On November 22, 2017, the Consumer Financial Protection Bureau (CFPB) officially nullified its rule prohibiting financial institutions from inserting mandatory arbitration clauses in contracts with consumers. This revocation comes after President Trump’s signature of the joint congressional resolution to do away with the CFPB rule aimed at restoring consumers’ ability to bring class-action lawsuits, as the arbitration clauses ordinarily prohibit class actions.
Not long before the rule was promulgated, news broke that Wells Fargo created approximately 3.5 million fake bank accounts without customers’ authorization. As a result, affected customers received unexpected fees and charges. To the customers’ detriment, they were bound by the mandatory arbitration clauses in their user agreements with Wells Fargo – forcing each customer to bring his or her dispute through arbitration instead of on a class-wide basis.
Wells Fargo is not the only large institution to impose mandatory arbitration clauses on consumers. For example, after news last year on the Equifax data breach that affected well over 100 million people, Equifax offered free credit monitoring to consumers. The catch? By enrolling in this free service, consumers would be required to settle any disputes in arbitration. After public backlash, however, Equifax clarified that it would not enforce its mandatory arbitration clause over the breach.
The ability for these large institutions to include mandatory arbitration clauses in their contracts stems from a 5-4 decision from the United States Supreme Court. In AT&T Mobility v. Concepcion, the majority held that the Federal Arbitration Act preempts state laws that ban the use of class action waivers in arbitration agreements. Since the AT&T decision, mandatory arbitration clauses accompanied with prohibitions on proceeding arbitration on a class-wide basis have become a first line of defense for companies and are the subject of many consumer complaints.
So, how do arbitration clauses harm consumers? First, consumers are reluctant to bring individual claims in arbitration, especially when their claim involves limited damages. As one judge aptly put it, “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”
Second, a 2015 study on arbitration by the CFPB shows that consumers do not prevail in arbitrations. Of the 341 arbitration cases filed in 2010 and 2011, in which an arbitrator rendered a decision, the CFPB found that only 32 resulted in the consumer receiving affirmative relief and the consumers in 46 cases received debt forbearance. Based on the CFPB study, less than 20.3% of cases resolved by an arbitrator resulted in a positive outcome for the consumer.
Fortunately, there are circumstances in which a court may strike down an arbitration clause. The Federal Arbitration Act (FAA) provides for the enforcement of arbitration agreements. The FAA also explains the limitations of arbitration clauses and permits the invalidation of an arbitration clause “upon such grounds as exist at law or in equity for the revocation of any contract.” As follows, courts may invalidate an arbitration clause on a showing that the parties did not form a contract or other contract defenses, such as fraud, duress, and unconscionability. Recently, the Ninth Circuit applied these principles and held Samsung’s mandatory arbitration provision to be unenforceable. In Norcia v. Samsung Telecommunications America, LLC, Samsung included the arbitration provision in the warranty booklet of its Galaxy S4. In rejecting Samsung’s argument, the Ninth Circuit held that the consumers did not receive adequate notice of the arbitration clause and similarly did not give any “outward manifestations of consent [that] would leave a reasonable person to believe [the consumer] has assented to the agreement.”
With mandatory arbitration clauses becoming the rule and not the exception in contracts with large companies, it is important that consumers and consumer class action attorneys alike keep a close eye on these limiting clauses.
Source: Mitchell Hamline’s School of Law
Halunen Law attorney Colin Pasterski brings tremendous dedication to his work helping employees, consumers, and whistleblowers take a stand for justice. Learn more about Colin.