The Supreme Court's latest arbitration decision is but the
latest in a long line of decisions enforcing the strong federal
policy enforcing arbitration clauses in consumer contracts. In
DirecTV v. Imburgia, a 6-3 decision, Justice Breyer held
that the Federal Arbitration Act preempts state laws, in this
instance California's, that invalidate arbitration clauses if
they contain a prohibition on class-wide arbitration.
While the United States Supreme Court continues to enforce the
strong federal policy favoring arbitration, another part of the
federal government, the Consumer Financial Protection Bureau (CFPB)
has been busily preparing to ban mandatory arbitration clauses in a
broad swath of consumer contracts. The CFPB's plans are based
on a view of consumer arbitration that is wholly contrary to that
expressed by the Supreme Court. The CFPB views arbitration clauses
as an unreasonable restriction on consumer's ability to file
class action lawsuits, and has launched a rulemaking process
designed to "prohibit companies from blocking group lawsuits
through the use of arbitration clauses in their contracts."
Prepared Remarks of CFPB Director Richard Cordray at the Meeting of
the Consumer Advisory Board, Oct. 22, 2015, available here. The CFPB's planned
regulation would limit companies' ability to include class
arbitration waivers in their arbitration provisions, a provision
the Supreme Court enforced in Imburgia pursuant to the
Federal Arbitration act. The CFPB's rulemaking proposal
developed as a result to its report to Congress on pre-dispute
arbitration provisions earlier this year. (Troutman Sanders'
commentary of CFPB's report can be found
here). The CFPB concluded a multi-year review of the use of
arbitration agreements, and based on its own data concluded that
"consumers' relief for disputes with financial service
providers" by way of class action lawsuit would be restricted
as a result of these arbitration agreements. The CFPB's study
has been criticized as providing a misleading comparative analysis
between class actions and arbitrations and making conclusions
regarding the inefficacy of arbitration contradicted by the very
data the CFPB accumulated.
While section 1028(b) of the Dodd-Frank Act gives the CFPB
authority to promulgate regulations that prohibit or impose
conditions on arbitration agreements for consumer financial
services or products, that provision says nothing about overturning
the established federal policy favoring arbitration. Nevertheless,
the CFPB proposes to exercise its authority in direct contradiction
to the strong federal policy favoring arbitration. Indeed, the
CFPB's regulation limiting the arbitration agreements will
stand in total discord with the long-standing federal policy
– as expressed by the Supreme Court in interpreting the FAA
– enforcing them as written. We can be sure that such a
contradiction of policies will foster a new round of litigation on
class arbitration waivers in arbitration clauses that is not likely
to come to a final resolution until the Supreme Court weighs
While foreshadowing that ultimate showdown,
Imburgia's specific holding is not without interest.
California's law barring enforcement of an arbitration
provision that contained a class arbitration waiver was previously
invalidated by the Supreme Court in AT&T Mobility LLC v.
Concepcion, 131 S. Ct. 1740 (2011). The California Court of
Appeal tried to sidestep that holding by interpreting a choice of
law provision in the parties' agreement as applying the law in
California as it existed prior to Concepcion. The Supreme
Court found that California should have applied its state law in
its current form, not as it existed prior to the
Concepcion ruling. While parties may contract the specific
law to govern potential disputes, that governing law must still be
a valid one. Because the California Court of Appeal sought to apply
a law that had been preempted by the Federal Arbitration Act,
arbitration contracts were not on equal footing with any other
contract. The Supreme Court, therefore, used its power to grant
certiorari to enforce the federal law favoring arbitration
under the Supremacy Clause of the U.S. Constitution. In other
words, the Supreme Court has backed up its view that arbitration is
supported by a strong federal policy with efforts to crack down on
continuing efforts by the states to negate that policy.
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Brattle Principal Lisa Cameron, Academic Advisors Professor Greg Allenby and Professor Peter E. Rossi, and Brattle Senior Research Analyst Yikang Li recently co-authored an article for BNA about fundamental economic errors in approaches to damages in recent product mislabeling cases.
The Consumer Financial Protection Bureau recently sued three law firms in the United States District Court for the Central District of California for collecting advance fees from consumers seeking debt relief.
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