Consumer Advocates Laud New Arbitration Limits

(CN) — An attorney who battled mandatory arbitration clauses in Washington predicted corporate backlash on the heels of new federal protections for consumers.

"It's going to be a fight," said Deepak Gupta, of the firm Gupta Wessler, applauding a rule proposed Thursday by the Consumer Financial Protection Bureau to ban companies from putting mandatory arbitration clauses in new contracts.

Often tucked deep inside the fine print of a contract, mandatory arbitration clauses require consumers to arbitrate claims rather than having the option of going to court. They are particularly favored by banks, credit card companies and other financial firms.

Corporations assert that arbitration is a cheaper and more efficient way of resolving disputes. It is certainly cheaper for the corporation — a successful class action lawsuit can be financially devastating.

But for the consumer, arbitration costs can reach several thousand dollars. If the cost of arbitration outweighs expected recovery, individuals with small claims often feel pressure not to litigate.

In the 2011 U.S. Supreme Court case Concepcion v. AT&T Corp., Gupta represented a class of consumers seeking to overcome an arbitration clause in their cellphone contracts.

California, where Gupta's clients filed their suit, had a law banning such clauses as unconscionable, but the Supreme Court found 5-4 that the Federal Arbitration Act pre-empted California's scheme.

Gupta, who testified at the CFPB field hearing preceding Thursday's proposal, predicts that the battle is far from over.

"Undoubtedly, they are going to sue the bureau, and they're also already trying to get riders slipped into various bills to take away the bureau's ability to do this," Gupta said, with regard to corporate interests that support arbitration clauses.

Gupta doubted, however, whether such objections will prevail.

"There's no question though that the bureau has this authority, so any legal challenge will have to be about the data, where they don't have good arguments," he said.

Mandatory arbitration clauses have exploded in the past 10 years, and data shows the odds are against consumers who do go to arbitration. A New York Times investigation found that the majority of consumers receive no monetary awards in arbitration.

The CFPB explicitly said arbitration clauses "deny groups of consumers their day in court." Its 2015 study on arbitration showed that very few consumers ever bring individual actions against their banks in court or arbitration, but class actions have successfully won millions of dollars for consumers each year, and forced corporations to alter questionable conduct.

Presidential candidate Hillary Clinton praised the CFPB's proposal Thursday, as did Paul Bland, director of consumer rights organization Public Justice.

"The CFPB's new rule essentially says that the financial industry can no longer rig the system to keep consumers out of court. Class actions are often the only way for consumers who have been wronged to get effective and meaningful justice," Bland said in a statement. "The CFPB rule is badly needed and long overdue. It is flat out proof that the CFPB is looking out for consumers."

With little doubt that the proposed rule will be challenged in court, its fate will likely be determined on whomever rounds out the U.S. Supreme Court, one member short since the death in February of Justice Antonin Scalia.

The conservative stalwart wrote the majority opinion in Concepcion, joined by Chief Justice John Roberts, who not long earlier as a corporate defense attorney had once unsuccessfully represented a corporation seeking to enforce a class-action ban.

The U.S. Chamber Center for Capital Markets Competitiveness is among those opposing the CFPB's new rule.

Center president David Hirschman joined a statement Thursday with Institute for Legal Reform President Lisa Rickard that says the rule will serve only to enrich attorneys.

Calling the rule "a wolf in sheep's clothing," Hirschman and Rickard said "the CFPB's own study concludes that arbitration empowers consumers to resolve disputes easily and quickly on their own without having to hire a lawyer."

"Nevertheless, the CFPB's rule will have the practical effect of eliminating arbitration for most consumers," they added. "Now the agency designed to protect consumers is proposing a rule that will end up hurting them."

The CFPB disputes this reading of its study, and says that study shows class actions provide a more effective means for consumers to challenge problematic corporate practices.

Gupta, the Concepcion attorney, said industry representatives were unable to adequately address the CFPB's findings that roughly 25 consumers per year are going to individual arbitration for small-dollar claims — and only a small percentage prevailed.

"It rings a bit hollow if you're trying to defend this system as so great for consumers when none are using it," Gupta said.

In a study of cases involving overdraft fees, the CFPB found that, of 23 banks sued, the five banks with enforceable arbitration clauses paid nothing to consumers. The other 18 banks paid approximately $18 billion to settle the claims.

"Its hard to overstate the importance of this rule, it's a game changer, the single most important thing the bureau can do to level the playing field for consumers," Gupta said.

Andrew Pincus, an attorney with Mayer Brown who represented AT&T in the landmark case, did not immediately respond to a request for comment.

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