Class action waivers may be banned in arbitration clauses
The Consumer Financial Protection Bureau (CFPB) is considering proposing new rules that would prohibit consumer financial institutions from banning class action lawsuits in their arbitration clauses.
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“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”
Buried in many contracts for consumer financial products like credit cards and bank accounts, most arbitration clauses deny consumers the right to participate in class action lawsuits against companies. With this free pass, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers.
The CFPB has been studying arbitration clauses and released a report in March that showed the clauses severely restrict consumers’ relief for disputes with financial service providers.
The study also found that many consumers weren’t aware they had agreed to arbitration when signing up for financial services and those who did were not aware they had waived their right to take a dispute to court.
According to the CFPB, arbitration agreements are more likely to be used to stop cases filed on behalf of a class than in cases filed on an individual basis. Among the 1,205 individual federal court cases studied, companies moved to compel arbitration in only 12 cases or less than 1 percent. In contrast, out of 562 class cases filed over three years in federal court and selected state courts, the study found that arbitration agreements were cited as the basis for a motion to dismiss or stay the case in 94 cases (about 17 percent of the class cases) and courts dismissed or stayed about half of those cases. Outside of those 562 cases analyzed, the study further identified more than 60 other class consumer finance cases dismissed or stayed on the basis of arbitration agreements since 2011, for a total of over 100 class cases identified in the study as blocked by arbitration agreements. For most of the cases analyzed in the study, information was not available as to whether the relevant contracts contained arbitration agreements.
The CFPB notes that class cases are particularly relevant in consumer financial markets where it is less likely for any individual consumer to incur large losses as a result of a particular common practice even though, in aggregate, losses may be substantial.
Class cases can provide significant relief to consumers who have been harmed by their consumer financial service providers. Conservatively, the Study found settlements in class cases provided, in federal courts alone, $540 million in gross relief to at least 34 million consumers per year on average over a five-year period.
Proponents of arbitration clauses waiving the right to participate in a class action are not pleased with the proposals of the CFPB and have criticized the study.
Opponents are pleased with the potential action and believe it’s long overdue.