New CFPB arbitration ban draws criticism

Last week, the CFPB announced a new rule banning arbitration clauses in consumer contracts for a variety of products and services, however many are concerned that now the only way into a courtroom is with a class-action lawsuit

Last week, the Consumer Financial Protection Bureau announced a new rule banning arbitration clauses in consumer contracts for a variety of products and services. Although the CFPB stated that the rule will allow any consumer with a dispute to “have their day in court,” many are concerned that their only way into a courtroom now is a class-action lawsuit.

All 50 states, plus the District of Columbia, allow for filing private suits over alleged consumer frauds, and 38 state consumer protection acts allow for class action litigation. According to a 2015 survey, three in 10 class action lawsuits involve alleged consumer fraud. Many states allow consumer fraud class action lawsuits to recover damages even without a showing of actual injury. A new study published earlier this year reported that in 432 such lawsuits, consumers as a group received on average less than 9 percent of the total dollars awarded.

Prior to issuing the new rule, the CFPB conducted a study as well. Even the CFPB’s own study shows that class action lawsuits typically reward plaintiffs’ lawyers handsomely, give consumers little compensation, and take years to pay out. Of the 251 class action lawsuits the CFPB reviewed, the average payment to a class member was just $32.35 per individual, while the average payment to the plaintiffs’ lawyers was more than $1 million per case. Eighty-seven percent of the class action lawsuits filed didn’t get approved for settlement and provided no benefits at all to consumers, although there were attorney’s fees and other significant costs to business defendants.

Arbitration typically benefits consumers because it is significantly cheaper and faster than filing a lawsuit. To be enforceable, arbitration clauses must provide terms of meaningful redress, and courts review them for “fundamental fairness.” Typical arbitration agreements require the business to pay the costs of arbitrating claims under $75,000 and permit consumers to make their cases online or in a telephone hearing. The exceptionally pro-consumer terms that companies offer under arbitration clauses demonstrate powerfully just how much they want to escape class action shakedown lawsuits. But by preventing arbitration clauses from foreclosing class action claims, the CFPB’s new rule will make it unaffordable for companies to offer consumer arbitration in the future.

Why would the CFPB adopt a rule that appears to harm consumers in favor of trial lawyers? To some, the answer is a quid pro quo, the details of which are revealed in a Wall Street Journal report from 2008. The article covers out-of-state plaintiffs’ firms funneling more than $800,000 to the Ohio Democratic party, which in turn heavily funded the campaign of Richard Cordray, who was running for attorney general. Cordray won his race and subsequently hired several of those firms to represent the state in class action lawsuits.

Fredrikson & Byron Law