The Consumer Protection Financial Bureau just adopted a new rule affecting class action clauses and mandatory arbitration. The new rule prohibits class action bans in arbitration clauses by financial service firms in consumer contracts and requires reporting of results of individual arbitrations. Arbitration and class action bans appear in most consumer contracts for services such as credit cards, banking, car loans, internet providers and cell phones but most consumers do not realize the impact or even the existence of these clauses in contracts.
Mandatory arbitration clauses and class action bans are two distinct ways that corporations try to prevent consumer lawsuits. A mandatory arbitration clause in a contract forces consumers to resolve any dispute regarding the contract before a 1 or 3 person panel of business-friendly arbitrators with no right to appeal, instead of a jury of people from all walks of life and a right to appeal.
A class action is a lawsuit where a number of people band together to file a lawsuit to enforce rights of a larger group. Often, class actions are brought for small amounts of money lost by a large number of people. Even though class actions and arbitration are different procedures, the two concepts are often discussed together because when a corporation puts a mandatory arbitration clause in a consumer contract, that mandatory arbitration clause usually also contains a ban on filing a class action.
The rule from the Consumer Protection Financial Bureau prevents financial service firms from banning class actions in consumer contracts. Restoring the ability to file a class action lawsuit helps consumers fight small fees that affect a large number of people. An ordinary person would not pay a lawyer to file an individual lawsuit to fight a $25 or $50 overcharge from a bank or cellphone provider because much more money would be spent fighting than could be recovered. A class action allows a small group to join forces to make it possible to file suit for the wrong done to hundreds or thousands of other consumers. The new rule restores the ability to fight smaller dollar rip-offs that may be happening to a large number of people. Without this ability, consumers would have no means to stop repeated overcharges or improper charges of small amounts to large numbers of people.
The new rule also impacts mandatory arbitration by requiring reporting of the results of arbitration without personal identifiers. Required reporting will benefit consumers. One of the many issues with mandatory arbitration is that, unlike verdicts in court, the results of the arbitration are secret. Reporting of results will shine a light on arbitration and will finally give data on whether mandatory arbitration overwhelmingly favors businesses instead of consumers who have been harmed.
There are, however, obstacles to the rule. This rule can be overturned by Congress within 60 days under the Congressional Review Act, but both the House of Representative and the Senate would have to set it aside by a majority vote.
Mandatory arbitration clauses in consumer contracts give businesses such as car dealerships unfair and overwhelming power, causing most legitimate claims to never be brought at all and sending the few remaining claims to be judged by pro-business arbitrators in cities hundreds of miles away and with no right to appeal a bad decision. The Consumer Financial Protection Bureau rule would have had a much greater impact on consumer protection if it had banned mandatory arbitration in consumer contracts altogether, but reporting of mandatory arbitration results and keeping class action bans out of consumer financial services contracts is a good first step.