** Federal Agencies and Legislators Attempt an Assault on the Enforceability of Class Action Waivers and Mandatory Arbitration Contract Provisions **        

By: Brent E. Johnson                                                                                                                                                                                                                                                                                                                                                                                                                                         

We’ve recently posted regarding the pushback state high courts have been giving the Supreme Court’s recent decisions regarding the primacy of the Federal Arbitration Act over state laws that restrict private arbitration agreements.  These state court cases arise in circumstances (such as in consumer cases) where the high cost/low recovery dynamic makes the class action attractive versus the consumer pursuing an individual claim in arbitration.  The concern over the increased use of mandatory arbitration agreements – particularly those providing class waivers – extends beyond state courts and to the federal government itself.  But unlike the states, who must accept federal pre-emption of state law, the feds can work around it – and they are (trying, at least).  For example, the Department of Education has just released a proposal to amend the federal regulations governing colleges’ participation in the Direct Loan Program.  The proposed amendments would prevent colleges participating in the lucrative program from requiring students to arbitrate unless they consent after the claim arises; and from prohibiting students from asserting their claims “in cases filed in a court on behalf of a class.”  Department of Education, Issue Paper 5 Session 3: March 16-18, 2016.  These proposed regulations stem in part from a citizen petition filed by a consumer group, Public Citizen, Inc and comes in the wake of some high profile for-profit college failings, especially the infamous 2014 bankruptcy of Corinthian Colleges, one of the largest for-profit, post-secondary school operators in the country (housing Bryman College, National Institute of Technology, etc.)  The Department of Education is justifiably concerned that taxpayers are on the hook for Direct Loans made to students who attended Corinthian Colleges’ campuses from 2010-2015 (to the tune of $3.5 billion according to Public Citizen).

The Department of Education’s proposal comes on the heels of the Consumer Fraud Protection Bureau’s announcement in October that it is considering proposed rules to eliminate mandatory arbitration provisions in consumer finance agreements.   Dodd-Frank tasked the CFPB with conducting a study of arbitration agreements in consumer finance contracts, which was completed in March 2015.  Among the study’s insights was that, based on a sampling of consumer finance agreements,  53% of those involving credit cards, 44% of debit cards, 92% of prepaid cards, and 99% of payday loans and wireless contracts contained mandatory arbitration clauses.  The study also disclosed that, while “a relatively small number of individual cases against their financial service providers [were filed] either in arbitration or in court” in the aftermath of Concepcion, prior to that Supreme Court decision, “at least 32 million class members per year were eligible for relief pursuant to class settlements approved by federal courts between 2008 and 2012” resulting in settlements of “$540 million per year in cash, in-kind relief and attorneys’ fees and expenses . . . .”  The CFPB concluded that the dramatic decline in consumer finance disputes was the direct result of the rise of mandatory arbitration agreements – the individual harm is too small for a consumers to bring a claim, lawyers won’t take on such small cases, and “in some cases consumers may not know that they have suffered harm” (presumably because a lawyer hasn’t informed them).

But the biggest challenge to mandatory pre-dispute arbitration agreements in consumer contracts comes from Congress, itself.  In what some readers might view as an ironic title for federal legislation — “The Restoring Statutory Rights and Interests of the States Act of 2016” was introduced by Senators Leahy (D. VT) and Franken (D. MN) on February 4th.  This bill would effectively “overrule” Concepcion (specifically referenced in the text) and its progeny by decreeing that FAA preemption does not apply to claims brought by an individual or “small business concern” – including class actions – arising from a Federal or state statute . . . or a constitution of a State.”  Not satisfied with merely protecting state statutory claims (e.g., California’s Consumer Legal Remedies Act) from pre-dispute arbitration agreements, the proposed legislation goes further by providing that state statutory or common law on unconscionability, contract formation, and public policy trumps the FAA as well.  Senator Leahy and Franken’s 2016 legislation appears aimed at garnering Republican support by specifically referencing state rights.  In 2015, Senator Franken along with Representative Hank Johnson reintroduced their prior bill, “The Arbitration Fairness Act” that was a full federal frontal assault on arbitration agreements, eliminating them in employment, consumer, civil rights and antitrust cases.  The Arbitration Fairness Act was referred to the House and Senate Judiciary Committees from whence it is unlikely to emerge.  The Restoring Statutory Rights and Interests of the States Act is unlikely to fare much better, but it is an election year and worth a watch.