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By George H. Friedman*

No, this is not another one of my screeds about how it’s not fair for the NFL’s Commissioner to act as arbitrator in the dispute between his own employer and the National Football League Players’ Association over Tom Brady’s suspension. I just can’t keep repeating the same points. But on a different topic, borrowing a football term, upon further review I now believe the days are numbered for mandatory arbitration of most consumer disputes.

I actually predicted this – sort of – ten years ago, when I said to my arbitration class at Fordham Law School:

“A day of reckoning is coming on predispute arbitration agreements in consumer arbitration. A dichotomy is developing between arms-length pre-dispute arbitration agreements and those imposed by the dominant party in an adhesion contract with consumers (and perhaps employees). This will be addressed in the next several years by the Supreme Court, Congress, the SEC or all.”

I say “sort of” because relief for consumers has not come from the Supreme Court or the SEC, and has come only piecemeal from Congress. No, dear readers, the cavalry has charged in from federal administrative agencies, one of which did not exist ten years ago.

No Relief so Far from SCOTUS and the SEC

As I’ve written before, SCOTUS remains steadfast in its support of mandatory predispute arbitration agreements (“PDAAs”). If anything, that support has grown stronger since 2005 (see, for example, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011)). Barring a change in the Court’s composition, I don’t see a shift on mandatory consumer arbitration.

What of the SEC, which has supervised securities arbitration for decades and since the 2010 enactment of the Dodd-Frank Act has had authority under section 921 to ban PDAAs, or limit or impose conditions for their use? After nearly five years, there has been very little activity. And, as I’ve said before, I don’t see the SEC issuing regs banning PDAAs. Why not? 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.” That’s just not going to happen.

But the SEC in my view will surely do something. I think it’s 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, PIABA, 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 mandatory arbitration), and eventually require some changes (impose limits or conditions).

It’s also possible that investors may get mandatory arbitration relief from FINRA, which convened a Task Force last year to review its dispute resolution program. Literally at the top of the Task Force’s agenda is “mandatory nature of arbitration.”

Congress Lays the Groundwork

Attempts have been made over the years and again this year to amend the Federal Arbitration Act (“FAA”) to ban mandatory consumer or investor arbitration. The proposed Arbitration Fairness Act of 2015 would add a new chapter to the FAA invalidating PDAAs for consumer, investor, employment, or civil rights claims. The proposed legislation is similar to prior failed efforts to similarly amend the FAA going back at least to 2005, including the Arbitration Fairness Act of 2013, which expired with the close of the last Congress. Also, introduced in February was the Investor Choice Act of 2015 (“ICA”), which would ban the use of mandatory pre-dispute agreements by broker-dealers and investment advisers and guarantee class action participation.

These efforts to amend the FAA 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 Madoff 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 PDAAs in consumer contracts. If it didn’t happen then, it’s not going to happen today with a Republican Congress. The same holds true for the Investor Choice Act, in my opinion.

But all is not lost in terms of Congressional relief for consumers facing mandatory arbitration clauses. 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 (see CompuCredit Corp. v Greenwood, 132 S.Ct. 665 (2012)). 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. Section 748 amends the Commodity Exchange Act in the same way. Also, Dodd-Frank section 1414 bans outright PDAAs in residential mortgage contracts.

The Federal Regulators – Relief is on the Way

Dodd-Frank also impacts arbitration via regulatory agencies. It established the Consumer Financial Protection Bureau (“CFPB”) and section 1028 directs the CFPB to study the use of PDAAs in consumer financial products and services and later report to Congress. It also vests authority in CFPB to possibly develop regulations banning, limiting, or conditioning PDAA use (the SEC has no study requirement under Dodd-Frank, but it does have similar rule-writing authority). CFPB in December 2013 issued its Preliminary Report on the first phase of its study of arbitration. In May 2014, as required by Dodd-Frank, the Bureau published its Semi-Annual Report to Congress. And last March, the Bureau issued its Final Report to Congress finding that PDAA use is prevalent and may harm consumers. I am convinced that CFPB will eventually write regulations banning or severely curtailing PDAA use in consumer financial products and services such as credit cards, various consumer loans, banking accounts, and cell phones.

The Federal Regulators –Blast from the Past

It turns out Congress planted anti-mandatory consumer arbitration seeds 40 years ago, when it passed the Magnuson-Moss Warranty Act of 1975 (“MMWA”). The purpose of the law was to create several consumer rights regarding warranties. The law also gave the Federal Trade Commission (”FTC”) regulatory authority to protect consumers. The Act in 15 U.S. Code § 2310 encourages establishment of “informal dispute settlement mechanisms” (“IDSM”):

Congress hereby declares it to be its policy to encourage warrantors to establish procedures whereby consumer disputes are fairly and expeditiously settled through informal dispute settlement mechanisms.

In 1975, FTC adopted Rule 703 on IDSM. It later interpreted the rule to ban mandatory binding PDAAs in consumer warranties, although non-binding arbitration as a precondition to litigation was permitted. Section 703.5(j) would seem to support this, where it states: “Decisions of the [ISDM] shall not be legally binding on any person.”

During the FTC’s 1996-97 rule review, some commenters asked the agency to back away from its position that Rule 703 bans mandatory binding arbitration in warranties. “The Commission, however, relying on its previous analysis and the MMWA’s statutory language, reaffirmed its view that the MMWA and Rule 703 prohibit mandatory binding arbitration.” And just last week, the FTC again reaffirmed its interpretation of MMWA and Rule 703.

So, the bottom line with arbitration, warranties and the MMWA is: 1) companies can use a mandatory PDAA that is non-binding, with the consumer’s right to go to court preserved; OR 2) the parties can execute a post-dispute agreement to binding arbitration.

Employees Not Left Out

Although I focus here on consumer arbitration, the federal agencies have not forgotten employees. Both the National Labor Relations Board and the EEOC have come out against mandatory PDAAs in the employment context, and appear more than willing to litigate the issue.

So, what’s the Bottom Line?

Before this year is out, I see mandatory binding arbitration in adhesion contracts eliminated in these areas:

  • Consumer financial products and services like credit cards, prepaid cards, bank accounts, consumer loans, and cell phones.
  • Consumer product warranties.
  • Non-union employment.

The lone survivors for now will be securities arbitration, and consumer matters not involving financial products and services or warranties. On the latter, I predict firms will give up trying to distinguish warranty claims from other consumer complaints and drop mandatory PDAA use.

My modest suggestion as articulated previously is allow PDAAs as long as they are not mandatory. In other words the consumer could be offered arbitration when the contract is signed, but there would have to be clear notice and the consumer could not be denied goods or services if they declined the arbitration option. And of course, online ADR is the way to go!1


1Just had to day that. I chair Arbitration Resolution Services, a cloud-based ADR service.

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*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 nation 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 (Wharton-FINRA Institute).

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