U.S. Supreme Court holds oral argument in case involving class action waivers in consumer contracts

The U.S. Supreme Court recently heard oral argument on a case which could have an impact on the availability of mandatory arbitration and class action waivers in consumer contracts. On October 11, 2011, the U.S. Supreme Court heard oral argument in the case of CompuCredit v. Greenwood, Case No. 10-948.

The issue before the Court in CompuCredit is whether a credit repair company can require its customers to arbitrate claims - and waive class treatment - under the Credit Repair Organizations Act (“CROA”).

Copies of the Ninth District’s decision and the briefing before the Supreme Court, as well as an earlier article on the case, can be found in our Class Action Resource Center.

Oral argument did not shed much light on the Court’s broader thinking regarding application of mandatory class action waivers. Rather, the discussion focused primarily on application of the specific language of the CROA (on which the Justices appeared to fall on both sides of the issue). However, the argument did veer at one point toward specific class issues once in a discussion between counsel for Petitioner (CompuCredit) and Justice Sotomayor during Petitioner’s rebuttal argument.

As background to this discussion, the CROA requires certain mandatory disclosures be made to consumers, including disclosing that customers have a “right to sue a credit repair organization that violates” the CROA. Petitioners take the position that the “right to sue” in the disclosure provision of the CROA is merely a layman’s “quick description” of the procedural rights set forth in more detail in 15 U.S.C. 1679g, which provides: “Any person who fails to comply with any provision of this subchapter with respect to any other person shall be liable to such person.”

Further, the CROA’s anti-waiver provision provides: “Any waiver by any consumer of any protection provided by or any right of the consumer under” the CROA “shall be treated as void” and “may not be enforced by any Federal or State court or any other person.” 15 U.S.C. 1679f. Petitioners take the position that this anti-waiver provision prohibits waiver of only substantive—and not procedural—rights. Because the “right to sue” is—if anything—a procedural right, waiver of this right is not prohibited under 1679f.

Respondents, on the other hand, argue that the phrase “any right” in the anti-waiver provision means both substantive and procedural rights. Moreover, Respondents point out that the CROA specifically discusses the damages available in class actions brought under the Act.

With this background in mind, the class action discussion began with this question from Justice Sotomayor: "If we buy your argument that procedural and substantive rights are different, is it your position that you could seek a waiver of the class action even though this statute expressly contemplates class actions?"

Counsel for Petitioner responded by first clarifying his position that although the CROA discusses various damages available for class actions, it does not require that class actions be available nor does the CROA make the class mechanism a non-waivable right. Counsel for Petitioner went on to hypothesize that if a statute did contemplate (i.e. require) class treatment, that right to class treatment could be vindicated through class arbitration proceedings, an issue discussed in AT&T Mobility v. Concepcion. (Again, as background, the Court in Concepcion discussed the availability - and inherent problems with - class-wide arbitration).

Also of interest, counsel for Petitioner pointed out that as part of the Dodd-Frank Wall Street Report and Consumer Protection Act (“Dodd-Frank Act”), Congress has mandated that the new Consumer Financial Protection Bureau (“CFPB”) conduct a “serious study of the use of arbitration procedures in consumer financial matters” to determine fairness to consumers. Here, Petitioner is referring to the portion of the Dodd-Frank Act that mandates a study by the CFPB regarding the use of mandatory arbitration agreements in consumer financial products.

If this study finds that mandatory arbitration is not “in the public interest,” the CFPB has the right under the Dodd-Frank Act to impose limits on - or prohibit - the use of mandatory arbitration agreements in consumer contracts “for the protection of consumers.” Public Law 111-203 §1028(b). Depending on the outcome of the CFPB’s study, it is possible, then, that the impact of Concepcion in consumer contracts may be short lived.

Other than this discussion, the oral argument focused on issues tied closely to the CROA, including whether the “right to sue” means the right to bring a “civil action” in court or the right to bring a “cause of action” before a court or an arbitrator, and whether the CROA creates a substantive bar to arbitration waiver. These discussions of statutory interpretation suggest that at least a few of the Justices believe that there may be congressional power to legislatively limit the power of contract - and to require the availability of class action litigation - if Congress just chooses the right language.

Although the oral argument did not focus specifically on class issues, it is still likely that the Court will use this case as an opportunity to provide a greater context for, and perhaps place some limitations upon the general applicability of, its decision in Concepcion. Moreover, the Court may use this case as a vehicle to shed further light on the strength of the Federal Arbitration Act in the context of consumer class arbitration waivers.