company offering the product or service. Dispute resolution
clauses that do not require arbitration frequently specify the
courts in the company’s state as have exclusive jurisdiction over
claims against the company (and sometimes against the consumer), which makes litigation of a claim prohibitively expense
in many cases. All these clauses have historically been upheld
under principles of freedom of contract, and it is not obvious why
arbitration clauses should be treated differently.
THE CLASS ACTION WAIVER ISSUE
The issue of whether pre-dispute arbitration clauses that
require consumers to waive their rights to participate in class
action proceedings is more problematic. The AAA Task Force that
drafted the 2010 Consumer Debt Collection Due Process Protocol could not agree on the whether class action waivers should
be permitted, and that issue was not addressed in the Protocol.
The CFPB’s October, 2015 notice of proposed rulemaking contained a proposal to preserve the ability of consumers to pursue
class action litigation, even if the agreement contained an arbitration clause. This would reverse the Supreme Court’s decisions
in AT&T Mobility v. Concepcion (2011) and Direc TV v. Imburgia
(2015), which upheld class action waivers in cell phone and satellite TV service contracts.
Although many commentators have categorized the availability of class actions as a substantive or even Constitutional right,
in fact, it is a procedural device, established under Rule 23 of the
Federal Rules of Civil Procedure or analogous state statutes.
Class actions allow plaintiffs in cases where there are common
issues of law and fact to represent all similarly situated potential
plaintiffs, provided certain other conditions are met. Historically,
class actions have been criticized as vehicles for plaintiffs’ lawyers to recover substantial attorneys fees awards without
providing significant benefit to individual plaintiffs. The Class
Action Fairness Act was passed in 2005 to address these concerns by subjecting proposed settlements to greater scrutiny.
The March, 2015 CFPB report included data concerning financial
services class actions. In its comments on the CFPB study, the
U.S. Chamber of Commerce and the financial services industry
argue that the data shows that class actions yield minimal financial recoveries for class members, and principally benefit the law
firms who are in the business of pursuing class actions. However,
consumer advocates often argue that class actions allow the
aggregation of claims that are individually too small to pursue,
and that without the class action remedy, companies would be
able to violate consumer rights in small ways with impunity.
Unfortunately, the CFPB report did not examine class actions
in the financial services context to see if their potential elimination through arbitration clauses would adversely affect the public
interest. Some of the questions that might have been asked, but
were not, include:
• Did the class actions assert substantive claims,
such as the imposition of unauthorized fees, or
technical violations such as imperfectly worded
• Were the class action claims meritorious, or
did plaintiffs make frivolous claims to attract
nuisance value settlements? (Defendants, unlike
plaintiffs, generally cannot recover attorneys
fees if they prevail, so frivolous claims may not
be adequately deterred?
• Was there any difference in the level of
compliance between financial services
companies with and without class action
waiver clauses in their contracts? This
might be reflected in the number or type of
complaints received by the CFPB regarding
financial services companies.
• Are class actions the most efficient method
of enforcing applicable statutes and
regulations or would enforcement actions by
the CFPB, based on information submitted
to it by consumers through its complaint
mechanism, be a more efficient approach
and yield greater recoveries to consumers?
• If preservation of class actions is desirable,
is an arbitration clause not containing a class
action waiver but providing for class action
arbitration adequate to protect the public
interest? (Of note, AAA and JAMS both have
specific rules for administration of class action
Concerns over the elimination of class actions as a method
for enforcing claims and deterring non-compliance have
prompted the reexamination of arbitration as a method for
resolving individual consumer complaints. In my view, these
issues should be untangled. The consumer due process protocols established by the AAA and other ADR purveyors do
guarantee a fair and efficient hearing on the merits. If class
actions are viewed as an essential enforcement tool, then
the CFPB should consider letting the parties decide in pre-dispute dispute resolution clauses whether they should take
place in court or in arbitration.
Consumer advocates often argue that class
actions allow the aggregation of claims
that are individually too small to pursue,
rights in small ways with impunity.