:
- The Arbitration Fairness Act is DOA; so is the Investor Choice Act
What I wrote: In 1925, what’s now called the Federal Arbitration Act (“FAA”) was enacted. It made mandatory predispute arbitration agreements (“PDAAs”) enforceable as a matter of federal law, and the Supreme Court in recent years has steadfastly supported the FAA. Legislation called the Arbitration Fairness Act (“AFA”) has been introduced in both houses of Congress that would amend the FAA to ban PDAAs outright in consumer contracts. While Senator Franken held hearings on the Senate bill, nothing else of consequence has happened.
Prediction: The AFA 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 next Congress. The same fate is in store for the Investor Choice Act (H.R. 2998) introduced earlier this year by Rep. Keith Ellison (D-MN). This legislation, would end the use of mandatory pre-dispute agreements by broker-dealers and investment advisers, and would guarantee class action participation.
- The Consumer Financial Protection Bureau will ban mandatory arbitration in many types of consumer financial contracts
What I wrote: The Dodd-Frank Wall Street Reform and Consumer Protection Act addressed fundamental consumer protection issues involving securities, banking, and indeed the US economy. The Act, known as Dodd-Frank, contains language governing the use of predispute arbitration agreements in consumer financial and investor contracts. Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB”) and charged the new federal agency with studying the use of PDAAs in consumer financial transactions 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…” Note that the CFPB’s choices are not binary, “yes-or-no” decisions; it can ban PDAAs outright or limit their use or impose conditions for their use. For example, the CFPB could promulgate a rule that limited PDAA use to a class of transactions (limitation on use) or required that consumers separately initial or click a PDAA (condition for use).
The uproar over General Mills’ decision to adopt and later retract a new policy by which consumers, by engaging in activities such as downloading a recipe, or participating in a contest, or “liking” the firm on Facebook, would unwittingly be agreeing to arbitrate, certainly refocused the spotlight on the prevalent use of mandatory, predispute arbitration in consumer transactions. Indeed, arbitration clauses abound in the consumer context, showing up in a vast array of contracts for consumer goods and services. Applied for a credit card? You’ve likely agreed to arbitrate disputes with your bank. Got a new cell phone? Payday loan? Rented a car? Opened a checking or stock brokerage account? Arbitration is likely right there in your contract.
Prediction: CFPB has been busy this year, holding field hearings, issuing reports, and conducting surveys. It will very shortly be issuing the report to Congress required by Dodd-Frank. Based on what I have seen, there’s no doubt in my mind that the Bureau will promulgate regulations banning use of PDAAs in a range of consumer contracts, specifically credit cards, bank accounts, car loans and payday loans. At a minimum, CFPB will impose conditions on PDAA use… While CFPB funding may be an issue in a Republican Congress (the agency is widely perceived to be anti-business), I don’t think Congressional animus will include the CFPB’s arbitration activities.
What happened: I think I pretty much nailed it! 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. Also, while it may have grumbled about the CFPB, Congress did not defund it. Two for two. Still batting 1.000.
- The SEC will finally act on mandatory investor-broker arbitration; so will FINRA
What I wrote: Dodd-Frank takes a different approach to PDAAs used in securities customer-broker contracts. Although the operative language in Dodd-Frank provides similar guidance and direction to both the CFPB and SEC about what the agencies are to do about mandatory or forced use of PDAAs, there is a key difference: Dodd-Frank section 921 does not require the SEC to do anything about PDAAs in customer-broker contracts. Given the more than 90 mandatory study and rulemaking requirements the SEC has under Dodd-Frank, it is not at all surprising that arbitration is not high on the agency’s priorities list.
Predictions: In my view, it is politically untenable for the SEC to do absolutely nothing about PDAAs, especially in light of the pressure that’s been brought to bear on this issue by some in Congress, NASAA (the association of state and Canadian securities administrators), PIABA (the bar association for lawyers who represent customers in securities arbitrations), and others (for example the AFL-CIO). My view is that, at a minimum, the SEC will study the subject (it has since 2010 been accepting comments on the topic), and eventually require some changes (impose limits or conditions). It will not, in my opinion, ban PDAAs outright. Think about it. To ban PDAAs in customer-broker contracts, the SEC would have to find that doing so is “in the public interest and for the protection of investors.” Essentially, the SEC would be saying: “We’ve been supervising customer-broker arbitration for decades. But, you know, we just realized it’s a terribly unfair system.” On the other hand, a finding that says, “We’ve studied customer-broker arbitration and we’ve concluded that it’s a fair process. But, you know, these few changes will make it even better” is politically tenable.
Et tu, FINRA?
During the summer, FINRA formed a Dispute Resolution Task Force to “suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum.” The Task Force’s area on the FINRA Website already reports news of the group’s first in-person meeting, held October 10th. The Task Force “agreed that it would be open to examine any issues that may affect the face of arbitration and mediation in the next 20 years and that no issue was off the table for discussion.” It also identified the initial topics it will examine, and created subcommittees to “gather information and viewpoints” on the topics and to report back to the full Task Force. The Task Force is soliciting written comments and may, based on the written submissions, conduct interviews with organizations and individuals. The update also advises that the Task Force plans to wrap up its work next fall.
Prediction: I believe the group will finally tackle the remaining major criticism of FINRA’s arbitration program: the mandatory use of PDAAs in investor-broker contracts.
What happened: Swing and a miss. Neither SEC nor FINRA has acted, although I get partial credit on FINRA. The FINRA Dispute Resolution Task Force issued its Final Report on December 16,, with significant recommendations on explained decisions, a raise for Arbitrators, expungements, paper cases and motions to dismiss. The group, however, could not reach a consensus on mandatory predispute arbitration agreements, but at least they considered it. The Task Force identified mandatory arbitration as an important issue, but concluded “The mandatory nature of SRO securities arbitration is a defining characteristic of the process that engenders controversy about its fairness. Despite considerable discussion, however, the task force was not able to reach consensus. It concludes that the debate over mandatory securities arbitration is to a large extent a philosophical or policy question about which thoughtful, informed individuals disagree and which the task force cannot settle.” Two for three. Batting .667.
- SCOTUS will rebuke the National Labor Relations Board on its anti-arbitration policy
What I wrote: OK, this one involves employment arbitration and not consumer, but it’s close enough. What’s happening here? The Supreme Court has upheld class action waivers in consumer arbitrations, and at least one federal circuit – the Fifth – has ruled the same way as to the employment context. Specifically, the Fifth Circuit reversed the Board’s policy in D.R. Horton, Inc. v. NLRB, No. 12-60031 (5th Cir. Dec. 3, 2013). “[W]e disagree and conclude that the Board’s decision did not give proper weight to the Federal Arbitration Act…The NLRA [National Labor Relations Act]should not be understood to contain a congressional command overriding application of the FAA. The burden is with the party opposing arbitration, Gilmer, 500 U.S. at 26, and here the Board has not shown that the NLRA’s language, legislative history, or purpose support finding the necessary congressional command. Because the Board’s interpretation does not fall within the FAA’s ‘saving clause,’ and because the NLRA does not contain a congressional command exempting the statute from application of the FAA, the Mutual Arbitration Agreement must be enforced according to its terms.”
Strong stuff, but despite the fact that a federal circuit court, relying heavily on several Supreme Court holdings, has expressly overruled the NLRB’s take on class action waivers, some of the Board’s administrative law judges have apparently not gotten the message, issuing several rulings ignoring Horton.
Prediction: There’s not much I remember from civics class or law school, but I do remember this: Congress passes laws, the president signs laws, the courts interpret laws, and, federal administrative agencies carry out and apply federal laws. It is my view that the NLRB is having a bit of an identity crisis, and that sooner or later, the Supreme Court will – in “read our lips” fashion – deliver the message that class action waivers in PDAAs are enforceable under the FAA … and the NLRA. Specifically, sooner or later, the Supreme Court is going to hit the NLRB with a 2 x 4 over its rulings on class action waivers in arbitration clauses in employment agreements. Now, I’m not predicting violence toward a federal agency; the Supremes’ actions will be entirely legal.
What happened: An infield single. The NLRB continues to thumb its nose at the courts, but thus far has escaped that 2 x 4 from SCOTUS. However, it was recently whacked pretty hard by a federal Circuit Court of Appeals. In Murphy Oil USA, Inc. v. NLRB, No. 14-60800 (5th Cir. Oct. 26, 2015), the Court delivered a unanimous, stinging rebuke to the NLRB. In a section of its Opinion titled “D. R. Horton and Board Nonacquiescence” the Court says “The Board, reaffirming its D.R. Horton analysis, held that Murphy Oil violated Section 8(a)(1) of the NLRA by enforcing agreements that ‘requir[ed] . . . employees to agree to resolve all employment-related claims through individual arbitration.’ In doing so, of course, the Board disregarded this court’s contrary D.R. Horton ruling that such arbitration agreements are enforceable and not unlawful. Our decision was issued not quite two years ago; we will not repeat its analysis here. Murphy Oil committed no unfair labor practice by requiring employees to relinquish their right to pursue class or collective claims in all forums by signing the arbitration agreements at issue here” (citations omitted).”
Sooner or later this issue will end up before SCOTUS. Speaking of the High Court, it just this month rebuked California over its begrudging acceptance of the supremacy of the Federal Arbitration Act and related Supreme Court rulings, in DIRECTV v. Imburgia, No. 14-462 (Dec. 14, 2015), a case involving a California court decision. The beginning of Justice Breyer’s Opinion has some rather strong language pointing out that the FAA “is a law of the United States, and Concepcion [a SCOTUS decision invalidating anti-arbitration California decisional law]is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.”
Two and a half for four. Batting .625.
- Web-based ADR will become much more prevalent
What I wrote: There’s a great scene in the classic 1967 movie The Graduate where a family friend of new college graduate Ben Braddock (played by Dustin Hoffman) gives some sage advice about the future to young Ben. With great fanfare, he leads up to a one word prediction: “Plastics!”
Prediction: Here’s my one-word prediction on technology and ADR: “C-ODR” which stands for complete – online dispute resolution services. This is a term developed by Arbitration Resolution Services, Inc., whose Board I chair. On what basis do I make this prediction? The dramatic and rapid advances in technology will make this choice an easy one for consumers, much like Amazon and other web-based entities have challenged brick-and-mortar shopping as the preferred method of commerce. Put differently, why drag yourself to a hearing and wait around for snail-mail when you can accomplish the same things via the cloud in a fraction of the time and cost? At a minimum, I see this as a breakthrough year for web-based ADR. Case administration, from filing to conclusion – including hearings – will be done online, and paper will become passé. It doesn’t take a Nostradamus to see that improving technology will drive this change.
In fact, I see changes happening even before arbitrations are filed. That’s right, before. Insurance companies, securities firms, credit-based companies, and just about any firm that processes claims online will start to build web-based ADR into their claims handling processes. For example, if a customer’s claim is denied in whole or in part, I can see the company offering cloud-based ADR on a voluntary basis as the next online step. Oh, wait, that one has already happened! ARS did that earlier this fall.
What happened: Spot on. ARS has had a very good year, and web-based ADR is expanding by leaps and bounds. I spoke on this topic at an international symposium that was held in New York in June, where for two days one speaker after another described the rapid growth of online ADR. The SEC on November 16th published in the Federal Register a Final Rule on Crowdfunding (Vol. 80, No. 200, pages 71387–71680). The JOBS Act permits retail investors to buy unregulated securities through online crowdfunding portals, but pending adoption of SEC rules, this sort of crowdfunding was not legal. Also, FINRAs has proposed requiring all parties, except customers who are not represented by an attorney or other person (pro se customers), to use its Dispute Resolution Party Portal. If approved, the proposal would also amend the Code of Mediation Procedure to allow mediators and parties to use the DR Portal.
Three and a half for five. Batting .700!
I think I did pretty well. If nothing else, this proves the arbitration world is constantly changing, and will evolve yet again next year. I’ll be back here in a few weeks with my predictions for 2016.
 See Friedman, George, The Arbitration Fairness Act: a Well-intentioned but Potentially Dangerous Overreaction to a Legitimate Concern, 2013:1 Securities Arbitration Commentator 1 (June 2013), available at http://static1.squarespace.com/static/53272e28e4b055350d946bcb/t/560070e0e4b0ef8db785eb9a/1442869472419/SAC+AFA+Article+%28final+06-2013%29.pdf.
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.
 See Retailers, Are You Ready? Cyber Monday Overtakes Black Friday (Nov. 30, 2012), available at http://blogs.teradata.com/teradata-applications/retailers-are-you-ready-cyber-monday-overtakes-black-friday/. Also Cheng, Andria, UPS, FedEx Forecasts Suggest Black Friday Weekend will Again be Key for Retailers, Marketwatch.com (Nov. 17, 2014), available at http://blogs.marketwatch.com/behindthestorefront/2013/10/25/ups-fedex-forecasts-suggest-black-friday-weekend-will-again-be-key-for-retailers/, and Cyber Monday to be Busiest Day Ever for FedEx, CNN Money (Oct. 24, 2013), available at http://money.cnn.com/2013/10/23/pf/fedex-cyber-monday/.
See Friedman, George, “Road Trips” in Consumer Arbitration: there Must be a Better Way (Sep. 15, 2013) available at https://www.arbresolutions.com/road-trips-consumer-arbitration-must-better-way/#.VGo-x_ldX84.
*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.