It’s very hard to compete with the understated eloquence of the heading that appeared on the press release issued by the Chairman of the House Financial Services Committee, Jeb Hensarling (R-TX): “CFPB Rule Big, Wet Kiss to Trial Attorneys.”

The reference, of course, is to the rule proposed today by the Consumer Finance Protection Bureau that would limit the ability of businesses to use binding arbitration as a means to avoid class action lawsuits that inevitably have to be settled for reasons having little or nothing to do with the merits of each case.

Specifically, the proposed rule, referring to mandatory arbitration clauses as “contract gotchas,” would prohibit companies from using mandatory arbitration clauses to prevent class action lawsuits in new contracts, permitting the continued use of such clauses so long as the clauses state specifically that they cannot be used to stop consumers from becoming a part of a class action.

Companies that now utilize such clauses would be required to submit a range of data to the CFPB, including the nature of the claims made against them, as well as details surrounding the awards granted, all of which may be made public at some point. The ostensible reason given for this data demand is so that the Bureau can “monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers.”       

Of course, there are myriad reasons why companies typically settle class action lawsuits, not the least of which have to do with the possible brand damage that might result from the continuing adverse publicity ginned up by the trial bar. And federal courts have acknowledged that Congress has the power to provide for arbitration as a cost-efficient alternative to expensive litigation, including class action litigation. But when the Dodd-Frank Act was enacted in 2010, Title X included language that required a study of such clauses and then appeared to prejudge the results of that very study by articulating a statutory standard that would authorize the Bureau to issue rules that would “prohibit or impose conditions or limitations” on the use of mandatory arbitration, so long as the limitation or condition that is placed on the use of such clauses is “consistent” with this study, “for the protection of consumers” and “in the public interest.”        

During his remarks earlier today at the CFPB’s field hearing in Albuquerque, New Mexico, Director Richard Cordray reiterated the “gotcha” characterization and referred to mandatory arbitration as a “legal lockout” designed to immunize businesses from class actions and preclude access to the civil justice system on the part of consumers. He added, though, that he does not think that the CFPB now has “enough data” to preclude its use more broadly “at this time.”

Comments to the proposed rule can be submitted over the course of the next three months. The Bureau’s press release about the proposed rule is available on its website: “CFPB proposes prohibiting mandatory arbitration clauses that deny groups of consumers their day in court.”