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End of the line for anti-arbitration rule? Maybe not

End of the line for anti-arbitration rule? Maybe not

While last week’s U.S. Senate vote that killed the Consumer Financial Protection Bureau’s anti-arbitration rule is a major relief to financial organizations, that may not be the end of the story.

In fact, how the issue ultimately plays out may depend in part on Ohio politics, observers say.

Vice President Mike Pence cast the tie-breaking vote last Tuesday that killed the CFPB’s new arbitration bill, which would have banned companies from using mandatory arbitration clauses, thus allowing consumers to participate in class-action lawsuits.

The rule was killed under the Congressional Review Act, which allows Congress to review and reject government agency rules. President Donald Trump is expected to approve the resolution.

The CFBP rule, with which firms would have had until March 2018 to comply, was widely criticized by financial service organizations and others.

These included the U.S. Treasury Department, which issued a report last week that said the CFPB’s rule would “impose extraordinary costs,” generating more than 3,000 additional class action lawsuits over the next five years, and more than $500 million in additional legal defense fees.

The vote was a relief to the industry, said Thomas M. Hanson, a member of Thomas McGlinchey Stafford P.L.L.C. in Dallas. There was concern “that the compliance date was coming, and people were starting to have to figure out” what they had to do to change their processes to accommodate it, he said.

If the rule had stood, “there would have had to be a big change to many of the contracts” that firms now have with consumers, said Jennifer Monty Rieker, counsel with Ulmer Berne L.L.P. in Cleveland. It could have resulted in firms facing more lawsuits in the court system, which would have had a negative impact on their financial results, she said.

Experts say the vast majority of the wide swath of companies that fall under the CFPB’s jurisdiction, which include financial services firms, require consumers to agree to arbitration in the event of a dispute. Mortgage companies, though, are not permitted to use mandatory arbitration provisions, and generally state law prevents insurance companies from having them as well, experts say.

But, said Christine A. Scheuneman, senior partner with Pillsbury Winthrop Shaw Pittman L.L.P. in Los Angeles, this is not a situation “where companies are sitting back and saying, ‘Now we can take advantage of consumers.’ It’s a situation where they’re all having to assess what makes sense for their own businesses and their own companies.”

“There have been “plenty of companies that have stopped using arbitration clauses over the years because they had just determined it didn’t make economic sense for them,” said Ms. Scheuneman.

She said also consumers may favor arbitration. Many times, a consumer simply wants to get their problem addressed, “and they want to get it addressed quickly and in a very straightforward way, and that’s really one of the hallmarks of arbitration. It’s a mechanism to address consumer concerns and issues more quickly than if you brought an action in court,” said Ms. Scheuneman.

Alternatives to arbitration clauses include dispute clauses under which “parties have to informally meet to resolve their differences,” said Ms. Scheuneman.

“It depends on what kind of issue and what kind of company” is involved, she said. Firms can also mediate their dispute first before moving to arbitration or litigation, she said.

Some experts say agency director Richard Cordray may not give up the fight so easily despite last week’s Senate vote.

“What we’re waiting on is Plan B,” said Richard E. Gottlieb, a partner with Manatt, Phelps & Philips L.L.P. in Chicago.

“I don’t see the CFPB walking away from a mandatory arbitration regulation,” he said. The Congressional Review Act, under which Congress rescinded the arbitration rule, “has a huge loophole,” which is the agency “cannot promulgate a new rule that is essentially the same as the old rule, so it just needs to be different enough” than the original rule.

One possibility, he said, would be for the agency to preserve the component of the old rule that would have permitted the agency to publicize arbitrations.

“That would provide a disincentive to push people” to arbitrate, he said. Such a rule would be less likely to be overturned by Congress, he said. “It’s a tougher argument.”

However, Quyen T. Truong, a partner with Stroock & Stroock & Lavan L.L.P. in Washington said, “I think Director Cordray has many regulatory priorities that he wants to address in the near term, so I don’t perceive a second attempt at arbitration rule-making as topping that list.”

Mr. Hanson said, “The CFPB has become somewhat renowned for engaging in what’s known as rule-making by enforcement, where they don’t necessarily enact a formal rule” but instead use their enforcement authority “to penalize companies that the CFPB feels are engaging in practices that are harmful to consumers. So If you’re talking about a Plan B, that might be part of it.”

An agency spokesman could not be reached for comment.

Mr. Hanson noted also that the U.S. Supreme Court upheld class action waivers in arbitration agreements in its 2011 ruling in AT&T Mobility L.L.C. vs. Vincent and Liza Concepcion. 

Experts also point out that Equifax Inc. has said it will not require consumers who sign up for their program because they have been impacted by September’s data breach to agree to arbitration.

However, clients who were not affected will continue to be required to comply with arbitration agreements, Mr. Gottlieb said.

Meanwhile, while Mr. Cordray’s term expires in July, there is speculation he may step down earlier from his post to run as a Democratic candidate for governor of Ohio.

In any case, whenever he leaves office, he is likely to be replaced by President Trump with a more business-friendly candidate, experts say. 


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