Arbitration Clauses and the CFPB – The Devil’s in the Details

Arbitration Clauses and the CFPB - The Devil’s in the Details

Originally published on Nov 15, 2016

How many times a day, week, or month do you click a checkbox next to the words “I Agree to the Terms of Service”? Or, how many times have you agreed to small print? You make sure the numbers are right, flip to the back page, and sign on the line? What about the eight pages of terms and text in between? Well, in a class action practice, that fine print is where we live and breathe. And sometimes, the devil’s in the details.

What is an Arbitration Clause?

An arbitration clause is a term of a contract that requires the parties to resolve their disputes through an arbitration (read: non-litigation) process. If enforceable, these clauses effectively eliminate a consumer’s ability to bring a class action on behalf of a large group of consumers. Given the cost of legal representation, arbitration over a small amount of money that you believe was wrongfully charged is never economical. Without the ability to bring a class action for these small but improper fees, companies can continue nickel-and-diming consumers without any real consequence.

CFPB – Consumer Financial Protection Bureau

Earlier last year, the Consumer Financial Protection Bureau published the first extensive study on arbitration clauses in six consumer finance markets: credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile wireless contracts. Its findings were startling and unequivocal: arbitration agreements limit the ability of millions of consumers to recover for consumer finance disputes.

Faced with this evidence, the CFPB, through the authority granted to it under Dodd-Frank, is currently attempting to make class action waivers in consumer financial products a thing of the past. Someday, hopefully soon, all consumer contracts will no longer be able to contain an arbitration clause.

Arbitration clauses do not raise prices

Now, smart people on the other side of things will argue that class actions cost good companies good money. The stakes get so high, even good corporate citizens will cave and pay off a settlement. As a result, these companies then have to turn around and pass costs down to consumers.
However, the CFPB addressed this exact claim in its study. They found “no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses.” Simply put, arbitration clauses do not raise prices.

Now, just to be clear: this is in no way to disparage the good companies out there. They are, by far, more prevalent than the bad actors. But sometimes there are legitimate disputes over a fee, a charge, or a business practice that affect a large group of consumers. And for a consumer to have to hire a lawyer, bring an arbitration action, and possibly be on the hook for costs, all in order to challenge a $4 fee… This is all contrary to the purposes of Civil Rule 23, substantive consumer protection law, and common sense.

Citizens are better at advocating for themselves.

Without a strong class mechanism that cannot be sidestepped, there is no effective way for consumers to take an active role in keeping corporate bad actors in check. If we can’t do it ourselves, we’d have to rely on the FTC or some other governmental body to act as our consumer advocate. Fortunately, the CFPB, through its efforts to get rid of arbitration clauses, has recognized that private citizens are simply better at advocating for themselves.

So when you click that box marked “I Agree to Terms of Service” or you skim those pages of small print, maybe take a little longer than you usually do. There are things in there that significantly affect your rights. And if something jumps off the page or smells fishy, give us a call.

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