United States: Revisiting The Enforceability Of Class Action Waivers In Consumer Financial Contracts

On July 19, 2017, the Consumer Financial Protection Bureau (CFPB) published the final Arbitration Agreements Rule (the rule) that would impact the way claims involving consumer financial products and services are handled in the future. The rule prohibits providers of consumer financial products and services from relying on a predispute arbitration agreement that includes an arbitration clause that bars a consumer from filing or participating in a class action.

The rule would apply to "providers" of covered consumer financial products and services. The rule defines a "provider" as:

  • A person or entity that engages in an activity that is a covered consumer financial product or service if not otherwise excluded for the rule, or to the extent that the person is not specifically excluded from coverage under the Arbitration Agreements Rule; or
  • An affiliate of such a person, when the affiliate is acting as that person's service provider.

Generally, covered products or services are those offered or provided to consumers primarily for personal, family or household purposes, or that are offered or provided in connection with another financial product or service that is offered or provided to consumers primarily for personal, family or household purposes. The rule covers various consumer financial services, including, but not limited to, core banking depository and consumer credit products, debt relief providers, servicing or collecting certain credit products, and check cashers.

Under the rule, predispute arbitration agreements must include specific language notifying the consumer that the agreement cannot be used to preclude his or her participation in a class action. Predispute arbitration agreements, including multiple products or services and those not covered by the rule, must also include specific language stating that the agreement cannot preclude class action participation with regard to covered products and services.

The rule also requires providers to provide the CFPB with records about permissible arbitrations and initial claims and counterclaims, answers to these claims and counterclaims, and individual awards resulting from those arbitrations. If a company is required to submit a record, it must be submitted within 60 days of the date that the record was filed with the arbitrator, arbitral administrator or court. Starting in 2019, the CFPB will publish this information on its website with "appropriate redactions as warranted."

The CFPB issued the rule on July 10, 2017. The final Arbitration Agreements Rule is a product of the CFPB's multiyear study on arbitration agreements, released March 2015, which found that arbitration agreements restrict consumers' relief for disputes with financial service providers by limiting class actions. In the lead-up to producing the rule, the CFPB published its proposed version in May 2016, which received over 110,000 public comments. In its press release announcing the rule, the CFPB highlighted three reasons why it believes this rule is necessary: that financial service companies are denying consumers their day in court, that the companies are using arbitration to avoid large payouts and that the companies are hiding behind arbitration to avoid amending their practices, which may be harmful to consumers.

The rule is effective on September 18, 2017, and will apply to arbitration agreements that are entered into on or after March 19, 2018 (the compliance date), which is 241 days after its publication in the Federal Register. The CFPB made the compliance date 30 days later than it initially proposed to ensure that providers can make the necessary revisions, software updates and hard-copy modifications as needed.

As of the effective date, covered providers will be required to include the required provision or alternative provision to all of the following:

  • New arbitration agreements entered into on or after the effective date.
  • Pre-existing arbitration agreements assigned to a covered provider (which becomes a party to the agreement) after the effective date.
  • Addition of an arbitration clause to a pre-existing consumer agreement after the effective date.
  • A new product or service that is sold after the effective date that is covered by a pre-existing arbitration agreement in which the provider is a party to that arbitration agreement.

Existing contracts are not covered under the existing rule. However, when existing contracts are purchased by a new provider, the new provider must either amend the contract to contain required language or provide the consumer a notice within 60 days of entering into the predispute arbitration agreement. As to the latter, the notice must state that the new provider will not rely on any predispute arbitration agreement to preclude the consumer's participation in a class action. Similar language must also be included when the purchased existing contracts cover a mix of covered and noncovered products and services.

The question of the day is whether the rule will be enforced.

As an initial matter, the Congressional Review Act (CRA) empowers Congress to review and overrule any new federal regulation issued by a government agency. Under the CRA, Congress has 60 "legislative days" (i.e., 60 days in which Congress is in session) from the date that the rule is received by Congress to disapprove of any given rule by a majority vote. Once a rule is overruled by Congress, the CRA prohibits the reissuing of that rule or any new rule that is substantially the same. Until 2017, the CRA was successfully invoked only once, in 2001. However, since January 2017, Congress has successfully invoked the CRA 14 times to overrule federal regulations enacted during the previous administration. On July 11, 2017, Sen. Tom Cotton, R-Ark., initiated the process for rescinding the CFPB's arbitration rule under the CRA. If the rule is not overruled by Congress, then its enforceability will be determined by the courts.

The Federal Arbitration Act (FAA) is the current law of the land in terms of deciding the enforceability of arbitration clauses containing class action waivers. Congress enacted the FAA in 1925 in response to widespread judicial hostility to arbitration agreements. The FAA provides that a written provision in any contract evidencing a transaction involving commerce to settle a controversy by arbitration "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Federal courts regularly describe the FAA as reflecting a "liberal federal policy favoring arbitration."

In 2011, the Supreme Court gave additional teeth to the FAA when it ruled in AT&T Mobility LLC v. Concepcion. The Concepcion Court, in a majority opinion authored by Justice Scalia, held that arbitration agreements containing class action waivers found in business consumer contracts are enforceable, as the FAA pre-empts the California state laws that prohibit contracts from disallowing classwide arbitration. In ruling, the Court held that "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." The CFPB rule, broadly prohibiting the enforcement of class action waivers in certain consumer contracts, seems to be in direct conflict with the Court's holding. In January 2017, the Supreme Court granted certiorari in three cases, which will allow the Court to define the scope of its Concepcion holding. Depending on the scope of the Court's holding and reasoning, there may be further grounds for invalidating the CFPB's prohibition of class action waivers in certain consumer financial agreements.

We will continue to follow this issue closely. For further reading on this topic, please see our prior posts (listed below), and we will continue to watch and keep you posted on developments as the CFPB's rule faces challenges in Congress and the courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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