Battle Against Forced Arbitration in Financial Contracts Could Take Years

A U.S. agency’s plans to ban forced arbitration clauses from financial contracts faces a tough road, with early reaction pointing to a years-long battle that could take a Supreme Court test to settle.

Thousands of angry consumers and business representatives have flooded the Consumer Financial Protection Bureau with comments on its May proposal to block companies from forcing customers to take disputes to arbitration instead of joining group lawsuits.

Sentiment in the unusually high number of comment letters, more than 8,380 have already been filed though the deadline still is a week away, seems roughly divided between supporters and critics of the proposed rule.

Some of its biggest opponents, such as the U.S. Chamber of Commerce and the Financial Services Roundtable, have yet to file their comments, although they are expected to do so closer to Monday’s deadline.

“If you see a final rule that is substantially similar or identical to the proposed rule there is a very high likelihood that there will be an industry challenge,” that could go all the way to the Supreme Court, said Benjamin Saul, a partner with White & Case who has represented financial services clients in CFPB cases.

The CFPB will review the comments before issuing a final rule.

The biggest question – whether the CFPB has legal authority to create such a rule – could be settled earlier. Several lawsuits challenging the CFPB, created in the 2010 Dodd Frank Wall Street reform law, are working their way through the courts and one is already awaiting a ruling at the U.S. Court of Appeals in Washington.

Consumers Could Choose

Under the agency proposal, companies could still use arbitration, but would have to tell consumers they could join class actions lawsuits instead.

In class actions, people band together to sue over the same allegations of wrongdoing to make the lawsuit more affordable. In arbitration, individuals settle complaints against businesses one at a time, with an independent arbitrator deciding the case. Frequently, companies select the arbitrators, proceedings are confidential and decisions are hard to appeal.

Requiring customers to sign arbitration clauses when signing up for financial products has become standard practice since a 2011 U.S. Supreme Court validated the practice. The CFPB jumped into the issue at the direction of Dodd-Frank.

The current crop of letters, some coming from members of Congress and state attorneys general, reveals the passions this inflames. Around 6,000 were considered mass mail by the CFPB because they were form letters, sent together, or extremely similar.

Supporters, who are mostly Democrats, lawyers, organizations that advocate for the poor, told the agency that lawsuits are the best way to rectify wrongful practices and they portrayed arbitration clauses as snuck into contracts to deny consumers their constitutional rights.

“Forced arbitration shields corporations from accountability for abusive, anti-consumer practices, which only encourages unscrupulous business practices by allowing violations of the law to go unchecked,” said a comment letter from 38 U.S. senators including Virginia’s Tim Kaine, the Democratic Party’s vice presidential candidate in the Nov. 8 election.

The proposal’s opponents, including conservatives, small businesses and car dealerships, said it will would increase their costs and open the door to “frivolous” lawsuits, benefiting only fee-driven trial attorneys.

(Reporting by Lisa Lambert; editing by Linda Stern and Grant McCool)