The U.S. Chamber of Commerce and other business groups have filed a federal lawsuit seeking to invalidate the Consumer Financial Protection Bureau’s Rule banning class action waivers in arbitration provisions contained in financial institutions’ contracts with consumers. Compliance with the Rule would be required beginning March 19, 2018. The lawsuit was filed in the United States District Court for the Northern District of Texas.

The Lawsuit

The lawsuit seeks declaratory and injunctive relief to invalidate the Rule, and it challenges the Rule on procedural and substantive bases.

The Chamber of Commerce and the coalition allege that, because the CFPB authorized the Rule without conducting the type of “narrow” study of arbitration issues mandated by the Dodd-Frank Act, the Rule violated the Administrative Procedures Act and is therefore invalid.

The lawsuit also alleges that the “opaque and flawed” study conducted by the CFPB was not “fair, unbiased [or] thorough” and that it ignored and misinterpreted key data in issuing the final Rule, which did not show that such clauses negatively affect consumers. It also states that the Rule ignores the federal policy favoring arbitration.

Finally, the lawsuit alleges that the CFPB is itself unconstitutional.

The Substance of the Rule

The Rule contains requirements that apply to a provider’s use of a “pre-dispute arbitration agreement” that is entered into on or after the compliance date. The Rule defines “pre-dispute arbitration agreement” as an agreement that (1) is between a covered person and a consumer, and (2) provides for arbitration of any future dispute concerning a covered consumer financial product or service. The form or structure of the agreement is not determinative; an agreement can be a pre-dispute arbitration agreement under the Rule regardless of whether it is a standalone agreement, an agreement or provision that is incorporated into, annexed to, or otherwise made a part of a larger contract, is in some other form, or has some other structure.

The Rule prohibits a provider from relying on a pre-dispute arbitration agreement entered into after the compliance date with respect to any aspect of a class action that concerns any covered consumer financial product or service. That prohibition may apply to a provider with respect to a pre-dispute arbitration agreement initially entered into between a consumer or a covered person other than the initial provider, such as debt collectors seeking to collect on the contract or assignees of the contract. The CFPB also specifically stated that the Rule applies to “indirect automobile lenders,” using them as an example of covered entities.

The Rule requires that, upon entering into a pre-dispute arbitration agreement, a provider must ensure that certain language set forth in the Rule is included in the agreement. Generally, the required language informs consumers that the agreement may not be used to block class actions.

The Rule also requires providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral and court proceedings to the CFPB. The requirement to submit these records applies to: (1) specified records filed in any arbitration or court proceedings in which a party relies on a pre-dispute arbitration agreement; (2) communications the provider receives from an arbitrator pertaining to a determination that a pre-dispute arbitration agreement does not comply with due process or fairness standards; and (3) communications the provider receives from an arbitrator regarding a dismissal of or refusal to administer a claim due to the provider’s failure to pay required filing or administrative fees.

The CFPB will use information it collects to continue monitoring arbitral and court proceedings in order to determine whether there are consumer protection concerns that may warrant further Bureau action. The CFPB is also finalizing provisions that will require it to publish on its website the materials it collects, with appropriate redactions as warranted, to provide greater transparency into the arbitration of consumer disputes.

Looking Forward

Congress still has time to invalidate the Rule under the Congressional Review Act, although a crowded and log-jammed legislative agenda has called into doubt whether action will be taken by the early November deadline.

A change in leadership at the CFPB could also be in the cards, with CFPB Director Richard Cordray being closely watched for a possible run for governor in Ohio. New leadership could, in theory, take action to stop the Rule.

However, the court challenge has been long expected as a major effort by business interests to thwart the Rule.