Senate puts corporations ahead of consumers by killing arbitration rule

This week, 50 members of the Senate, along with Vice President Mike Pence, were partying like it was 2007, before the financial collapse, before thousands lost their homes, and before the taxpayers bailed out the big banks. In a 51-50 vote, the Senate repealed a rule issued by the Consumer Financial Protection Bureau that would have provided consumers with a meaningful opportunity to pursue redress when harmed by big banks and other financial services companies like Equifax.

Our American judicial system is premised on the two core values. First, those who have a claim that they were harmed by unlawful conduct should have their day in court. Second, if a court or a jury determine that someone has a meritorious claim, in other words, that a person has the law and the facts on her side, then she should be able to recoup her losses. With their votes to undo the rule, the Senate undermined both of those core values.

{mosads}Close to 90 percent of business entities include forced arbitration clauses in their contracts with employees and consumers. These arbitration clauses tend to include draconian procedural provisions like class action prohibitions and business selected arbitrator clauses, among others. All of these provisions are designed to prevent consumers from accessing courts, and they make it effectively impossible for consumers to pursue remedies for wrongs in any forum. The core purpose of the CFPB rule was to prevent consumers, who have no real choice but to accept these provisions, from being stripped of any meaningful protection against unlawful behavior.

Nonetheless, arguments in favor of repeal were cloaked in language of consumer friendliness, of consumer protection. This cloak, however, is about as good a disguise as the grandmother’s cloak donned by the Big Bad Wolf. For starters, it was argued that the repeal of the CFPB rule would benefit consumers by ensuring that banks avoiding lawsuits would pass on those litigation cost savings to consumers in the form of lower priced goods and services.

It is of course true that any penny a bank doesn’t spend on dispute resolution is a penny the bank saves, but there’s no evidence that those saved pennies are passed onto consumers. Further, the empirical studies, which the proponents of repeal studiously avoid bringing up, suggest that in reality the cost savings to businesses gained through the use of forced arbitration clauses aren’t going to consumers. Instead, they’re staying within the bank vaults.

Justification for repeal was also cloaked in arguments that the CFPB rule was actually unfriendly to consumers because it deprived them of the right to arbitrate. As the White House put it, the CFPB rule would leave consumers with “fewer options for quickly and efficiently resolving disputes.” This is utter nonsense. Arbitration has a dismal track record of fairness for consumers.

As one striking example, the National Arbitration Forum, formerly the leading arbitral institution used by financial entities in debt collection actions, was forced by the Minnesota attorney general to shut down all its consumer arbitration because of the bias that existed as a result of its extensive ties, financial and otherwise, to the very financial entities arbitrating before it.

More fundamentally, even if arbitration were fair, the gambit of these arbitration clauses is not to get disputes to arbitration. It is to eliminate dispute resolution altogether. Virtually all of these arbitration clauses contain prohibitions on the use of class actions, which as a practical matter, means that very few consumers will ever be able to bring claims at all.

An everyday consumer, someone who might just be trying to make ends meet and hardly needs the extra hassle of being fleeced by the big financial institutions, may well have a claim that is very “valuable” to her, but is not valuable enough for an attorney to pursue, or even valuable enough for her to deal with potential arbitration costs.

In 2013, the Supreme Court in American Express v. Italian Colors essentially told folks in such a position that it was “too darn bad” that their claims were not economical to pursue individually. The CFPB tried to remedy that state of affairs for consumers of financial products and services, but when faced with the chance to help those very consumers, 50 senators and the vice president said, “Too darn bad.”

Waxing poetic about consumer cost savings and optionality sounds nice to consumers. It sounds nicer to Wall Street, though, which knows full well that what’s really going on is broad deregulation of financial entities. The United States is rather unique in that it relies heavily, sometimes exclusively, on private enforcement through individual and class litigation to enforce our laws. The repeal of the CFPB rule takes a massive swipe at that private enforcement apparatus, leaving big financial institutions free to act with near impunity. What do consumers receive in exchange for trading away the ability to pursue redress for wrongs? Absolutely nothing.

Maria Glover is a professor at Georgetown University Law Center, where she specializes in civil procedure and complex litigation. Her work on arbitration and class action prohibitions has been published in the Yale Law Journal, University of Pennsylvania Law Review, and Vanderbilt Law Review, and has been quoted by the United States Court of Appeals for the Second Circuit.