Those of us in the consumer finance industry know that arbitration is a hot topic for the CFPB these days. And now, it seems the issue has gone “mainstream.”
Over the past week, The New York Times published a three-part series examining arbitration—or as The Times puts it, “how clauses buried in tens of millions of contracts have deprived Americans of one of their most fundamental constitutional rights: their day in court.”
Published on October 31st, the first article in the series is titled, “Arbitration Everywhere, Stacking the Deck of Justice.” The article presented several real world examples of litigants whose claims as class representatives in arbitration, were dismissed based upon U.S. Supreme Court precedent. The article gives the contextual history of the development of the law, including the role of now Chief Justice John Roberts, when he was a private lawyer for Discover Bank.
This article follows on the heels of the CFPB's anticipatory notice of proposed rulemaking that would ban mandatory class wide arbitration of disputes in consumer transactions. The CFPB bases its proposal on its congressionally mandated study finding that consumers do not get a fair resolution of their complaints in arbitration if they are not able to maintain class-wide resolution. That is, the cost of pursuing a consumer's complaint in an individual arbitration may be so prohibitive as to make such dispute resolution procedure unfair. Industry's response has been to highlight flaws in the CFPB study, arguing that the use of arbitration often produces a more efficient and fair resolution of a consumer's complaint than costly litigation.
The Times article points out that much of the literature concerning the effect and effectiveness of arbitration as a consumer remedy is anecdotal as there is no central repository for reporting arbitrations filed, arbitrations dismissed and arbitration awards. The article relies upon The Times own examination of federal cases filed between 2010 and 2014. According to the article, “Of 1,179 class actions that companies sought to push into arbitration, judges ruled in their favor in four out of every five cases.” The article goes on: “But by assembling records from arbitration firms across the country, The Times found that between 2010 and 2014, only 505 consumers went to arbitration over a dispute of $2,500 or less.” And, the article reports, “Verizon, which has more than 125 million subscribers, faced 65 consumer arbitrations in those five years…Time Warner Cable, which has 15 million customers, faced seven.”
Both industry analysis and the article point out that mandatory pre-dispute resolution in general, and limiting mandatory class-wide arbitration in particular, have reduced the number and severity of judgments in law suits, that were bringing the consumer finance industry to its knees in the 1990's. A case in Alabama brought by Dr. Gore against BMW relating to diminution in value by $4,000, leading to a $4 million punitive damages judgment, helped spark industry's determination to change the system.
And, indeed, the system has been changed. In a follow-up article published Monday, “In Arbitration, a ‘Privatization of the Justice System',” The Times engaged in a detailed analysis of the use of arbitration forums today.
There will be much more to be heard from the CFPB with respect to limiting the use of arbitration as a dispute resolution tool in consumer finance transactions. We aren't sure when the CFPB may finally act, but there is little doubt that action is coming soon. And, now we now know how The Times feels about it.