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Collision course: The looming conflict between the Supreme Court and CFPB over arbitration clauses

John Lande Iowa Banking Law Dickinson Law Des Moines Iowa

Posted on 03/25/2015 at 08:51 AM by John Lande

On March 10, 2014, the CFPB released its much-anticipated study on consumer arbitration. The Dodd-Frank Act gave the CFPB authority to issue regulations on the use of arbitration contracts in consumer contracts if doing so is in the public interest. The CFPB's recent study was aimed at determining whether the public interest will be served by CFPB intervention in the language of consumer contracts. The study concluded that arbitration agreements restrict consumers relief for disputes with financial service providers by limiting class actions, and that they limit relief for consumers. In light of its findings, the CFPB appears poised to issue regulations that could control or limit the use of arbitration clauses in contracts between banks and consumers. This blog has previously covered courts’ willingness to enforce arbitration clauses.

For decades, federal and state courts have liberally enforced arbitration clauses in all kinds of contracts. For example, in American Exp. Co. v. Italian Colors Restaurant the United States Supreme Court enforced an arbitration clause that waived the ability to bring a class-action lawsuit. The Supreme Court reached its conclusion despite evidence that the costs of bringing the arbitration would always exceed recovery for individual claims.

The plaintiffs argued the only way it made economic sense to bring the claims would be to do so as a class action. The Court rejected the argument on the basis that parties get what they contract for. The CFPB's study sets up an interesting conflict between the CFPB and the United States Supreme Court. It has been an unshakeable proposition of federal law that arbitration is a preferred means of resolving disputes. The CFPB seems prepared to try to curb the use of arbitration clauses. There will likely be substantial legal challenges to any CFPB rule that effectively limits the use of arbitration clauses. Such challenges will likely implicate another important Supreme Court doctrine agency deference. This blog has repeatedly covered federal court deference to agencies. For example, agency rules need only be based on a “plausible” interpretation of the statute they are intended to implement. Courts will even defer to agency judgments about what the agency has authority to regulate. The CFPB’s new rules on arbitration clauses could put the liberal federal policy favoring arbitration clauses at loggerheads with deference to agency decision-making. On one hand, the Supreme Court will likely view any regulation curbing arbitration with skepticism because of the firmly entrenched judicial preference for arbitration. On the other, the CFPB claims to have authority to regulate arbitration clauses and the Supreme Court generally upholds agency action when the agency claims to have authority. The bottom line is CFPB action on arbitration clauses could tie federal courts in knots as they try to weigh competing legal doctrines. For now, banks should continue to pay close attention to the CFPB's actions, and consult with their attorneys about the effectiveness of arbitration clauses.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.  

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