CFPB

“Arbitration in America” – A Summary of the Senate Judiciary Committee Meeting

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By Echo K.X. Wang 

An April 2 Senate Judiciary Committee hearing, “Arbitration in America,” chaired by North Carolina Republican Lindsey Graham, examined the values of the practice, focusing on mandatory arbitration clauses in consumer contracts.

The Senate is closely divided on the subject. Democrats have pushed strongly against mandatory arbitration clauses in reaction to Supreme Court decisions. In the past two months, several bills limiting or eliminating mandatory arbitration clauses in consumer contracts have been introduced.

In February, Rep. Hank Johnson, D., Ga., joined Sen. Richard Blumenthal, D., Conn., to introduce the Forced Arbitration Injustice Repeal Act–the FAIR Act–in the House (H.R. 1423), which would “prohibit predispute arbitration agreements that force arbitration of future employment, consumer, antitrust, or civil rights dispute.” (Text and information can be found at https://bit.ly/2UTQoeO.)

More recently, on April 10, Sen. Sherrod Brown, D. Ohio, introduced another bill, Arbitration Fairness for Consumers Act (S. 630), which would restrict mandatory arbitration and class action waivers in contracts that relate to a “consumer financial product or service.” (S.630 can be found at https://bit.ly/2UvCuQs).

The bill would reverse last fall’s vote by the Senate to overturn Consumer Financial Protection Bureau rules that barred mandatory pre-dispute arbitration combined with class processes in litigation and arbitration in consumer financial services contracts. The CFPB rule, which had been in the works for more than four years, was rescinded by a 51-50 Senate vote, with Vice President Mike Pence casting the deciding vote.

For more details on these bills and more, see Vincent Sauvet, New Push Coming for Familiar Arbitration Bills? CPR Speaks blog (April 3) (available at https://bit.ly/2UynZeJ).

While the proposals are facing pushbacks from Republicans and business owners, the committee meeting provided a venue for the two sides to engage in discussions. Most important, the fact that Sen. Graham organized and led this meeting signals that there is a bipartisan opening for negotiation on arbitration reform.

In his initial statement, Graham noted that while arbitration has a place in society, everything good for business is not necessarily best for society. The hearing, he said, therefore sought to address the applicability of arbitration where it conflicts with social issues, in matters including sexual harassment and employment disputes.

Sen. Blumenthal followed, noting that “a right without remedy is [a] dead letter.” Throughout the meeting, Chairman Graham repeatedly stated he wanted to find a “middle-ground” solution to allow businesses to thrive while at the same time provide consumer protection.

But during the two-hour hearing, the divergent views clashed more than they found common ground. The Judiciary Committee listened to testimony from a small business owner, a Navy Reservist, practitioners on both sides, and business owners, all focusing on whether there should be a limit or bar to the use of “forced” arbitration agreements.

The hearing participants discussed the degree to which mandatory arbitration harms consumers, the effects of class-action waivers, and the way that businesses can be affected by mandatory arbitrations.

Sens. Graham and Blumenthal, as well as Sen. Dianne Feinstein, D., Calif., and Sheldon Whitehouse, D., R.I., spoke in favor of establishing limits to the arbitration use.

Kevin Ziober, a Newport Beach, Calif., Navy reservist and federal employee, spoke about his experience in which he was forced to arbitrate an employment dispute. Ziober worked as a federal employee for six months when he signed a mandatory arbitration agreement as a condition to keep his job.

When Ziober left his job to join the Navy Reserve, he was fired from his position on the last day of work. As a result, he was forced to arbitrate his rights under the Uniformed Services Employment & Reemployment Rights Act. Ziober argued that “no Americans should be denied the choice to enforce their rights.”

In response to a question from Sen. Joni Ernst, R. Iowa, on the impact of being forced into arbitration, Ziober described the anxiety and hardship he faced after being fired, knowing that he would not have a job after serving in the military. Ziober advocated that “an option to go to court should be something all servicemen be allowed.”

Prof. Myriam Gilles, a professor at New York’s Benjamin N. Cardozo School of Law, argued that when the Federal Arbitration Act was enacted in 1925, Congress intended to help ensure businesses so that their “agreements to arbitrate with each other can be enforced.” But, she said, the FAA was never meant to be applied to massive employment arbitrations that strip away individuals’ rights under state and federal law, providing a litigation shield for companies. Nor was it meant to be used in take-it-or-leave-it boilerplate agreements against individuals with no bargaining power, according to Gilles.

In response to a question from Sen. Graham, Gilles clarified that she does not wish to “do away” with arbitration. “We only want to get rid of arbitration clauses that are forced upon consumers and employees who have no choice,” she said.

Prof. Gilles also spoke extensively against class action bans, noting that it is often too expensive and time intensive for each individual to arbitrate their cases alone. As a result, forced arbitration provisions are shielding companies from liability, she said.

Alan Carlson, an owner and chef of Italian Colors Restaurant in Oakland, Calif., described his experiences with arbitration clauses as a small business owner. Carlson said he was forced to arbitrate a claim with the credit card company American Express, which took more than 10 years to conclude, and included a trip to the U.S. Supreme Court that sent him to arbitration. (See American Express Co. v. Italian Colors Restaurant, 559 U.S. 1103 (2010) (available at http://bit.ly/2Zb41FD).)

He said he was “shocked” when he learned that the documents he signed included a mandatory arbitration clause. He noted that small businesses like his have no bargaining power to negotiate contracts with credit card companies, while big companies like Walgreens and Safeway have the power to negotiate and remove mandatory arbitration clauses in their contracts with those same companies.

Carlson stated that “small businesses do not get their day in court because they have no power,” and that it is impossible for small businesses to hold large corporations accountable for their actions.

Carlson’s statement evoked strong empathy in Sen. Blumenthal, who echoed the unfairness that the big companies had their day in court, but Carlson was denied his. In response to questions from Blumenthal and Sen. Amy Klobuchar, D., Minn., Carlson stated that mandatory arbitration handcuffs and prevents small businesses from “getting a fair shot of leveling the playing field.” In addition, Carlson stated that the companies often don’t give contracting parties enough time to get through all the fine print “unless you have an attorney on hand.”

  1. Paul Bland, Jr., executive director of Washington,, D.C., public interest law firm Public Justice, argued that forced arbitration clauses are “rigged and unfair.” He notes that it is getting harder to challenge arbitration clauses, and the clauses are often written to the disadvantage of consumers.

As examples, Bland cited to a Consumer Financial Protection Bureau report that suggests even when a person is directed to read an arbitration provision, only 9% of the people knew it means they cannot go to court.

Furthermore, Bland cited an instance where a rape victim was forced to arbitrate, and was given a choice to select from a list of arbitrators. But, explained Bland, all of the arbitrators were defense attorneys that he said presumptively are pro-corporations.

Previous witnesses Kevin Ziober and Alan Carlson affirmed this point, stating that neither of them had a choice in selecting their arbitrators. Chairman Lindsey Graham expressed concern about this practice, and stated that he will look into the issue.

New Jersey Democratic Sen. Cory Booker spoke passionately against arbitration provisions, arguing that it unfairly stacks the deck against consumers and impedes individuals’ ability to seek redress. Citing a study suggesting that big corporations win 98% of arbitrations, Booker exclaimed, “This is not justice. This is not equal justice. This is corporate favoritism.”

Finally, Sen. Dick Durbin, D. Ill., suggested that mandatory arbitration clauses should be barred from student agreements to attend for-profit college, especially those that guarantee job placement. He said that in these situations, the arbitration clauses especially harm middle-income people.

Durbin noted that that if a student starts with a busboy job, goes to a for-profit school paying tens of thousands of dollars yet still comes out a bus boy, the school considers that a “placement” and can’t be sued for misrepresentation.

Arbitration proponents then had a chance to fire back, demanding that consumer arbitrations be allowed to continue.

Sen. Chuck Grassley, R., Iowa, advocated to have more transparency in arbitration clauses to help bring accountability. He said that “consumers should know what they are agreeing to.” He raised the concern that banning mandatory pre-dispute arbitration clauses may impose extraordinary costs to corporations, which may in turn result in the costs being passed down to consumers.

Alan Kaplinsky, a partner at Ballard Spahr in Philadelphia and longtime business arbitration advocate, argued that arbitration under the FAA is important for companies. He said that the arbitration system is dynamic, and most of the times it works for both companies and individual consumers. He also rejected the argument that arbitration provisions offer no choices for consumers.

When questioned by Sen. Grassley about best practices to enforce transparency in arbitration clauses, Kaplinsky noted that it is important to draft arbitration agreements to “create fundamental fairness, give the consumer or employee the right to reject or opt out of the arbitration within some reasonable period of time.” He notes that these are not practices “required” under existing arbitration rules such as those issued by providers like the American Arbitration Association and JAMs.

Kaplinsky agreed with Sen. Grassley’s point that banning arbitration would create billions of dollars in costs for corporations, in addition to costs in defending against potential influxes of class action suits.

Victor E. Schwartz, a co-chair at the Public Policy Practice Group of Shook, Hardy, & Bacon, and a well-known as a Washington tort reform advocate and a supporter of class-action restrictions, also argued for consumer arbitration. He said that arbitration is generally a cheaper and faster alternative to litigation.

Schwartz also argued that consumers have the duty to read contracts and agreements, even if the clause is buried within the agreement. He rejected the view that consumers lack choice, noting that consumers enter binding arbitrations willingly. “You can choose to go to an employment office that does not require you to sign binding arbitration,” he said.

In addressing the argument that mandatory class action waivers harm the ability to address smaller claims, Schwartz countered that most employees are not eligible for class action anyway, given that the cases are usually factually different, and therefore class action is not a viable alternative.

Finally, Schwartz criticized plaintiffs’ attorneys, noting that since they usually are not paid by the hour, they are unlikely to accept litigation cases to represent employees in small claims cases. Thus, he said, in cases involving claims of $20,000-$30,000, arbitration is likely the only way for employees to get their claims addressed.

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To read further about this committee meeting from a different perspective, see Ellis Kim, “Arbitration Gets the Spotlight at Senate Judiciary Hearing,” Law.com (April 2) (available at https://bit.ly/2Ug7KxU).

A video of the hearing, as well as transcripts of the individuals’ remarks, is available from the Senate Judiciary Committee here: http://bit.ly/2KBiB6c.

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The author is a Spring 2019 CPR Institute intern, and a student at Brooklyn Law School.

 

The Reaction: Here’s What They’re Saying in the Wake of the Senate’s Vote to Overturn the CFPB Arbitration Rule

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By Elena Gurevich and Russ Bleemer

Last night in a narrow 51-50 vote, Senate Republicans overturned the Consumer Financial Protection Bureau rule that would have allowed the consumers to file class action suits against financial institutions and prohibited waivers of such processes accompanied by mandatory predispute arbitration.

Vice President Mike Pence cast the deciding vote.  See our blog post from earlier today here.

According to the New York Times, “By defeating the rule, Republicans are dismantling a major effort of the Consumer Financial Protection Bureau, the watchdog created by Congress in the aftermath of the mortgage mess.” See Jessica Silver-Greenberg, “Consumer Bureau Loses Fight to Allow More Class-Action Suits,” N.Y. Times (Oct. 24)(available at http://nyti.ms/2yL9eHn)

Reuters, noting that the House already passed the resolution repealing the rule soon after it was released in July, observed that the resolution under the Congressional Review Act “also bars regulators from instituting a similar ban in the future.” Lisa Lambert, “Republicans, Wall Street score victory in dismantling class-action rule,” Reuters (Oct. 24)(available at http://cnb.cx/2yQd8B2).

Moments after the vote, the White House issued a statement applauding Congress for passing the resolution and stating that a recent Treasury Department report was clear evidence that “the CFPB’s rule would neither protect consumers nor serve the public interest.” The White House statement is available at http://bit.ly/2yLFOew.

President Trump is expected to sign the resolution the moment it hits his desk. This, according to Reuters, will “abruptly end a years-long fight that has included multiple federal regulators, consumer advocacy groups, and financial lobbyists.”

In its blog that closely monitors the CFPB, consumerfinancemonitor.com, Ballard Spahr, a Philadelphia-based law firm, congratulated the Senate for “its courageous action and for recognizing . . . that arbitration benefits consumers, while class action litigation benefits only the plaintiffs’ bar.”

Keith A. Noreika, the acting Comptroller of the Currency, issued a statement praising the vote and calling it “a victory for consumers and small banks across the country.” Noreika stressed the crucial role of the OCC that “identified the rule’s likely significant effect on consumers.” The OCC statement is available at http://bit.ly/2gJ1rFC.

Late Tuesday night, Sen. Elizabeth Warren, D. Mass., who was among those who defended the rule this week wrote on Twitter, “Tonight @VP Pence & the @SenateGOP gave a giant wet kiss to Wall Street. No wonder Americans think the system is rigged against them. It is.”

CNN reported that “Consumer advocates said the vote was a tremendous setback for Americans, and that it offered companies like Wells Fargo and Equifax ‘a get-out-of-jail-free card.’” Donna Borak & Ted Barrett, “Senate kills rule that made it easier to sue banks,” CNN (Oct. 25)(available at http://cnn.it/2zCxJFN).

CNN also quoted Karl Frisch, executive director of Washington’s Allied Progress, a consumer watchdog group, who said that “This repeal will hurt millions of consumers across the country by denying them their rightful day in court when they get screwed over by financial predators.”

Public Citizen, a Washington, D.C., nonprofit consumer advocacy group echoed this sentiment, tweeting that the “#RipoffClause enables bad actor banks like @WellsFargo to steal billions from the very consumers they defraud and get off scot free.”

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Gurevich is a CPR Institute 2017 Fall Intern. Bleemer edits Alternatives for the CPR Institute.

The CFPB’s Arbitration Rule is Overturned by the Senate

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By Elena Gurevich and Russ Bleemer

Just a day after the U.S. Treasury Department issued a report criticizing a controversial Consumer Financial Protection Bureau rule that prohibited class waivers requiring consumers use mandatory predispute arbitration for disputes, the U.S. Senate voted on October 24 to overturn the rule.

The House in July had voted to overturn the rule under the Congressional Review Act, which gives Congress 60 legislative-session days to reverse administrative rulings it disagrees with.

The bill will go to President Trump, who is expected to sign it.

The legislative moves will overturn five years’ worth of efforts to roll back the use of class waivers accompanied by arbitration by the CFPB, which was designated by the 2010 Dodd-Frank Act to examine the utility of the ADR process in consumer disputes.

A 728-page 2015 study by the independent Washington agency said that arbitration was ineffective in vindicating consumers’ rights in financial services contracts, which are under the CFPB’s jurisdiction. The agency vowed to regulate arbitration.

After the report, Republicans, who long said the agency was too powerful, used the CFPB’s moves to increase calls to eliminate the agency in last year’s presidential campaign.

Late last night, Jeb Hensarling, R., Texas,  who as House Judiciary Committee chair led the fight against the rule, congratulated the Senate, noting in a statement on his social networks that the vote “is a victory for consumers, a defeat for the wealthy trial lawyers lobby and a rejection of the unchecked, unconstitutional and unaccountable CFPB.”

The CFPB had finalized its rule and published it July 19. It would have fully taken effect next year after a 180-day waiting period.

The rule, however, didn’t outlaw arbitration, though it increased the CFPB’s scrutiny by requiring reporting. The rule instead required that class processes, in either litigation or arbitration, be made available to consumers signing financing contracts or purchasing financial services.

Business lawyers, lobbyists and trade groups said the rule would wipe out financial services arbitration, because companies would rather face class action in courts, under familiar federal rules, than class arbitration with few outlets for appeal.

The Senate didn’t follow the House’s quick lead because it didn’t have the votes to overturn the rule, with some Republicans fearing a backlash for voting to support a banking industry-approved bill in the wake of scandals that invoked arbitration.

In fact, the Senate was split evenly, with two Republicans, Lindsay Graham, of South Carolina, and John Kennedy, of Louisiana, joining the Democrats. Vice President Mike Pence joined fellow Republicans to cast the deciding vote.

Treasury might have brought a senator or two to the side of overturning the law. On Monday, in a highly unusual move, the Treasury Department issued a 17-page report blasting the rule. See “Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule,” U.S. Dept. of the Treasury (Oct. 23)(available at http://bit.ly/2h0N7VB).

According to the Washington Post, Jaret Seiberg, an analyst with Cowen and Co.’s Washington Research Group, said that the Treasury Department report “[p]rovides some needed political cover for the few Senate Republicans who have been reluctant to vote in favor of the banks.” See Renae Merle, “Treasury Department sides with Wall Street, against federal consumer watchdog agency on arbitration rule,” Washington Post (Oct. 23)(available at http://wapo.st/2zxMABI).

It wasn’t the first Washington institution to fire back at one of its own on arbitration.  Earlier this month, the CFPB report and rule had been the subject of a heated argument between Keith A. Noreika, the acting U.S. Comptroller of the Currency, and Richard Cordray, the CFPB’s director.

Noreika slammed the CFPB’s action in an article on the Beltway website The Hill.  See “Senate should vacate the harmful consumer banking arbitration rule,” The Hill (Oct. 13)(available at http://bit.ly/2izENzT).

According to Noreika, the CFPB failed to support its case and “failed to disclose the costs to consumers that will likely result from the rule’s implementation.”

Soon after Noreika’s post, Cordray responded, stating that Noreika’s claims were “bogus” and “out of the blue.” See “The truth about the arbitration rule is it protects American consumers,” The Hill (Oct. 16)(available at http://bit.ly/2gIHbk2).

Added Cordray, “Why should Wells Fargo be able to block groups of customers from suing over fake accounts? Why should Equifax be able to force people to surrender their legal rights when the company put their personal information at risk?”

For more on yesterday’s vote, see Jessica Silver-Greenberg, “Consumer Bureau Loses Fight to Allow More Class-Action Suits,” N.Y. Times (Oct. 24)(available at http://nyti.ms/2yL9eHn).

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Gurevich is a CPR Institute 2017 Fall Intern. Bleemer edits Alternatives for the CPR Institute.

House Passes Resolution to Override CFPB Mandatory Arbitration Rule

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On July 25, and by a vote of 231-190, the U.S. House of Representatives relied upon the authority provided by the Congressional Review Act to pass a “resolution of disapproval” (H.J. Res. 111) to revoke the CFPB final arbitration rule published on July 19, 2017. The White House also issued a statement of support for the resolution.

The CRA requires both the House and Senate to pass a resolution of disapproval within 60 legislative days; the Senate vote on a similar resolution is expected to take place in September.

For a summary of the Democratic response to the House’s action, see Ballard Spahr’s Consumer Finance Monitor, “House Financial Services Committee Democratic Staff Report on CFPB Assails Republicans, Defends CFPB and Arbitration Rule,” by Barbara S. Mishkin.

For a review of how these issues have unfolded, see also CPR Speaks’ earlier posts on the CFPB Rule, “CFPB Announces Final Rule Barring Mandatory Arbitration in Consumer Financial Contracts” and “Congress Responds Rapidly to Block CFPB Rule Banning Mandatory Arbitration Clauses.”

Congress Responds Rapidly to Block CFPB Rule Banning Mandatory Arbitration Clauses

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On Monday, July 10, the Consumer Financial Protection Bureau announced its new rule preventing banks and credit card companies from using mandatory arbitration clauses in new customer accounts.

On Tuesday, July 11, and as predicted on “CPR Speaks,” Congress moved to stop the CFPB final rule. Arkansas Republican Sen. Tom Cotton announced he was drafting a resolution to get the new CFPB rule rescinded using the Congressional Review Act. Pennsylvania Republican Sen. Pat Toomey, Chair of the Subcommittee on Financial Institutions and Consumer Protection, is reported to be considering a similar step.

The newly popular 1996 Congressional Review Act—see the “CPR Speaks” link above–provides expedited  procedures through which the Senate may overrule regulations issued by federal agencies by enacting a joint resolution.

Characterizing the CFPB as having gone “rogue,” and its new rule as an “anti-business regulation,” Cotton is stressing the benefits of arbitration, as well as consumers’ capacity to make business decisions.

Financial Services Committee Chairman Jeb Hensarling, R., Texas, is also publicly criticizing the rule as bureaucratic and beneficial only to class action trial attorneys. He is urging Congress to work with President Trump to reform the CFPB and excessive administration by government. As also mentioned in yesterday’s post, in April Hensarling proposed H.R. 10, the Financial CHOICE Act of 2017, which would repeal the CFPB’s authority to restrict arbitration. The bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.

It remains to be seen whether the CFPB’s new rule will survive these and other potential congressional and court challenges. Much will depend upon the Senate and how many Republicans switch sides on this issue. Please stay tuned to this space for important developments.

CFPB Announces Final Rule Barring Mandatory Arbitration In Consumer Financial Contracts

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By Russ Bleemer

The broadest move by a government agency so far to restrict arbitration has been unveiled by the Consumer Financial Protection Bureau—a long-expected ban on the use of class-action waivers that require mandatory arbitration in consumer financial contracts.

While arbitration itself wasn’t the direct target, the practice has taken a public relations hit, becoming a proxy in a war over class-action processes.

Under the CFPB’s final rule—it proposed the ban last year under the Obama Administration after researching the subject since 2012—financial services firms, including those providing bank accounts and credit agreements, would be prohibited from using contracts that prevent consumers from joining together in class-action suits in court and require, instead, individualized arbitration processes.

Arbitration, the CFPB emphasized, would not be banned.

But it will be subject to unprecedented regulation.  Companies would have to note in their consumer credit agreements that the arbitration process being offered does not prevent the individual from initiating or joining a class-action suit.

And the companies using arbitration would have to provide the results of those processes to the CFPB, which on Monday announced it would post those cases, after redacting identifying information, on its website beginning in July 2019.

The rule, according to CFPB Director Richard Cordray, “prevents financial companies from using mandatory arbitration clauses to deny groups of consumers their day in court.”

Still, it may never get to the marketplace.  The rule, the CFPB said Monday, will be sent to the Federal Register for publishing, expected in the next week or two.  There is a total of 241 days needed for compliance before the rule is fully effective—the CFPB said it would announce an exact date upon publication.

In the interim, the Republican Congress may move to revoke it.  The 2017 Congress has embraced the Congressional Review Act, a formerly little-used 1996 law that allows it to review new federal regulations issued by government agencies and overrule them under a joint resolution.

This year, the CRA has been invoked 14 times to overturn regulations. The CFPB’s arbitration efforts have been squarely in the sights of banking and finance lobbyists, among others.

There are other options, including President Trump firing Cordray and replacing him with a director who would strike the CFPB proposal.  See Alan S. Kaplinsky, “Proposed CFPB Arbitration Rule Faces Multiple Obstacles,” 35 Alternatives 3 (January 2017)(available at http://bit.ly/2hRb943).

And H.R. 10, the Financial CHOICE Act of 2017, an April proposal by Rep. Jeb Hensarling, R., Texas, would repeal the CFPB’s authority to restrict arbitration.  The bill passed the House and has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.

Late last month, the Trump Administration reversed course on mandatory employment arbitration contracts, switching sides in three consolidated U.S. Supreme Court cases to be argued this fall in which the National Labor Relations Board similarly had banned the use of arbitration clauses because they prevent class cases against employers.  See Nicholas Denny, “DOJ to NLRB: You’re On Your Own in the Supreme Court,” CPR Speaks (June 21)(available at http://bit.ly/2uJNDwC).

Said Cordray, “I am aware, of course, of those parties who have indicated they will seek to have the Congress nullify the new rule.” He said that such steps will be “determined on the merits.” He continued: “My obligation as the [CFPB director] is to act for the protection of consumers and in the public interest, [and] that is what I believe have done” with the release of the final class waiver-arbitration rule.

The CFPB’s press announcement, along with links to the rule’s text and a new video explaining the moves, can be found HERE.

Russ Bleemer is the editor of CPR’s award-winning magazine, Alternatives.

DOJ to NLRB: You’re On Your Own in the Supreme Court

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CLASS WAIVER/MANDATORY ARBITRATION CASES

By Nicholas Denny

In the clearest illustration so far of the Trump Administration’s evolving hands-off policy toward mandatory arbitration clauses and class action waivers, the U.S. Solicitor General authorized the National Labor Relations Board (NLRB) last week to represent itself in one of three consolidated arbitration cases to be heard by the U.S. Supreme Court this fall.

At the same time, the U.S. Department of Justice, which had been representing the board in NLRB v. Murphy Oil USA Inc., No. 16-307 (U.S. Supreme Court docket page at http://bit.ly/2kOPxal) until last week, switched sides in the case, filing an amicus brief backing the employer in the matter.

Justice, via the friend-of-the-court briefs, is now advocating against the NLRB, and against its previous position.

The case—along with its companions, Ernst & Young v. Morris, No. 16-300 (Docket page at http://bit.ly/2kLxCEg) and Epic Systems Corp. v. Lewis, No. 16-285 (Docket page at http://bit.ly/2kFVxm6)—asks whether mandatory arbitration clauses as a condition of employment bar individual employees from pursuing work-related claims on a collective or class basis under the National Labor Relations Act (NLRA). Mandatory arbitration clauses are used throughout employment settings and apply to employees regardless of titles or union affiliation; two of the three cases involve white-collar office workers.

The Supreme Court will hear the consolidated cases in the term beginning in October.

The issue in the consolidated cases is whether employers can continue to unilaterally require that employees agree to a mandatory arbitration clause in employment contracts. Often, these clauses are non-negotiable: either employees accept the employer’s terms or the employer finds someone else to hire.

The Supreme Court must decide which of two laws controls: the National Labor Relations Act, 29 U.S.C. § 151, et seq., or the Federal Arbitration Act, at 9 U.S.C. § 1 et seq. Under the NLRA, an employee’s rights to collective bargaining and action are protected. Under the FAA, however, an employment contract that includes a mandatory arbitration clause binds the worker to arbitrate with the employer instead of litigating in court, and is accompanied by a waiver barring the employee from bringing a class-action suit in favor of an individualized process.

As a result, arbitration clauses can deliver a one-two punch: (1) workers arbitrating individually may have less power, because they are not operating as part of a collective whole as contemplated by the NLRA, and (2) a worker may be less likely to find counsel because arbitration awards are perceived to be much smaller than court and class-action outcomes—meaning a lawyer working for a portion of the settlement would be less likely to take the case.

On the other hand, employers contend that mandatory arbitration clauses protect the company and benefit the employee. They argue that arbitration clauses ensure a speedier and more cost-effective conclusion to conflicts: class actions are harder and more costly to fight than arbitrations.

The disagreement over the use of mandatory arbitration clauses has arisen in the political arena, too. While the Obama Administration focused on pro-employee, anti-mandatory arbitration policies that prohibited employers from unilaterally waiving workers’ rights to concerted action under the NLRA, the Trump Administration is leaning toward an employer-centric policy by permitting mandatory arbitration clauses in employment contracts and as a condition of hiring.

This drastic shift in policy culminated with Friday’s news that the NLRB will represent itself, and that the Department of Justice would switch sides. The NLRB, as an autonomous government entity, is tasked with protecting “the right of employees to engage in protected concerted activities—group action to improve wages, benefits, and working conditions and to engage in union activities and support a union,” according to its website, as well as protecting the right of workers to refrain from engaging in protected concerted or union activities.

While the Justice Department prosecutes on behalf of the nation as well as defends government agencies, it is exceedingly rare for it to withdraw its representation of an agency it had been representing and subsequently file a brief in opposition to the position had it previously taken.

The Justice Department amicus brief switching sides in Murphy Oil is available at http://bit.ly/2sUnFbL.  The NLRB’s June 16 announcement that it would represent itself without Justice Department support can be found on the board’s website at http://bit.ly/2traH2s.

The move, however, is consistent with another recent Trump Administration policy shift on arbitration. In early June, the Centers for Medicare and Medicaid Services, an arm of the U.S. Department of Health and Human Services, withdrew a 2016 Obama Administration position prohibiting mandatory arbitration clauses in long-term care nursing home contracts.

CMS’s new position allows arbitration agreements provided that the provisions are written in plain language, and explained to and accepted by the applying resident.  Among other conditions, the CMS requires that the nursing home retain a copy of the signed agreement and post a notice that details the nursing home’s arbitration policy.

In addition, House Republicans introduced the “Financial CHOICE Act” earlier this month, a proposed law that aims to dismantle the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank is an extensive law that was passed to ensure higher accountability in the U.S. financial sector after the economic recession of 2008 and it was endorsed by former President Obama.

Among its many goals, Dodd-Frank pointed its then-new Consumer Financial Protection Bureau at pre-dispute mandatory arbitration clauses in consumer finance contracts. A lengthy study concluded last year by the CFPB resulted in a promise to finalize regulations that would ban the use of predispute mandatory arbitration in consumer financial contracts, such as cellphone agreements.

But should the “Financial CHOICE Act” become law, it likely would allow financial institutions to include mandatory arbitration clauses in their consumer contracts and agreements, and negate the CFPB efforts.

President Trump’s stance on mandatory arbitration clauses is becoming clear. Whether the clauses are legal in the employment context, and whether they will withstand Supreme Court scrutiny, are developing issues that are expected to be answered within the year. Watch CPR Speaks for updates.


The author is a CPR Institute Summer 2017 intern.

Making the Mandatory Argument: Arbitration, Class Waivers and the Practitioners’ Role

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By Russ Bleemer

Legislative and court arguments over whether ADR processes can be used to defray class litigation are moving toward a decisive 2017 conclusion.

New regulations barring the use of class waivers associated with mandatory arbitration clauses in consumer financial contracts, like credit card agreements or wireless telephone service agreements, are due for release soon by the Washington, D.C.-based Consumer Financial Protection Bureau.  The CFPB had issued a proposal in May and accepted public comments until August.

In the December Alternatives, Sanford Jaffe and Linda Stamato, longtime conflict resolution process theorists, designers, and practitioners at the Center for Negotiation and Conflict Resolution at Rutgers University in New Brunswick, N.J., backed the move.  They argue that the mandatory arbitration processes that prohibit class litigation that the CFPB targets indeed should go.

But with the intervention of last month’s election, the prospects for the vitality and longevity of the coming regulation has dimmed.

So the authors also argue that the responsibility for preserving the integrity of alternative dispute resolution processes by breaking the link between mandatory processes and class waivers lies with practitioners themselves.

“Rarely seen are misgivings about mandatory arbitration expressed by dispute resolution professionals,” the authors write. “But we ought to be heard in the hearings and rule-making processes, and in social and print media, to support the proper use of the processes we have worked to design, develop, apply and evaluate.  We need . . . to defend the principles upon which this field is grounded, not the least of which is choice. We need to return to the attitudes and beliefs with which the field started decades ago, to fulfill the promises of the architects of the field.”

In addition to discussing mandatory arbitration in contracts over which the CFPB regulates, Jaffe and Stamato discuss mandatory arbitration in the employment context, noting the line of cases involving the clash between the Federal Arbitration Act and the National Labor Relations Act.

Three federal circuit courts have held that the FAA permits employers to use class waivers in requiring arbitration to resolve workplace disputes, while two circuits have gone the other way, saying that the NLRA preserves a right to class processes, including litigation, under the law which says that employees may “engage in . . . concerted activities.” See CPR Blog post from Aug. 23 HERE.

Since the December issue of Alternatives was released (HERE free on CPR’s website for members logged in; HERE with archives on publisher John Wiley’s site) , the U.S. Supreme Court has scheduled five FAA-NLRA cases for discussion at its Jan. 6 case conference.

Experts believe the Court will accept one or more of the cases—perhaps one favoring the defense view upholding mandatory arbitration with a class waiver, and one backing the National Labor Relation Board’s ruling that class processes must be preserved—to finally decide the matter, which has been brewing since the NLRB struck the mandatory arbitration/class waiver provision it found in D.R. Horton Inc., 357 NLRB No. 184, 2012 WL 36274 (Jan. 3, 2012)(PDF download link at http://1.usa.gov/1IMkHn8), enforcement denied in relevant part, 737 F.3d 344 (5th Cir. 2013)(Graves, J., dissenting)(PDF download link at http://bit.ly/1XRvjrM), reh’g denied, No. 12-60031 (Apr. 16, 2014).

Meantime, the viability of the CFPB’s yet-to-be-released regulations is in doubt in light of President-elect Trump’s anti-regulation views, including his loathing of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which authorized the CFPB.  While the agency is committed to a forthcoming final regulation, it’s unlikely it will stand without attack.

In the forthcoming January issue of Alternatives, available at the links above on or around Jan. 4, Philadelphia-based Ballard Spahr partner Alan Kaplinsky will counter the December Alternatives commentary discussed above with an outline of the options to challenge to the CFPB’s regulation, which some analysts say may emerge before Trump’s Jan. 20 inauguration.

As Kaplinsky points out, a Congressional repeal may not even be necessary.  A new Trump appointee replacing current CFPB Director Richard Cordray could roll back the roll-out, restore (or reassert) mandatory arbitration and class waivers, and delay or change the regulations via the Administrative Procedure Act.

The December Alternatives commentary, “Private Justice: Losing Our Day in Court,” by Sanford M. Jaffe and Linda Stamato, is available now for all readers HERE.

The author edits Alternatives to the High Cost of Litigation for the CPR Institute.

Class Act: Looking at How the CFPB Wants to Restrict Arbitration Agreements

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By Russ Bleemer

If you want to make your voice heard on federal arbitration regulation, now’s the time.
The Consumer Financial Protection Bureau in May released its proposal to ban arbitration agreement provisions that bar class processes and require individual ADR for disputes in consumer financial services contracts under the agency’s jurisdiction.

The formal public announcement early last month was followed by the publication May 24 of the official proposal. “If finalized in its current form,” said CFPB Director Richard Cordray last month, “the proposal would ban consumer financial companies from using mandatory pre-dispute arbitration clauses to deny their customers the right to band together to seek justice and meaningful relief from wrongdoing. This practice has evolved to the point where it effectively functions as a kind of legal lockout.”

Public comments, due by Aug. 22, are piling up. There are 599 at this writing. (You can view them HERE, along with the full proposal and the link to provide a comment.) A day after the comment period opened, the deluge was kicked off with a letter signed by more than 200 law professors strongly supporting the agency’s proposals.

But Republicans on the House Financial Services Committee, continuing a long-running push to eliminate the CFPB and overturn the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 that created the agency, introduced on June 8 a new proposal that specifically bars the CFPB from regulating arbitration.

The June Alternatives, available now HERE, covers in detail Cordray’s remarks and those of a pro-and-con panel at the May 5 CFPB Albuquerque, N.M., field hearing that introduced the proposed regulation. (An enhanced, annotated version of the article can be accessed directly by subscribers and individuals at CPR Institute members who are logged into CPR’s website at this link.)

The June Alternatives article discusses how the agency’s research into arbitration’s effects on consumers—a voluminous 728-page report conducted over a three-year period that was released in March 2015–led to last month’s proposal.

Agency representatives, including Cordray, emphasized that the CFPB is not proposing to ban pre-dispute arbitration agreements. The key agency goal is to allow consumer class actions that the waivers have cut off.

The Albuquerque panel discussion of arbitration practice experts included three consumer advocates who congratulated the agency, and three business representatives who criticized it and suggested alternative paths–assuming what has become, for some of the panel, traditional public roles in a short period of regulatory time.

The debate continues in Alternatives in the special combined summer July/August issue, which will be available by July 14 HERE. In “Between the Lines: How the CFPB Will Police Financial Services Arbitration,” we examine the specifics of the proposal, including the mandatory language that the CFPB wants included in consumer financial services arbitration agreements.

Following the June report linked above, the new article wades through the 377-page proposal and accompanying report to highlight how the class action moves will affect arbitration parties, providers, contract drafters, neutrals and tribunals.

It will focus on the details in the CFPB’s proposal and report absent from generalized coverage of the CFPB’s move—minutiae to most, but parts of the proposal that are essential to arbitration practitioners and providers’ businesses, and which are drawing comments this summer.

Russ Bleemer edits the CPR Institute-published Alternatives to the High Cost of Litigation.

CFPB Decision Implicitly Recognizes Arbitration as Legitimate Alternative to Litigation

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CFPB’s Decision Not to Bar Mandatory Arbitration Clauses Implicitly Recognizes Arbitration as Legitimate Alternative to Litigation

There has been much focus over the past years on mandatory arbitration clauses combined with class action waiver provisions that preclude parties from bringing claims on anything other than an individual basis. Earlier this month, in a move to protect consumers, The Consumer Financial Protection Bureau’s Arbitration Field Hearing announced the Bureau’s decision, following a study and report the CFPB published and issued to Congress earlier this year, to launch a rulemaking process to bar class action waivers in combination with consumer financial arbitration agreements,

Here’s what CFPB Director, Richard Cordray, had to say regarding the decision:

After carefully considering the findings of our landmark study, the Bureau has decided to launch a rulemaking process to protect consumers. The proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well. …

 So what does this rulemaking process mean?

To start, the rules wouldn’t ban arbitration clauses altogether. Rather, they would require clauses to state that they don’t apply to cases filed as potential class-action lawsuits unless a judge denies class certification or a court dismisses the claims. Furthermore, the proposals would mandate that companies using arbitration clauses divulge records to the CFPB showing the claims filed by consumers and the awards issued — which may be made available to the public in an effort to ensure fairness and transparency of the arbitration process on behalf of the consumer. Should the proposal be adopted by the CFPB, new rules would apply to financial products overseen by the CFPB, including those cited by CFPB director, Cordray.

Many consumer groups are hailing the CFPB’s efforts as a victory for consumers. Still, the CFPB’s move is expected to face stiff opposition from the likes of the U.S. Chamber of Commerce; the Minneapolis-based Association of Credit and Collection Professionals (ACA International), a membership group of credit and collection industry firms as well as asset buyers, attorneys, creditors and vendor affiliates; and other business groups which, according to a recent New York Times article, maintain that “arbitration offers a more efficient but equally fair means for consumers to resolve complaints. These private proceedings, held outside court, provide the same opportunity for relief without the staggering legal bills, the groups say.”

According to CPR’s SVP of Product Development and Public Policy, Beth Trent, “While it’s difficult to tell the precise impact of the CFPB’s proposed rule, the CFPB’s decision not to bar mandatory arbitration clauses is quite telling. It implicitly recognizes that arbitration is a legitimate alternative to litigation, which is supported by the CFPB’s own data which shows that arbitration is a speedier process than class action litigation, that claim rates in class actions are low, and that average recovery per class member is low.”

“People generally prefer speedy resolution of their claims, and it’s not clear that individuals would necessarily choose to bring a class action,” Ms. Trent added. “That said, lawyers most often initiate class actions with only one, or a few named class representatives, and the vast majority of individuals have no choice regarding whether they are included in a proposed class. In fact, they may be entirely unaware that they are included in a class action at all. Ultimately, the impact of the proposed rule will be shaped, at least in part, by the business response to that rule. Most notably, whether businesses offer arbitration programs that meet standards of due process and consumer needs in a cost-effective manner.”

The next CFPB step is convening meetings of a Small Business Regulatory Enforcement Fairness Act panel, which will review the impact of the proposed regulation on small businesses.  The first such meeting is scheduled for Washington, D.C., Oct. 28, according to the CFPB Monitor, a blog published by the Philadelphia-based law firm Ballard Spahr.