If it were a World Wrestling Entertainment bout, it'd surely be pay-per-view. The nation's youngest consumer protection agency fired a direct shot at one America's oldest institutions last week — banking. The stated goal of the Consumer Financial Protection Bureau's latest proposal is to make it easier for consumers to sue a bank if it misbehaves. But there's one problem for the agency in the epic wrestling showdown that's sure to come: it's a tag-team match that could include the U.S Supreme Court, to stretch the metaphor, and so far, the Supremes have sided with the bankers.
"It comes down simply to whether the (bureau) can now make rules that run directly counter to clear Supreme Court findings," said Matt Adler, a law professor at the University of Virginia and chair of the arbitration practice at Pepper Hamilton law firm.
For years, many compulsory contracts for common products like credit cards or cellphones have included language that effectively prevents angry consumers from suing corporations they do business with. Instead, people who believed they've been wronged must bring their cases to an arbitration panel. Last week, after a protracted three-year study and seemingly endless foreshadowing, the CFPB announced its plans to ban class-action lawsuit waivers from consumer contracts involving financial products.
How Each Side Views Mandatory Arbitration
Banks say this process is more efficient; consumer advocates say it has taken away people's right to their day in court. A waiver of class-action rights is particularly problematic, consumer advocates say, because oftentimes the "wrongs" involve small dollar amounts that no single person would bother to fight over. When a bank systematically overcharges consumers $10 at a time, the only way to get justice is to let thousands or even millions of consumers bind their claims together.
At least, that's what the CFPB says. Its new rule would ban class-action waivers in generic consumer contracts, and place new requirements on individual arbitration too.
With class-action waivers, "companies can sidestep the legal system, avoid big refunds and continue to pursue profitable practices that may violate the law and harm countless consumers," the bureau said in a press release. "The CFPB's proposals under consideration would give consumers their day in court and deter companies from wrongdoing."
The banking industry began fighting these proposals before they were issued. Earlier this year, several industry groups signed a letter saying the study the CFPB conducted was flawed and claimed they were left out of the rule-making process. When the CFPB rule takes effect, perhaps within a year, opponents will try plenty of legal strategies to have it set aside.
The most novel might be the creation of a Constitutional crisis.
The Supreme Court's Arbitration Rulings
There have been two landmark cases in the recent years in which a Supreme Court majority has not only struck down efforts to limit arbitration clauses, but also has positively affirmed the benefits of arbitration.
In the 2011 decision of the AT&T Mobility vs. Concepcion case, the Supreme Court said that California state law could not invalidate arbitration clauses, essentially saying it was pre-empted by the 1925 Federal Arbitration Act. The next year, in what is known as the CompuCredit case, even the explicit statement of private right of action in a federal law — in this case, the Credit Repair Organizations Act — wasn't enough to trump the Supreme Court's support of the Federal Arbitration Act. Consumers who wanted to sue a credit repair firm were told they had to go to arbitration.
There is "a liberal federal policy favoring arbitration agreements," the majority wrote at the time. The court views its job as interpreting Congressional intent, and the intent of the Federal Arbitration Act was to encourage dispute resolution outside the court system.
Finally, in 2013, American Express won a case at the Supreme Court upholding its language preventing a lawsuit by merchants who thought the the credit card firm was abusing its monopoly power.
"The Supreme Court took another big step down the road of permitting companies to use arbitration agreements to entirely insulate themselves from class-action liability," said Brian Fitzpatrick, a law professor at Vanderbilt University, to the Washington Post at the time. "The writing is on the wall now more clearly than ever: There is little future for consumer and employment class actions, and even shareholder class actions may not survive."
So Who's in Charge Here?
Now comes the CFPB, offering its own ban on class-action waivers — seemingly in direct contradiction of these Supreme Court rulings.
"It's really going to come down to whether an agency rule can overcome those cases. There's absolutely going to be test ligitation," Adler said.
His opinion was clear-cut — absent an explicit amendment to the 1925 Federal Arbitration Act, the CFPB rule won't survive.
"I think you're going to need a Congressional Amendment," he said. "The court will most certainly not roll over in face of an agency rule."
Not so fast, counters Paul Bland, executive director of consumer advocacy organization Public Justice — and also a leading critic of class-action waivers. Federal agencies, which are part of the executive branch, make rules all the time at the direction of Congress. The Dodd-Frank financial reform legislation explicitly mentions arbitration agreements, and orders the CFPB to study the issue and make a ruling.
"It's hard to see an argument that this isn't what Congress intended," Bland said. He did concede, however, that the current court "loves arbitration," and anything is possible.
"It's … a court that has been skeptical of the administration, and if they view this through a partisan lens, that will be problematic for the consumer," Bland said.
In fact, a successful Supreme Court challenge to the arbitration rule might call into question every other rule the bureau has made — or perhaps ever rule any administration agency has made.
Adler, doesn't see it that way, however. The Environmental Protection Agency, for example, was clearly created by Congress to make rules about environmental issues. The CFPB is regulating an overly broad area beyond its expertise, he argued.
"I find this to be unique…The agency can't make any rule it wants," he said. "I could see the Supreme Court saying not only is this contrary to precedent, but it's contrary to the plain language of the (Federal Arbitration) Act."
Still, it seems hard to deny that a successful Supreme Court challenge to a rule make by the CFPB wouldn't be a huge hit to the agency's ability to make rules — and to protect consumers.
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