Pencils down.  (Is the modern equivalent “cursors down”?)  All the attorneys who were drafting new form consumer agreements to comply with the CFPB rule prohibiting class action waivers can now trash those documents.  Pursuant to the Congressional Review Act, the Senate voted 51-50 last night (with the VP as tie-breaker) to nullify the CFPB’s rule.  (The House of Representatives had cast a similar vote earlier this summer.)  And President Trump has signaled he will sign the bill.  But you already know all that.  The news came out last night.

So, what’s next?

After deleting all the new draft agreement, of course.  And I’m not being facetious about that.  The rule required that new agreements be in effect by March 2018 and it takes large companies significant time to approve and roll out new consumer agreements, so many were already in the works.  Especially since the Senate waited until almost the end of its 60 session day deadline to act.  But, most large institutions would rather eat those attorneys’ fees than be the subject of new class action lawsuits, so they won’t complain.

There are many constituencies that are very unhappy with the U.S. Supreme Court’s interpretations of the Federal Arbitration Act.  They are not going to give up just because 50 Senators disagree.  Those constituencies had been largely unsuccessful in the federal courts in the last dozen years, but more successful in federal agencies in the last few years. Under the Obama administration, multiple agencies had issued rules limiting the use of arbitration with consumers and employers.  All of those have been reversed in the first ten months of the Trump administration.  Which leaves those who are still concerned about arbitration with a dilemma — how can they make change?  Do they push for smaller legislative victories, adding riders to federal statutes so that claims brought under them must be heard in a court of law?  That’s not a terrible idea, since the slimmest majority voided the CFPB rule.  Or do they develop new, creative legal theories in state and federal courts?  Theories like “wholly groundless” and that the FAA does not apply to motions to vacate in state court that nip at the edges of FAA jurisprudence?  I think that is the most likely result.

What about those who are happy with this outcome, what’s next for them?  I predict more companies will make use of class action waivers.  In the last few years, with the proposed (and then actual) rule-making by various agencies, any move to add a class action waiver carried with it some risk that it would be soon made ineffective.  But now, the Supreme Court and its conservative majority are firmly in favor of enforcing those class action waivers.  And the federal agencies are also supportive of class action waivers.  So, some of those companies who were kept on the fence by administrative action are likely to jump off and land on the side of adding class action waivers to their arbitration agreements.

I’d love to hear what you think may happen in arbitration law as a result of the Senate vote to trump the CFPB.  Send me a line.

 

 

The CFPB today issued a consumer-friendly rule that is likely to significantly curtail the use of arbitration in consumer financial agreements.  That rule has two major components.  First, it prohibits institutions from relying on arbitration clauses to avoid class actions.  And second, it mandates the submission of redacted data on consumer financial arbitrations that will be accessible on the internet.

The rule was originally proposed in May of 2016, roughly a year after the CFPB issued its report on the use of arbitration in the financial industry.  During the required 90-day period, the CFPB received around 110,000 public comments on its proposal.  Yet, the CFPB waited over a year to finalize and issue the rule.  During that time, President Trump took office and his administration reversed course on three previous arbitration-related rules/positions from the Obama Administration.  That context lead to speculation that the CFPB might weaken its proposed rule or otherwise take a safer course.

Yet today the rule was issued and it appears substantially the same as the initial proposal.  Maybe the CFPB wisely spent the past year gearing up for the challenges that similar pro-consumer arbitration rules have faced — like lawsuits challenging the rule’s validity or Congress using its ability to pull the plug on rules within the first 60 days.  Or maybe it just took a year to draft this 775 page behemoth of a rule with all its arguments in favor of its issuance (and responses to its detractors).  (Note that the Trump Administration has been trying to convince a federal court that the President has the authority to fire the CFPB director without cause, which probably did not help any negotiations over the proposed rule.)

In any case, the result is a very far-reaching rule that will likely lead to an uptick in class actions in the financial industry.  It applies to all consumer lending, credit card agreements, auto leases, debt management services, check cashing services, and debt collectors.  Starting six months after the effective date of the rule (assuming no court injunction), it will affect all new agreements within its scope.

The text of the key provisions of the rule follows:

(a) Use of pre-dispute arbitration agreements in class actions—(1) General rule. A

provider shall not rely in any way on a pre-dispute arbitration agreement entered into after the

date set forth in § 1040.5(a) with respect to any aspect of a class action that concerns any of the

consumer financial products or services covered by § 1040.3, including to seek a stay or

dismissal of particular claims or the entire action, unless and until the presiding court has ruled

that the case may not proceed as a class action and, if that ruling may be subject to appellate

review on an interlocutory basis, the time to seek such review has elapsed or such review has

been resolved such that the case cannot proceed as a class action.

(2) Provision required in covered pre-dispute arbitration agreements. Upon entering

into a pre-dispute arbitration agreement for a consumer financial product or service covered by

  • 1040.3 after the date set forth in § 1040.5(a):

(i) Except as provided elsewhere in this paragraph (a)(2) or in § 1040.5(b), a provider

shall ensure that any such pre-dispute arbitration agreement contains the following provision:

“We agree that neither we nor anyone else will rely on this agreement to stop you from being

part of a class action case in court. You may file a class action in court or you may be a member

of a class action filed by someone else.”

(ii) When the pre-dispute arbitration agreement applies to multiple products or services,

only some of which are covered by § 1040.3, the provider may include the following alternative

provision in place of the one required by paragraph (a)(2)(i) of this section: “We are providing

you with more than one product or service, only some of which are covered by the Arbitration

Agreements Rule issued by the Consumer Financial Protection Bureau. The following provision

applies only to class action claims concerning the products or services covered by that Rule: We

agree that neither we nor anyone else will rely on this agreement to stop you from being part of a

class action case in court. You may file a class action in court or you may be a member of a

class action filed by someone else.”

(iii) When the pre-dispute arbitration agreement existed previously between other parties

and does not contain either the provision required by paragraph (a)(2)(i) of this section or the

alternative permitted by paragraph (a)(2)(ii) of this section:

(A) The provider shall either ensure the pre-dispute arbitration agreement is amended to

contain the provision specified in paragraph (a)(2)(i) or (a)(2)(ii) of this section or provide any

consumer to whom the agreement applies with the following written notice: “We agree not to

rely on any pre-dispute arbitration agreement to stop you from being part of a class action case in

court. You may file a class action in court or you may be a member of a class action filed by

someone else.” When the pre-dispute arbitration agreement applies to multiple products or

services, only some of which are covered by § 1040.3, the provider may, in this written notice,

include the following optional additional language: “This notice applies only to class action

claims concerning the products or services covered by the Arbitration Agreements Rule issued

by the Consumer Financial Protection Bureau.”

(B) The provider shall ensure the pre-dispute arbitration agreement is amended or provide

the notice to consumers within 60 days of entering into the pre-dispute arbitration agreement.

***

(b) Submission of arbitral and court records. For any pre-dispute arbitration agreement

for a consumer financial product or service covered by § 1040.3 entered into after the date set

forth in § 1040.5(a), a provider shall comply with the requirements set forth below.

(1) Records to be submitted. A provider shall submit a copy of the following records to

the Bureau, in the form and manner specified by the Bureau:

(i) In connection with any claim filed in arbitration by or against the provider concerning

any of the consumer financial products or services covered by § 1040.3:

(A) The initial claim and any counterclaim;

(B) The answer to any initial claim and/or counterclaim, if any;

(C) The pre-dispute arbitration agreement filed with the arbitrator or arbitration

administrator;

(D) The judgment or award, if any, issued by the arbitrator or arbitration administrator;

and

(E) If an arbitrator or arbitration administrator refuses to administer or dismisses a claim

due to the provider’s failure to pay required filing or administrative fees, any communication the

provider receives from the arbitrator or an arbitration administrator related to such a refusal;

(ii) Any communication the provider receives from an arbitrator or an arbitration

administrator related to a determination that a pre-dispute arbitration agreement for a consumer

financial product or service covered by § 1040.3 does not comply with the administrator’s

fairness principles, rules, or similar requirements, if such a determination occurs; and

(iii) In connection with any case in court by or against the provider concerning any of the

consumer financial products or services covered by § 1040.3:

(A) Any submission to a court that relies on a pre-dispute arbitration agreement in

support of the provider’s attempt to seek dismissal, deferral, or stay of any aspect of a case; and

(B) The pre-dispute arbitration agreement relied upon in the motion or filing.

(2) Deadline for submission. A provider shall submit any record required pursuant to

paragraph (b)(1) of this section within 60 days of filing by the provider of any such record with

the arbitrator, arbitration administrator, or court, and within 60 days of receipt by the provider of

any such record filed or sent by someone other than the provider, such as the arbitration

administrator, the court, or the consumer.

(3) Redaction. Prior to submission of any records pursuant to paragraph (b)(1) of this

section, a provider shall redact the following information:

(i) Names of individuals, except for the name of the provider or the arbitrator where

either is an individual;

(ii) Addresses of individuals, excluding city, State, and zip code;

(iii) Email addresses of individuals;

(iv) Telephone numbers of individuals;

(v) Photographs of individuals;

(vi) Account numbers;

(vii) Social Security and tax identification numbers;

(viii) Driver’s license and other government identification numbers; and

(ix) Passport numbers.

(4) Internet posting of arbitral and court records. The Bureau shall establish and

maintain on its publicly available internet site a central repository of the records that providers

submit to it pursuant to paragraph (b)(1) of this section, and such records shall be easily

accessible and retrievable by the public on its internet site.

Today the Consumer Financial Protection Bureau proposed the rules that it previewed last fall, following up on its Arbitration Study. Those rules would essentially ban class action waivers from consumer financial agreements, as well as requiring arbitral institutions to provide data on consumer financial disputes to the CFPB.  (As an aside, the proposal is 377 pages long. Are all proposed notices of rulemaking so long??  If so, I am very happy not to practice in administrative law.)

There will be lots of analysis of the rules and their potential impact in the coming days, but for now here are the deets on the proposal, with direct quotes from it where appropriate:

What Do the Proposed Rules Say? Two things.

  •  First, financial consumers will be entitled to participate in class actions in court, even if the governing agreements call for arbitration generally:

 “A provider shall not seek to rely in any way on a pre-dispute arbitration agreement . . . with respect to any aspect of a class action that is related to any of the consumer financial products or services covered by § 1040.3 including to seek a stay or dismissal of particular claims or the entire action, unless and until the presiding court has ruled that the case may not proceed as a class action and, if that ruling may be subject to appellate review on an interlocutory basis, the time to seek such review has elapsed or the review has been resolved.”

The arbitration agreement must clarify:

“We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”

  • Second, providers of arbitration services must submit redacted copies of the following documents to the CFPB for its continuing monitoring:

“In connection with any claim filed in arbitration by or against the provider concerning any of the consumer financial products or services covered by § 1040.3;

(A) The initial claim and any counterclaim;

(B) The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;

(C) The judgment or award, if any, issued by the arbitrator or arbitration administrator”

 CFPB’s Authority:  “In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the [Arbitration] Study (hereinafter Study), to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers.”   In particular, the Bureau relies on sections 1022(b) and (c), and 1028(b) of the Dodd-Frank Act.

Why CFPB is Proposing the Rule (in its own words):

“The Bureau preliminarily concludes, consistent with the Study and based on its experience and expertise, that: (1) the evidence is inconclusive on whether individual arbitration conducted during the Study period is superior or inferior to individual litigation in terms of remediating consumer harm; (2) individual dispute resolution is insufficient as the sole mechanism available to consumers to enforce contracts and the laws applicable to consumer financial products and services; (3) class actions provide a more effective means of securing relief for large numbers of consumers affected by common legally questionable practices and for changing companies’ potentially harmful behaviors; (4) arbitration agreements block many class action claims that are filed and discourage the filing of others; and (5) public enforcement does not obviate the need for a private class action mechanism.”

Which entities are affected: “[P]roviders of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money.” This includes entities that provide credit to consumers (banks, credit card issuers), extend auto leases, provide debt relief services, collect debts, provide check cashing services, and provide credit reports.

When would the rule take effect?  “Compliance with this part is required for any pre-dispute arbitration agreement entered into after” 211 days after the final rule is published in the federal register.  (So, affected entities likely have about a year to prepare.)

What Other Agencies are Doing on Arbitration:  CFPB spends three pages of its proposal explaining what other agencies have done, or are doing, to protect consumers in the context of arbitration.  The most recent examples are from the Centers for Medicare and Medicaid Services (in the context of long-term health care facilities) and the Department of Education (in the context of college enrollment agreements).

Deadline for comments: The public has 90 days to comment on this proposed rule.

These proposed rules are a continuation of the battle between the executive and judicial branches of the federal government over arbitration.  If passed, they will undoubtedly lead to a significant increase in consumer financial class actions.  It will be interesting to see if they also affect the willingness of companies to include arbitration agreements at all.

Richard Cordray, Director of the Consumer Financial Protection Bureau, has positioned himself as the Boogeyman that financial companies fear this Halloween season.  Earlier this month, the CFPB outlined the proposals under consideration for regulating arbitration in the consumer financial industry.  The proposals address the availability of class actions — as was widely expected — but also express concern about individual financial arbitrations and suggest those will be monitored.  [I am late to the party on this topic.  But I had to consider it carefully over butterbeer in Orlando…]

To set the table, the CFPB describes its take-aways from the arbitration study it published in March.  In particular, the study led to two concerns:

  • “[T]he Bureau is concerned that arbitration agreements effectively prohibit class proceedings, including litigation, and that they prevent many consumers from obtaining remedies when they are harmed by their providers of consumer financial products or services” and
  • “The Bureau is concerned [] that pre-dispute arbitration agreements that require arbitration of individual claims may have in the recent past led to harms to many consumers and is further concerned that these types of harms may recur.”  “The Bureau is concerned that there is a potential for significant consumer harm if arbitration agreements were to be administered in biased or unfair ways.”  [Here CFPB cited the NAF example.]

Each of those concerns inspired a particular proposal for regulating consumer financial arbitration.  The proposal for addressing the concern about class proceedings is that any arbitration agreement included with consumer financial agreements must state that it is inapplicable to cases filed in court on behalf of a class “unless and until class certification is denied or the class claims are dismissed.”

The proposal for addressing the concern about potential bias in individual arbitrations is “to shed sunlight” on those proceedings by collecting consumer financial claims filed with private arbitration administrators (and potentially publishing them), and publishing the resulting arbitration awards (with redactions for privacy).  CFPB notes that FINRA already publishes all awards and the AAA publishes employment awards, so there is some precedent.

Opponents of the proposals take the position that the data in the CFPB study does not support these proposed regulations and that they will lead to higher prices for consumers as companies pass along their increased costs of defending class actions. There has also been a suggestion that these regulations by the CFPB go beyond the authority granted in the Dodd-Frank Act or are otherwise improperly broad.  On the other hand, consumer advocates urge the CFPB to go farther and ban pre-dispute arbitration agreement in all consumer financial transactions.

The proposals will now be the subject of a small business advisory review panel, and then after formal rules are proposed there will be a notice and comment period, so final regulation is not likely until late 2016.  However, I personally am interested to see whether the conversation over these proposals catches the public’s attention to the extent that it becomes a topic in the presidential election.  If so, it is possible that there could be even more changes in store for arbitration.

 

In my last post, I shared some of the highlights from the first half of the new CFPB Arbitration Study.  This post covers the second half of the report, with juicy information gleaned from CFPB’s analysis of almost 2,000 actual consumer arbitrations and its comparison of those results to actual consumer court actions.

Arbitration Outcomes

The AAA gave the CFPB access to information about 1850 total disputes filed with it in 2010, 2011, and 2012 relating to credit cards, checking accounts, payday loans, (GPR) prepaid cards, student loans, and auto loans.  The average claim made by a consumer was $27,000, and the average claim made by the financial institution was $16,011 (debt collection).  The bulk of the claims related to credit cards, with auto loans and students loans following a distant second and third.  Arbitration was usually completed within 5-8 months. Of the disputes resolved by arbitrators, 74% were resolved by an arbitrator who also was appointed on at least one other consumer arbitration in the sample set.

32% of the consumer arbitrations filed in 2010 and 2011 were resolved on the merits.  (The rest either settled or ended in another fashion.)  Of the 158 cases in which the consumer had an affirmative claim, arbitrators provided consumers with relief in 20% of them, with an average award around $5,400.  “When consumers were provided relief on their claims, consumers won an average of 57 cents for every dollar they claimed.”  In contrast, of the 244 affirmative claims by companies that resulted in an award, arbitrators provided the companies relief in 93% of those disputes, with an average award of $12,500 (“companies won 98 cents for every dollar claimed” in the cases where companied were provided relief).  (That could be read as indicating bias.  But, it could also mean that an unpaid debt is inherently easier to prove than a FDCPA (or other consumer) claim.)

If you’ve ever wondered how often the AAA appoints a new arbitrator after receiving a “factual objection” to the arbitrator’s service, the CFPB found that happened in response to 68% of objections in these consumer arbitrations.

With respect to attorneys’ fees, consumers who were represented and took their claims all the way to an award received fees in 14% of those cases, with an average fee award of $8,148.  Companies also received attorneys’ fees in 14% of disputes resolved by the arbitrators, with an average award of $3,387.

Litigation Outcomes

Individual Federal Court Claims 2010-2012

If there were about 2,000 individual consumer arbitrations filed in these six areas in three years, how many individual federal actions were filed?  3,462 — and 2,621 of those related to credit cards.  A whopping 87% of the individual actions asserted FDCPA claims.  And 93% of the individual plaintiffs requested a jury.  The individual federal cases were concluded in an average of 171 days.

Of those individual claims that were resolved within the study period, 48% resolved by settlement, 3.7% were dismissed on a dispositive motion, 6.8% resulted in a judgment in favor of the consumer (another 41% of cases may have settled, but the docket did not clearly indicate).  Most of the cases that the consumer won were by default (78 of 82).  The average amount awarded the consumer was $13,131.  (The CFPB could not calculate the ratio of damages to claim, because unlike arbitration demands, complaints generally have generic statements about their damages like “more than 75,000.”)

Class Actions in State and Federal Court 2010-2012

In addition to the individual cases, CFPB found 470 putative class actions filed in federal court (and another 92 filed in state courts with searchable electronic records — OR, UT, OK, and NY, plus individual counties in IL, TX, FL, and CA).  Juries were requested in 80% of the class actions.  Almost half of those cases related to credit cards.  And the majority of the claims were federal or state statutory claims (FDCPA, TCPA, TILA, Deceptive Trade Practice, etc.)  The median time to close a federal class action was around 215 days (though MDL classes took around 600 days).  Class actions in state court took longer than federal court — about 400 days on average.

Most class cases settled — either by non-class settlement (CFPB estimates 60%) or a class settlement approved by the court (12%).  Another 10% of cases ended when the defendant won a dispositive motion.  Consumers obtained a judgment in their favor in only 1.8% of class cases, usually through default judgment.  No class action in the sample went to trial.

In 94 of those putative class actions, companies moved to compel arbitration, and courts granted the motion half of the time. In the 46 classes that were compelled to arbitration, CFPB was able to identify only 12 that subsequently demanded arbitration, two of which filed as putative classes in arbitration.  Similarly, for the six individual cases that were compelled to arbitration, CFPB found only one that subsequently went to arbitration.

Small Claims Court

In an effort to see if consumers are taking advantage of their arbitration carve-outs allowing claims to proceed in small claims court, CFPB searched for filings in jurisdictions where those records are accessible.  It found that credit card issuers are filing many debt collection matters in small claims court, but very few consumers are filing affirmative claims.  For example, there were 7,905 credit card debt collection cases in Harris County, Texas alone, but 870 small claims court cases filed by consumers across 31 jurisdictions combined.

Class Action Settlements 2008-2012

 To determine the benefit of class litigation, CFPB analyzed consumer financial class action settlements that took place from 2008-2012.  The 419 settlements in that time period involved more than 350 million class members (not necessarily 350M unique people) and resulted in $2.7 billion in total relief.  For the 105 settlements where a determination was possible, the average claims rate was 21% (i.e. the plaintiffs recovered 21% of the dollars they sought).  On average, it took the classes 690 days to get to a settlement.

Which Comes First — Private or Public Action?

The report presents findings about whether public enforcement of consumer protection statutes usually comes before or after similar class actions filed by private citizens.  It found that where there are overlapping actions, “public enforcement activity was preceded by private activity 71% of the time.  In contrast, private class action complaints were preceded by public enforcement activity 36% of the time.”  So, don’t knock the creativity of the plaintiffs’ bar.

Does Arbitration Lead To Cheaper Products?

The final section of the report analyzes whether arbitration agreements in financial products leads to lower prices for consumers.  After acknowledging that it is difficult to test that assertion on a broad level, the report looked at one example to test the cause and effect.  In that example, a number of credit cards agreed to remove their arbitration clauses for three and a half years as a result of a settlement.  The CFPB found no statistically significant evidence that those companies raised their prices more or differently from comparable companies with no change in ADR.

What Have We Learned?

My brain is a little fried from all the numbers and graphs and words, but here are some initial reactions from the information in the report:

  • Individual consumer actions settle more often in court than in arbitration.  Put differently, more cases get heard on the merits in arbitration.  (32% of cases are resolved on merits in arbitration, compared to about 10% in court.);
  • Arbitrators are repeat players, just like financial institutions, and plaintiffs’ lawyers;
  • Arbitration is not necessarily faster than litigation (comparing individual arbitrations to individual federal litigation);
  • Parties who don’t show up will lose — both in arbitration and in court (the volume of defaults surprised me);
  • Courts grant more damages to consumers than arbitrators do;
  • A large percent of plaintiffs will not bother prosecuting their claims if they have to go to arbitration (instead of remaining in court); and
  • Eliminating class actions can be a huge financial benefit to the financial institutions.  Whether you think that is also a benefit to the economy overall or not likely depends on your politics.

Watch this space for news on what the CFPB recommends going forward.

 

The Consumer Financial Protection Bureau released an “Arbitration Study” exceeding 700 pages to Congress this week.  You have likely heard the headlines – most commentators assume that the CFPB will use the study to support an effort to restrict or regulate the use of “pre-dispute” arbitration in financial transactions.  But, let’s not get ahead of ourselves.  The study itself is worth digging into; the CFPB was able to access lots of information that us regular folks cannot.  Indeed, one complaint about arbitration is that it happens inside a black box, out of reach of statistical analysis or scholarly study, and precluding development of legal precedent. Here’s part one of my peek inside that black box, courtesy of the CFPB.

What the Cool Kids Are Putting in Their Arbitration Clauses

About a year ago, CFPB published its findings on the frequency of arbitration agreements in financial agreements.  This report does not add much in that area.  But, it has new information on the features of arbitration clauses that are prevalent in contracts in the industries studied (credit cards, checking accounts, general purpose reloadable prepaid accounts, private student loans, payday loans, and mobile wireless third-party billing).

  • Would you guess that 50% of payday loan agreements and 83% of private student loan agreements allowed their customers to opt out of arbitration? I was surprised. More than a quarter of credit cards and checking account agreements did also.
  • A majority of all types of financial agreements carved out small claims from their arbitration agreements.
  • The AAA is king. It is listed as either the sole provider or an arbitral option in about 9 out of 10 financial agreements (other than student loans). By comparison, JAMS is an option for about half of the agreements (but only 14% of mobile).
  • Roughly 9 of 10 arbitration clauses in these industries preclude class actions in arbitration. Most also stated that if the class waiver is unenforceable, the entire arbitration clause is unenforceable as well. (CFPB calls it the “anti-severability provision.”)
  • What are financial institutions not putting in the agreement? They are not shortening statutes of limitations often, they are not limiting damages very often, they are not authorizing the arbitrator to award attorneys’ fees to the prevailing party often, and they are generally not addressing confidentiality.

What the Public Understands About those Arbitration Clauses

The CFPB surveyed 1007 people about their dispute rights with respect to their credit cards, and found they know *nothing.*  And this should surprise no one.  (I am not pointing fingers.  If you asked me whether I could sue one of my credit card issuers in court, I would not know either.)  The study explains partly why that is: dispute resolution clauses do not factor into a consumer’s choice of credit card.  When all 1007 people were asked what features they considered in acquiring their credit cards, literally no one mentioned the ADR clause.

The 1007 people were asked what credit cards they had, and whether they could sue the company if there was a dispute.  The people who thought they could sue their credit card issuer in court were wrong 80% of the time.

The most surprising thing about the survey results to me were just how passive people are about disputes.  When confronted with a hypothetical example of a credit card refusing to correct a billing mistake, most people would cancel their cards and take no further action. Only 2% of people would consider going to court or talking to an attorney.

In the next post (part two), I will highlight statistics and findings from the CFPB’s comparison of how consumer disputes are resolved in arbitration and how they are resolved in court.

Happy summer!  It’s been far too long since my last update, but rest assured I have been thinking a lot about arbitration.  In fact, I’m currently teaching a summer course at Queen Mary University of London’s International School of Arbitration, which is a ton of fun.

My teaching, in fact, partly inspired this post.  Teaching arbitration in an international context reminds me of the fact that the United State’s permissive “everything can be arbitrated” approach isn’t universal or inevitable.  Plus, the Sixth Circuit recently issued a deceptively simple decision, in Arabian Motors Group v. Ford Motor Co., 2019 WL 2305313 (May 30, 2019), which raises some significant arbitration policy issues, particularly with respect to subject matter arbitrability and delegation.

A quick clarification of terminology first.  Though courts tend not to be clear about various branches of arbitrability, it’s useful to distinguish between them.  By “subject matter arbitrability,” I mean the power of an arbitrator to hear certain categories of disputes as a matter of public policy.  In the United States, there are virtually no subject matter constraints on arbitration.  But there are a handful, and Arabian Motors implicates one of them: 15 U.S.C. § 1226.

In relevant part, § 1226 says that “whenever a motor vehicle franchise contract provides for the use of arbitration to resolve a controversy arising out of or relating to such contract, arbitration may be used to settle such controversy only if after such controversy arises all parties to such controversy consent in writing to use arbitration to settle such controversy.”

The dispute in Arabian Motors centered on Ford’s termination of a franchise with a Kuwaiti company selling cars in the Middle East.  Briefly, the Kuwaiti company argued that § 1226 prevented enforcement of the pre-dispute arbitration clause in its contract with Ford.  It went further and argued that a court – not the arbitrator – needed to decide the applicability of § 1226.

The district court disagreed.  While compelling the parties to go to arbitration, the district court concluded that the arbitrator, not the court, should decide whether § 1226 undermined the arbitrator’s ability to hear the dispute.  The arbitrator considered the statute and decided that it didn’t apply extraterritorially.  Then, on the merits, the arbitrator ruled in favor of Ford. The Kuwaiti company sought to vacate the award, and the district confirmed it.

An appeal followed.  Perhaps because the Kuwaiti company had framed up its complaint as being about manifest disregard, the Sixth Circuit merely focused on whether the arbitrator had made a decision that flew “in the face of clearly established legal precedent.”  Because the issue was one of first impression in the United States, the court reasoned that “the arbitrator, at most, could have made an ‘error in interpretation or application of the law’ and that is ‘insufficient’ to constitute a manifest disregard for the law.”  The court never really engaged with the “who decides” question.  Accordingly, the Sixth Circuit affirmed the lower court.

The case is simple on the surface, but it raises some significant issues and it conflicts, I think, with the logic of SCOTUS in New Prime Inc. v. Oliveira, 139 S. Ct. 532 (2019).

Although there are currently precious few subject matter limits on arbitration in the U.S., there are constant calls for arbitration reform at the federal level.  As the drama surrounding the CFPB’s short-lived 2017 arbitration rule indicated, those efforts are fraught, but they are also always bouncing around the margins of arbitration practice.  To the extent that congress might and could create additional limits on arbitration, a case like Arabian Motors takes on tremendous importance. Who decides whether a statutory subject matter limitation on arbitration applies, a court or an arbitrator?

New Prime suggests strongly, I think, that it must be a court.  Remember, in New Prime, SCOTUS was considering whether the employment exemption in § 1 of the FAA applied to independent contractors.  In its analysis, the majority (which included everyone except Justice Kavanaugh) says that the Court has “long stressed the significance of the [FAA’s] sequencing.”  Although “a court’s authority under the Arbitration Act to compel arbitration may be considerable, it isn’t unconditional.”  Instead, the FAA’s authority “doesn’t extend to all private contracts, no matter how emphatically they may express a preference for arbitration.”  This lead to the conclusion that a court must decide whether § 1’s exclusion applies before ordering arbitration, even if the arbitration agreement contains a delegation clause.  It seems to me that the same logic should apply to any other congressional act that regulates the recourse to arbitration.

The point, I think, that is that New Prime suggests that there’s a difference between contractual arbitrability – issues about flaws in the arbitration agreement, scope of the arbitration agreement, or procedural preconditions that need to be satisfied before the recourse to arbitration is appropriate – and subject matter limits on what can be arbitrated.  Parties are free to assign the former questions to an arbitrator through a delegation clause. But because certain subjects are – or could be – excluded from the federal policy favoring arbitration – like disputes arising out of a motor vehicle franchise agreement – parties cannot assign an arbitrator to arbitrate about whether the exclusion applies.

2017 was a big year in arbitration law.  We went from a country that seemed on the verge of banning arbitration in most consumer and employee contracts to a country whose federal policy embraces arbitration in nearly every context.  From my vantage point, here are the ten top developments in the last twelve months:

  1. Regulation Reversal.  At the end of 2016, federal agencies were proposing rules to ban arbitration in various settings (student loans, nursing home agreements, consumer financial contracts).  Today, all of those have been reversed.  Most were reversed by the agencies themselves (CMS, Dept of Ed.), but in the big CFPB story, it was Congress that did the reversing.
  2. New Preemption Case from SCOTUS: Kindred Nursing Ctrs v. Clark, 137 S. Ct. 1421 (May 15, 2017).  This case found Kentucky had developed a rule for analyzing “power of attorney” documents that stood as an obstacle to arbitration.  What should state supreme courts learn from this decision?  To avoid FAA preemption, don’t insult SCOTUS, don’t worship the jury, and you really should be able to cite to a case where you’ve applied the same rule outside the arbitration context.  (Read the postscript.)
  3. Arbitration on Trial.  The public discourse in 2017 was hostile to arbitration.  Arbitration was literally on trial in a case against JAMS (for an arbitrator’s alleged resume-padding), but also was figuratively on trial as a contributor to the problem for sexual harassment victims and an obstacle for consumers impacted by the fake accounts at Wells Fargo and Equifax data breaches.  However, the level of public interest in this issue does not seem high enough to capture the interest of Congress (see vote on CFPB in #1), and one primary arbitration critic in the Senate, Al Franken, will resign shortly.
  4. Waiting for NLRB.  This fight between the NLRB and the courts has been brewing for so long!  My first post about the NLRB’s decision that class action waivers in employment agreements violated the federal labor laws, and the federal courts’ disagreement with that decision, was in 2013.  This year, the drama heated up as not only did SCOTUS take the case and hear argument in October, but the Dept. of Justice shifted its support from one side to the other shortly before the argument.
  5. Circuit Split on “Wholly Groundless.”  Should courts do any spot check on arbitrability before enforcing a delegation clause?  Until this year, the only answer was yes, and that came from three circuits (Fed, 5th, 6th), but in 2017, two circuits said “no way!” because it violates SCOTUS’s precedent (10th, 11th).  This could end up on SCOTUS’s docket soon.
  6. Small Claims Court Confusion.  A number of cases took up the issue of whether a company’s effort to collect a debt in small claims court (usually pursuant to a carve out in the arbitration clause) waived its right to later enforce arbitration when that consumer sued about the debt collection effort.  E.g., Cain v. Midland Funding, LLC, 156 A.3d 807 (Md. Mar. 24, 2017). The case outcomes were inconsistent.
  7. Statutory Preclusion.  Attempting to avoid arbitration by holding up a statute that appears to require a claim to be heard in court is always a solid argument (but usually unavailable).  This year it came up often, but not successfully.  See McLeod v. General Mills, Inc., 854 F.3d 420 (8th Cir. 2017).
  8. Non-Signatories Get Divergent Results.  Another perennial favorite topic is defendants who want to compel the arbitration clause in a plaintiff’s contract with someone else.  This came up often again this year, but with notable losses and generally inconsistent results.  (Teaser for an upcoming post…)
  9. Clarifying That Awards Don’t Get Vacated For Trivial or Old Relationships. One area of law that courts seem to be trying to clean up this year is the standard for what types of relationships are significant enough that the award could be vacated.  What’s not enough?  Having decided a different matter with the same expert, and having been colleagues with counsel for one party 15 years before are two examples of what is not enough.
  10. Are There Exceptions To The Three Month Window For Vacating Awards?  The Ninth Circuit said yes (in the case of fraud), but the Nebraska Supreme Court found no exceptions available.  Given that this statute has been in place since 1925, this seems like the kind of thing that would have been settled by now…

 

What happens when state courts disagree with SCOTUS’s interpretation of the Federal Arbitration Act?  They resist, and they have a thousand different ways of doing so.  The Mississippi Supreme Court demonstrated one way to resist recently in Pedigo v. Robertson, Rent-A-Center, Inc., 2017 WL 4838243 (Miss. Oct. 26, 2017). (I neglected to mention the state appellate courts as important actors in last week’s post about what we may see now that the CFPB rule is dead.)

In Pedigo, the plaintiff entered into a Rental Purchase Agreement (RPA) from Rent-A-Center.  (Yes.  The same Rent-A-Center of delegation clause fame.)  Within about four months, he stopped making payments.  At that point, Rent-A-Center found out that plaintiff had sold the television to a pawn shop shortly after purchasing it.  Rent-A-Center then filed a complaint with the police, and the plaintiff was arrested and incarcerated.

After the plaintiff was released from jail, he filed a civil action against Rent-A-Center, alleging the police report was false.  Rent-A-Center moved to compel arbitration.  The trial court judge compelled arbitration.

On appeal, the high court found that plaintiff’s claims of malicious prosecution were outside the scope of the parties’ arbitration agreement.  The RPA itself prohibited the sale or pawning of the leased goods.  The arbitration agreement in the RPA stated that covered claims “shall be interpreted as broadly as the law allows and mean[] any dispute or controversy between you and RAC….based on any legal theory…”  The only claims not covered were those for injunctive or declaratory relief, or those seeking less than $5,000 in damages.  However, because “the agreement fails to contemplate that a lessor/signatory might pawn collateral and subsequently be indicted and jailed” the court did not require the plaintiff to arbitrate his claims.

Why do I call this “resistance”?  Because there are many cases saying that as part of the federal policy favoring arbitration, courts presume that claims are within the scope of a valid arbitration agreement.  The coin is weighted towards “heads.”  And here, the agreement explicitly prohibited pawning the TV, and the arbitration clause was about as broad as it could be.  Yet the court refused to compel arbitration.  The implication of this court ruling seems to be that if a specific claim is not enumerated in an arbitration clause in Mississippi (to show it was contemplated), the claim is not arbitrable.  And that just does not fit within the federal precedent.

You know what state is not currently resisting?  Missouri.  The Supreme Court of Missouri faithfully followed the instructions SCOTUS gave in Rent-A-Center, and enforced a delegation clause over the votes of two dissenting justices.  In Pinkerton v. Fahnestock, 2017 WL 4930289 (Mo. Oct. 31, 2017), the Missouri high court found that the parties’ incorporation of the AAA rules was a clear and unequivocal delegation clause.  It also found that the great majority of the plaintiff’s challenges were not specific to the delegation provision (they applied to the arbitration agreement as a whole) and so could not be considered; the only specific challenge was plaintiff’s argument that it is unconscionable to delegate arbitrability to “a person with a direct financial interest in the outcome.”  The court dismissed that out of hand, citing Rent-A-Center.  Because the plaintiff had made no successful challenge to the delegation clause, the Missouri high court enforced it, sending the issue of the arbitration agreement’s validity to the arbitrator.