The CFPB's Final Report on Pre-Dispute Arbitration Clauses

On March 10, 2015, the CFPB issued its long-awaited Arbitration Study analyzing the use of pre-dispute arbitration provisions in connection with consumer financial products or services. In the 728-page report, as well as during a field hearing held the same day, the CFPB was critical of the use and effect of pre-dispute arbitration provisions in credit card agreements and other consumer financial contracts, particularly when compared to class-action lawsuits. In the coming months, the CFPB will likely use this report as the basis to adopt regulations restricting, if not entirely banning, the use of pre-dispute arbitration clauses in connection with consumer financial products and services. In the face of this potentially game-changing regulatory effort, industry representatives have quickly raised questions about the data underlying the CFPB's report to undermine the agency's conclusions, and will undoubtedly continue to scrutinize the report's data and highlight any flaws as the CFPB considers issuing arbitration-related regulations.

Background

Many contracts for consumer financial products and services include a "pre-dispute arbitration clause" that requires any dispute related to the contract be resolved through private arbitration rather than litigation. In addition, many arbitration clauses include "class waivers" that prohibit consumers from banding together with other similarly situated persons to file claims as a class rather than an individual. Consumer advocates have challenged these pre-dispute arbitration clauses as unfairly restricting basic consumer rights, such as the right to sue, while industry representatives have argued that arbitration represents a better, faster, and cheaper means of resolving disputes.

Section 1028(a) of the Dodd-Frank Act requires the CFPB to study and provide Congress with a report on the use of pre-dispute arbitration clauses in contracts for consumer financial products and services. The Dodd-Frank Act further authorizes the CFPB to issue regulations prohibiting or imposing conditions on the use of pre-dispute arbitration provisions in connection with consumer products or services, provided that such regulations are in the public interest and consistent with the findings of the CFPB's study. See 12 U.S.C. 5518.

As we discussed in a previous post, the CFPB initiated a public inquiry in 2012 as a "preliminary step" in its study of consumer arbitration, seeking comments on the appropriate steps, methods, and data sources for the required study. The CFPB released preliminary results of its study on December 12, 2013, focusing on three types of consumer financial services contracts: cardholder agreements for credit cards, deposit account agreements for checking accounts, and cardholder agreements for general purpose reloadable prepaid cards. The preliminary report included findings with respect to the incidence and substance of arbitration provisions (including their complexity and inclusion of class action waivers), and the incidence and types of consumer disputes filed with the American Arbitration Association and in small claims courts. In that report, the CFPB indicated that it would conduct additional empirical research, including a telephone survey of consumers, to assess the use of litigation and arbitration to resolve disputes about consumer financial services and products, and the impact of pre-dispute arbitration clauses on the price of consumer financial services and products, among other things.

CFPB's Final Arbitration Study

The CFPB's recently released study is based on an empirical assessment of:

• 850 consumer financial product or service agreements, including credit cards, checking accounts, general purpose reloadable prepaid accounts, private student loans, storefront payday loans, and mobile wireless third-party billing;
• 1,847 consumer finance arbitration disputes;
• 562 consumer finance class action lawsuits filed in federal or state courts;
• 3,462 individual lawsuits in federal court;
• Over 42,000 small claims court filings related to credit cards;
• 419 consumer finance class action settlements in federal court; and
• 1,150 state and federal regulatory and enforcement agency actions.

The CFPB has highlighted the following key findings from the gathered data:

• Arbitration agreements affect a large number of consumers, including 80 million consumers in the credit card market alone;
• Consumer understanding of arbitration is significantly lacking—three in four consumers did not know if they were subject to an arbitration provision and only 7 percent recognized such a provision meant they could not sue their card issuer in court;
• Consumers are reluctant to bring small individual claims against companies, while roughly 32 million consumers on average are eligible for relief through consumer financial class action settlements each year; and
• Arbitration clauses have not produced lower prices for consumers.

The CFPB's study attempts to compare aggregate arbitration outcomes with aggregate class action outcomes. It concludes that, over a five-year period, at least 160 million consumers were eligible for relief in consumer class actions, and that settlements in those cases totaled $2.7 billion in cash, in-kind relief, expenses and fees. By contrast, over a two-year period, consumers obtained relief in only 78 arbitrations (out of 1,060 filed with AAA), and obtained less than $400,000 in relief and debt forbearance in those cases, which was outweighed by the $2.8 million consumers were ordered to pay companies in some 263 other arbitrations where decisions were reported.

The CFPB separately highlighted a few additional findings regarding the use of arbitration clauses:

• 90 percent of arbitration provisions expressly prohibit class arbitrations;
• Credit card issuers attempted to invoke arbitration provisions to block 65 percent of class action lawsuits, compared to less than 1 percent of individual lawsuits; and
• Only two class arbitrations were filed with AAA between 2010 and 2012, neither of which resulted in a favorable resolution for consumers.

CFPB Field Hearing

The CFPB held a field hearing on March 10, 2015 in Newark, New Jersey, to announce the results of its study, moderate a discussion on the topic between consumer and industry advocates, and receive public testimony. CFPB Director Richard Cordray gave scripted introductory remarks and industry representatives and consumer advocates were each given an opportunity to present their respective positions. Director Cordray focused much of his remarks on the comparison of arbitration as an alternative to class action litigation, and the evidence the CFPB has relied on to conclude that arbitration clauses "restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year." He noted that only a small number of consumers bring arbitration claims each year, despite tens of millions of consumers being covered by contracts containing arbitration provisions, and highlighted the significant monetary recoveries and non-monetary relief produced by class actions, including unquantifiable benefits stemming from changed practices and deterrent effects.

Consumer advocates called on the CFPB to use the report as a basis to ban pre-dispute arbitration provisions, which they characterized as "litigation avoidance" tools that companies use to insulate themselves from class-action liability. Pressing the point that the majority of consumer claims disappear rather than proceed in arbitration, plaintiffs' attorneys claimed they regularly turn away potential clients whose contracts include arbitration provisions and class action waivers because they are not economically feasible to pursue. One consumer advocate argued that arbitration has stunted the development of consumer protection law because all arbitration decisions are confidential and common law doctrines are therefore not being created or modified based on application of the law to various facts and circumstances. Industry representatives argued that arbitration offers consumers and companies a more efficient and less expensive alternative to the judicial system, and criticized the CFPB for not surveying consumers on their satisfaction with arbitration. They noted that the arbitration system is still in its infancy and evolving, and called on CFPB to better educate consumers about arbitration and other aspects of the contracts they are signing. In addition, the CFPB was criticized for failing to note the limited, small-dollar relief individual consumers often obtain in class action settlements, as well as the number of frivolous class action claims that end up being dismissed or abandoned and the costs companies incur in defending those cases.

Our Initial Assessment

The CFPB's report has wide-ranging implications for the consumer finance industry, as it sets the stage for the CFPB to issue regulations that will restrict or prohibit pre-dispute arbitration clauses in consumer financial services contracts. Based on the CFPB's report and the tenor of its comments at the public hearing, it likely will conclude that pre-dispute arbitration clauses (or at least class arbitration waivers) have a very limited place—or no place at all—in consumer financial services contracts. As any arbitration regulations the CFPB issues must be "consistent with" this study, its depth and extensive citation to empirical evidence give proponents of pre-dispute arbitration clauses a high bar to challenge any future regulations.

If the consumer financial services industry is to persuade the CFPB to adopt a different or more limited approach than an outright ban on pre-dispute arbitration clauses, it will need to rebut or convincingly respond to the study's findings, and the CFPB's interpretation of those findings. Some initial thoughts on ways the industry can focus this effort include the following:

• Identifying flawed or missing data. In its report, press release and testimony at the public hearing, the CFPB framed the empirical data as strongly supporting its central conclusion that pre-dispute arbitration clauses "restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year." That underlying data will need to be scrutinized for accuracy, particularly with respect to the CFPB's comparison of class action litigation and arbitration outcomes, including their respective costs and benefits. Based on our initial review of the report, some data points the CFPB does not appear to have fully considered include:
  • Collateral consequences of class actions. The coercive effects of class actions, including the significant legal costs borne by providers of consumer financial products and services in defending baseless actions.
  • Individualized costs and benefits. The individual consumer costs and benefits of class actions as compared to the individual consumer costs and benefits of arbitration. The CFPB's conclusions appear to be focused primarily on the aggregate data; the individual data may tell another story.
  • Effectiveness of other dispute resolution mechanisms. Many consumer complaints can be easily resolved through customer service departments, government-facilitated complaint mechanisms (e.g., the CFPB's complaint portal), and third party services (e.g., the Better Business Bureau). The limited set of consumers who file arbitrations may reflect the resolution of numerous disputes through such informal means, while representative class action plaintiffs, selected and influenced by plaintiffs' class action lawyers, and purporting to act on behalf of millions of consumers, are unlikely to avail themselves of informal dispute resolution mechanisms.

• Developing additional relevant information. If flawed or missing data is identified, the consumer financial services industry should consider conducting its own studies to develop alternative data points. Given the CFPB's claim to be a data-driven agency, strong data will be needed to rebut the CFPB's data and conclusions and to support any policy arguments in favor of arbitration. Anecdotal experience, such as the actual experience of consumers who have participated in arbitrations and class action litigation, can be converted to empirical data through controlled satisfaction surveys.

• Focus on policy arguments. While careful and detailed analysis of the empirical data will be a vital aspect of any challenge to the CFPB's conclusions, strong policy arguments that support arbitration will also need to be advanced. For example, the CFPB noted at the field hearing that the Dodd-Frank Act specifically banned pre-dispute arbitration clauses in mortgage agreements, and queried how or why it should approach other financial products or services differently. Developing nuanced differentiators between products and services, and identifying the varied impact of arbitration and class actions, may be necessary.

• Highlighting tension with FAA. Depending on how the CFPB crafts any proposed regulations regarding pre-dispute arbitration provisions, those regulations could come into conflict with the Federal Arbitration Act, 9 U.S.C. § 2, and the liberal federal policy favoring arbitration, which the Supreme Court strongly affirmed in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Highlighting the long history in favor of arbitration, and how regulations against arbitration might conflict with that precedent, may bolster the case for arbitration.

We will be continuing to assess the data in the CFPB's report, and to monitor the CFPB's follow-up actions in this area over the coming months.