On April 24, 2012, the Consumer Financial Protection Bureau (“CFPB”) issued a “Request for Information Regarding Scope, Methods, and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements” (“Request”). The Request, which the CFPB describes as a “preliminary step” in its study of consumer arbitration as required by Section 1028 of the Dodd-Frank Act, seeks public comment by June 23, 2012 on several areas concerning the scope, methodology and data sources of its study.

Section 1028 of Dodd-Frank requires the CFPB to conduct a study and report to Congress regarding the use of mandatory, pre-dispute arbitration agreements involving consumer financial services products or services. Section 1028 further directs the CFPB to promulgate rules that limit or prohibit such agreements for the protection of consumers if warranted by the study results.

In its Request, the CFPB identified the following areas for which it seeks further comment:

  • The prevalence of arbitration clauses in consumer financial products and services;
  • Claims brought by consumers in arbitration against financial services companies;
  • Claims brought by financial services companies against consumers in arbitration;
  • The impact of actual arbitrations on consumers and companies; and
  • The impact of arbitration clauses outside of actual arbitrations on consumers and companies.  

With respect to each area, the Request provides guidance set forth in a series of questions.

Noticeably absent from the request is any mention of class actions, a hot topic in the context of mandatory pre-dispute arbitration agreements as these frequently are used to foreclose the possibility of proceeding on a class basis in litigation or arbitration. The validity of class action waivers has been a source of extensive litigation, resulting in a split of authority regarding their enforceability under the Federal Arbitration Act (“FAA”). In a widely-anticipated decision last year, the U.S. Supreme Court upheld the validity of class-action waivers in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), ruling that the FAA preempts state laws prohibiting the use of class-action waivers in mandatory arbitration agreements in consumer contracts. In so doing, the Court clarified the preemptive reach of the FAA and reaffirmed that arbitration is the preferred method for resolving disputes between individuals and companies, provided that the terms of the arbitration are fair to the consumer.

Nearly one year later, courts continue to struggle with assessing the enforceability of class action waivers in consumer arbitration, and some have taken pains to distinguish Concepcion in order to decline to enforce such agreements. See, e.g., In re American Express Litigation, Slip Op. No. 06-1871, — F.3d — (2d Cir. Feb. 1, 2012) (holding that a class action waiver in contracts between a credit card issuer and merchants is unenforceable under the FAA because enforcement of the clause effectively would preclude any action seeking to vindicate plaintiffs’ statutory rights) (discussed here).

Although the CFPB’s Request sheds no light on its position with respect to waivers of class action proceedings per se, it does make clear that a primary purpose of its Request is to gather information that will enable it to assess whether consumers are better off in litigation or arbitration, and ultimately, whether limiting or eliminating pre-dispute arbitration is warranted to protect consumers. A number of studies already have demonstrated that arbitration offers consumers many benefits, provided adequate fairness safeguards are in place.

Indeed, there are real questions regarding whether consumer protection is best advanced by renewed attacks on mandatory arbitration, or whether legislative and regulatory efforts should instead focus on ensuring that arbitration agreements contain sufficient procedural safeguards to guarantee a fair process for all parties. An outright ban on such arbitration agreements would have severe consequences as it would leave many consumers and employees without access to a viable dispute-resolution forum, and would reward only the trial lawyers’ bar, which would stand to profit from the inevitable increase in litigation.

Rather than limit or ban mandatory consumer arbitration agreements, it would be more effective to bridge the gap between consumer and industry advocates by establishing a mandatory due process protocol to ensure fairness in the arbitration proceedings. At a minimum, these safeguards should include:

  • Adequate notice in the arbitration agreement of the meaning and consequences of such an agreement.
  • Adequate notice of hearings and an opportunity to be heard.
  • A right to access material information.
  • Reasonable costs.
  • A reasonable location for proceedings.
  • An unbiased and competent arbitrator.
  • No limitation on remedies otherwise available at law or equity.  

Given the many benefits of arbitration to all parties, the protections already afforded to consumers, and the potential safeguards that may be instituted through rulemaking or new legislation, Congressional and CFPB efforts should be directed at regulating arbitration to ensure the availability of a fair process for all parties.