Since the Federal Arbitration Act (FAA) of 1925, the United States has had a policy preference for arbitration, even when an arbitration provision includes language barring class action litigation. We saw this most recently in December 2015 when the Supreme Court reversed a decision by a California Court of Appeal to invalidate a class-arbitration waiver within a service agreement between DirecTV and its customers. But not everyone thinks arbitration is so great a thing. Encouraged by consumer groups and trial lawyers, federal regulators are pushing for limits on arbitration provisions in consumer contracts.
At its core, the debate is about whether companies may compel consumers to arbitrate rather than litigate disputes and – perhaps more significantly – bar consumers from class action remedies as part of the arbitration requirement. Critics of mandatory arbitration say that it restricts consumer redress and is tantamount to a deceptive trade practice because the arbitration provisions are usually contained in the “fine print” of a contract. The new rules being proposed reportedly are designed to eliminate mandatory arbitration provisions and facilitate class action litigation.
Despite the criticisms of consumer groups, arbitration often is cheaper and more effective for both individual consumers and companies. By interfering with Americans’ freedom of contract to prevent the use of mandatory arbitration, the government could severely damage U.S. business interests by exposing them to a marked increase in expensive class action litigation. In turn, that would result in more limited choices and increased costs for consumers.
The government’s efforts to eliminate mandatory arbitration provisions in consumer-related contracts have been highlighted in several recent agency actions. In its list of near-term goals, the Bureau of Consumer Financial Protections (CFPB) said that new rules to govern arbitration in consumer contracts would be a priority in 2016. The Department of Education announced that it, too, was reviewing mandatory arbitration provisions in college enrollment contracts. And despite multiple appellate decisions to the contrary, the National Labor Relations Board (NLRB) again concluded that class action waivers in arbitration agreements infringe on an individual’s rights under Section 7 of the National Labor Relations Act.
All of this has happened in the space of three months, indicating a clear effort by the government to diminish businesses’ ability to require arbitration that shields them from often frivolous and costly class action litigation. The acts of some Congressmen have made this agenda even more transparent. In February 2016, Senator Patrick Leahy introduced a bill that would modify the scope of the FAA and curtail the use of mandatory arbitration. The bill is unlikely to pass in the current Republican Congress, but Congress previously empowered federal agencies to curtail the use of mandatory arbitration provisions on a significant, but more limited, basis.
The CFPB’s current actions were authorized by the 2010 Dodd-Frank Act, which barred the use of arbitration clauses in certain mortgage contacts and gave the SEC power to ban or restrict the use of arbitration in other disputes. Deepak Gupta, then the CFPB’s senior counsel for enforcement strategy, stated that prohibiting or restricting mandatory arbitration would be “the single most transformative thing the bureau can do” for consumers. In March 2015, the CFPB released a 728-page study of arbitration in consumer contracts, which was criticized by some academics and trade groups for misstating the impact of mandatory arbitration provisions on consumers. Since then, members of Congress have engaged in deeply partisan squabbling over the need for additional rulemaking on consumer arbitration or to limit class action litigation in other ways.
Despite the criticism and opposition, CFPB director Richard Cordray reiterated the agency’s plans to release new rules aimed at banks and other financial firms. Earlier comments by the agency confirm that the new rules will be designed to prevent arbitration clauses from restricting class action remedies. We think such changes would quickly spread to encompass telephone, Internet, and other commonplace consumer agreements.
American companies should be concerned with how executive agencies, e.g., the CFPB, the Department of Education, and the NLRB, will carry out their plans to introduce regulations that restrict the use of arbitration clauses in a broad range of consumer contracts. We will not be surprised to see some companies restrict their consumer offerings or increase prices to account for these new rules. If you work in American business, we urge you to take notice of these changes and review how to protect your company from undue litigation in future contracts. Among other options, you should analyze the inclusion of non-mandatory arbitration provisions, the separation of class-action waivers from arbitration provisions, and the option of raising prices to contend with increased litigation.
 Id. § 1414.
 Carter Dougherty, CFPB Finds Arbitration Harms Consumers, Presaging New Rules, BLOOMBERG BUS., March 10, 2015, available at http://www.bloomberg.com/news/articles/2015-03-10/cfpb-finds-arbitration-harms-consumers-in-study-presaging-rules.
In the age of handheld banking apps, private funds transfer systems, and digital currencies, ensuring that new products are fair to consumers and compliant with existing – and sometime archaic – regulations are difficult tasks. The Bureau of Consumer Financial Protection (“CFPB”) recently finalized a new policy for providing “no-action letters” (“NALs”) to companies seeking to introduce new consumer finance products and technologies. Although the CFPB’s stated goal was to ensure transparent and efficient markets that “facilitate access and innovation,” it has failed to hit that target. The CFPB’s new policy is a step in the right direction, but the benefits of the new policy are limited and applicants will run commercial and legal risks in seeking the limited shelter offered by the agency.
Not only will NALs offer limited protection, they will be available only in exceptional circumstances where there is both regulatory confusion and a new product. The CFPB said that it is devoting only limited resources to this program and expects to issue only two or three NALs per year. The restrictive nature of this policy will minimize the value of the agency’s much-needed guidance. The limited scope of the new policy stands in contrast to the SEC’s no-action policy, where NALs are important tools for market participants and their counsel in conducting business. Although NALs are rare in the bank regulatory context, the SEC has recognized that many issuers and securities law practitioners closely monitor such letters, and often view them as “the most comprehensive secondary source on the application of [the federal securities] laws.” (1)
There is considerably less guidance as to CFPB regulations and a more robust no-action policy would provide much needed clarity for market participants and innovators. Under the new policy, market participants considering bringing a new product to market may request a “no action letter” (“NAL”) from the agency. The request for a NAL must contain 15 categories of information, including: a description of the new product (including how it functions); the product’s timetable, an explanation of its substantial benefit to consumers; a “candid explanation” of the potential consumer risks posed by the product; an explanation of the source(s) of the regulatory uncertainty to be addressed by the NAL; and a promise to share data about the product’s impact on consumers. Examples of products that might qualify for a NAL include the early intervention credit counseling program proposed by Barclays PLC and Clarifi (a consumer credit counseling service), which was an early CFPB Project Catalyst research pilot.
The benefit from any NAL issued by the CFPB will be limited. The proposed relief offered is a statement that the CFPB “staff has no present intention to recommend initiation of an enforcement or supervisory action against the requester in respect to the particular aspects of its product…” This amounts to “we won’t take action – unless we do.” While the CFPB is unlikely to take enforcement action with respect to a new product shortly after issuing a no-action letter, the proposed letters are in no way binding and offer little more protection than the existing process of informal consultation. This weakness may be ameliorated over time as courts have an opportunity to weigh in on the impact of CFPB no-action letters and the agency develops a track record for its handling of these issues.
Submitting a request for a NAL could create commercial or regulatory risk for an applicant. From a cost standpoint, preparation of such an application will be a significant undertaking, especially for smaller companies. Because the process is only available for products that are close to market ready, potential applicants will have invested significant sums to prepare their new product. A company in this position may not want to run the risk that the CFPB denies the NAL request, which might delay or prevent it from bringing the new product to market altogether. The publication of the NAL might also give competitors a chance to duplicate or improve on the innovation before or shortly after it reaches the market.
The process also entails legal risks. The NAL application process requires the company’s lawyers to explain why they think the legality of the proposal is “substantially uncertain” but nonetheless should be resolved in the company’s favor. If the CFPB determined that the product is not in compliance with any pertinent law or regulation, the application effectively will be converted to an admission of wrongdoing that would bar the product from the market. (2)
Because the CFPB will publish each NAL that it issues, the non-binding letters also may highlight potential compliance issues to other regulators (and potential consumer litigants), none of which will be bound by the NAL.
By creating such a restrictive process, the CFPB has offered innovators little opportunity to save costs if their product is deemed non-compliant, and no real protection if it is. In many instances, it is questionable that the new no-action policy offers substantially more comfort to a market participant than they could already obtain through informal discussions with the agency. But because there is little existing guidance on CFPB regulations, the new process is welcome, even if limited. The new policy will be particularly useful for companies introducing products at the edge of current law. Deciding whether to seek a NAL will require careful consultation with a company’s lawyers to navigate the potential legal and business risks.
(1) Expedited Publication of Interpretative, No-Action and Certain Exemption Letters, Securities Act Release No. 6764, [1987-1988 Transfer Binder] Fed. Sec. L. Rep. (CCH) 84,228, at 89,053, 89,054 (Apr. 7, 1988). 10 Thomas P. Lemke, The SEC No-Action
(2) The CFPB limited its new policy to new services and technologies. It would make little sense to seek guidance for existing products where the application itself could be seen to be an admission of wrongdoing.