Top 10 Myths on Forced Arbitration You Will Likely Hear from the U.S. Chamber’s Lawyer

Today, the Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee will hold a hearing entitled “Legislative Proposals to Improve Transparency and Accountability at the CFPB” 

Among other witnesses will be the go-to hired gun lobbyist and lawyer for the U.S. Chamber of Commerce: Andrew “Andy” Pincus, partner at the international law firm Mayer Brown, LLP. Below is a list of the top 10 myths on forced arbitration you will likely hear from the U.S. Chamber’s lawyer.

Number 1 Red Background Clip Art Myth: Forced Arbitration is good for consumers.

Fact: Be suspicious when the U.S. Chamber’s lawyer claims to know what is a good deal for consumers.

The “About Us” section on Mayer Brown’s website brags, “We serve many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, DAX and Hang Seng Index companies and more than half of the world’s largest banks.”[i]

In contrast, it appears the U.S. Chamber’s lawyer, Mr. Pincus, has handled zero consumer claims in arbitration or litigation. In fact, just last year, he filed a brief on behalf of the U.S. Chamber, Business Roundtable, American Bankers Association, and National Association of Manufacturers in the American Express v. Italian Colors case arguing that a forced arbitration clause should be enforced even if it eliminates consumers’ ability to enforce their rights under federal and state law when they’ve been cheated or ripped off.[ii] In a 5-3 decision, he won.[iii]

Number 2 Red Background Clip Art Myth: Forced arbitration gives customers the same rights they have in court.

Fact: Forced arbitration denies due process and legal rights to people cheated by banks or discriminatory lending practices.

·         There is no appeal to a court of law – even if the arbitrator is biased towards the corporation, ignores the facts, or gets the law completely wrong. In forced arbitration, the arbitrator’s decision is final.

·         Since only corporations are repeat users of an arbitrator, there is a disincentive for an arbitrator to rule in favor of a consumer if he expects further retentions.

 ·         In forced arbitration, there is no right to discovery, like there is in the courts. The limited discovery allowed in forced arbitration is often touted as a benefit to corporate defendants. For consumers, especially those with civil rights claims, it is the opposite.[iv] Bringing a fair lending or Equal Credit Opportunity Act (ECOA) claim often requires statistical analysis of a large amount of loans or financial data. Such information is available through the civil justice system – not through forced arbitration. Without the information necessary to prove the case (which the bank has but will not reveal), victims of financial misconduct and discrimination fail to get relief in forced arbitration.

·         Many banks make the consumer pay ALL the costs in forced arbitration, according to a recent Pew Study. MarketWatch reported the shocking findings of what is in the fine print: 

Thought ATM, overdraft and bounced-check fees were bad? Banks want to fine you for beating them in court. … [P]erhaps the most surprising fine print is the loss, costs and expenses clause. This essentially requires consumers who pursue a claim against a bank to pay the banks’ expenses — even if the consumer wins the claim. Roughly one in four banks include this language in their checking account fine print, the study found.

[v]

Number 3 Red Background Clip Art Myth: Everything the CFPB is doing is behind closed doors.

Fact: The CFPB has welcomed public input.

Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 instructs the CFPB to study the use of pre-dispute (aka “forced”) arbitration contract provisions in connection with the offering or providing of consumer financial products or services, and to provide a report to Congress on the same topic. In April 2012, the CFPB formally asked for public input on the scope of the study. The U.S. Chamber and others provided much information.[vi]

In December 2013, the CFPB released the preliminary results of that study.[vii] It also published the topics it intended to examine in the second part of the study so the public could provide information on those topics. See Section 6 “Future work.” The CFPB has scheduled meetings with various constituencies to get comments on the preliminary results and the scope of the second part of the study. Representatives from the U.S. Chamber have met multiple times with CFPB staff.

Number 4 Red Background Clip Art Myth: The American Arbitration Association’s (AAA) consumer procedures are sufficient to protect individuals’ rights.

Fact: There are many bad forced arbitration companies out there, and even AAA does not provide customers with the same rights they would have in court.

·         The AAA’s consumer procedures eliminate customers’ legal rights by limiting discovery and due process.

·         The AAA is only the top forced arbitration provider today because the last “leading choice of forced arbitration provider” was shut down in 2009 because it allegedly conspired with debt collectors to rig the system against consumers. That arbitration provider, the National Arbitration Forum (NAF), up until its demise, was one of the largest forced arbitration companies in the country, amassing an estimated 200,000 consumer debt collection arbitrations per year.[viii]

·         Many companies don’t use AAA. We don’t know which forced arbitration providers many companies use or if the procedures administered by those providers are fair because forced arbitration is, by nature, secret and shielded from public oversight.[ix] 

·         Many companies that do use AAA simply don’t abide by the “Consumer Due Process Protocol” in their forced arbitration clauses. For example, law professor Michael Rustad examined the arbitration clauses of a number of social media websites. He found that most of the social media sites’ legal terms violate the Consumer Due Process Protocols developed by the National Consumer Disputes Advisory Committee and adopted by AAA.[x]

Number 5 Red Background Clip Art Myth: We need forced arbitration to provide relief to consumers with low-dollar claims.

Fact: Consumers with smaller claims do not get relief in forced arbitration.

Virtually no one brings smaller claims (<$1,000) in forced arbitration. The CFPB found, “From 2010 through 2012, almost no AAA arbitration filings for these three product markets had under $1,000 at issue.”[xi]These are the very types of claims that the U.S. Supreme Court has said are properly suited for class actions, whereby many consumers’ are able to join together to hold corporations accountable for widespread wrongdoing.[xii]  

Number 6 Red Background Clip Art Myth: When problems with unfair forced arbitration clauses arise, the courts can deal with them.

Fact: The reason corporations use forced arbitration is to avoid the courts.

Forced arbitration is a completely private and secretive way for corporations to resolve disputes. There is no appeal to a court of law – even if the arbitrator is biased towards the corporation or gets the law completely wrong.

The Supreme Court has interpreted the Federal Arbitration Act to mean that even harsh forced arbitration clauses will be enforced against consumers. For example, in Rent-A-Center, West, Inc. v. Jackson, the Supreme Court gave the go-ahead for companies to write forced arbitration clauses that say the arbitrator – not a court – gets to decide if the arbitration clause itself is fair.

Number 7 Red Background Clip Art Myth: Consumer advocates hate arbitration and won’t give it a chance.

Fact: Consumer advocates support arbitration, so long as it is voluntary.

Consumer advocates support truly voluntary arbitration. We support the right of anyone to agree to arbitrate a dispute after it has arisen. If a customer has a dispute with a bank and the two parties agree to have an arbitrator settle it rather than go to court, great.

We do not support forcing consumers to give up their constitutional rights as a condition of doing business, opening a checking account, taking out a loan, etc. If corporations really just wanted consumers to give arbitration "a chance" they would allow consumers to choose whether to proceed in arbitration or the civil justice system after a dispute arises. But they don’t. 

Number 8 Red Background Clip Art Myth: A Mayer Brown “memo” on class actions shows they don’t benefit consumers.

Fact: The Mayer Brown memo includes only 1 consumer lending class action relevant to the CFPB and that case is a great example of how class actions benefit consumers.

You will hear a lot of complaints about class actions generally. But in the debate about whether big banks should be able to use forced arbitration to wipe out the rights of their consumers to band together in a class actions, it’s important to focus on class actions against big banks. The one financial services class action Mayer Brown discusses in their memo actually involves JP Morgan Chase paying $100 million back to customers that it defrauded with a bait and switch scheme.

Mayer Brown described that case as follows:

[A] credit-card issuer settled claims that it improperly raised the minimum monthly payment and added new fees in connection with promotional loan offers. The defendant issued class members a flat-rate payment of $25, plus (for certain customers) a share of the remaining settlement fund calculated by taking into account the ways the class member has used the promotional loan and had been charged fees.

[xiii]

Doesn’t sound like much of a big deal the way Mayer Brown describes it. But here’s how Fox Business explained the settlement:

J.P. Morgan Chase (JPM) has agreed to pay $100 million to settle a three-year-old lawsuit that accused the biggest U.S. bank of unlawfully boosting minimum monthly credit card payments. Cardholders, who called the ruling an “excellent result,” claimed the Wall Street bank enticed them to transfer balances from other lenders to Chase accounts and then would consolidate their debt into loans with “fixed” interest rates until balances were paid off. The New York-based bank would then raise minimum monthly payments on some cards to 5% from 2%, customers claimed in a complaint first filed in late 2008.

[xiv]

Number 8 Red Background Clip Art Myth: Consumers do not benefit from class actions.

Fact: The CFPB has found that millions of consumers have benefitted from class actions against financial institutions

There are a number of reasons why financial services consumer class actions directly benefit customers:

·        They often involve small-dollar harm committed against large groups of people. For example, millions of people were harmed by the banking industry’s practice of re-ordering checking account transactions so as to maximize overdraft fees. But the typical overdraft fee is only around $25, far too small an amount to be worth an individual lawsuit.

·        It is often easy to determine the amount of the harm. Because these cases involve banks and their relationships with customers, when there is harm to the customer, the loss suffered is evident from the records of the bank.

·        No claims process is typically required. Most of these cases involve situations where the class members are in an ongoing customer relationship with the defendant. They are credit card or checking account holders. Or they are debtors who owe a lender. Accordingly, once a settlement is negotiated, the money can be paid back directly to those harmed.

The CFPB, in part one of its study, examined three cases of banks reordering checking account charges to increase overdraft fees. For years, America’s largest banks had a practice of using sophisticated and specially designed software programs to maximize the number of overdraft fees charged to customers. What the banks did was manipulate customer transactions records so that at the end of each day the customer’s debit transactions were reordered from largest to smallest – so-called high-to-low ordering – in order to produce more overdrafts, and consequently more overdraft fees, than if the debit transactions were processed chronologically.

A number of successful class actions were filed against the banks to stop the practice and get refunds for customers overcharged. The CFPB found that just three of these class actions provided more than $120 million relief to over six million wronged customers. The CFPB also looked at all the consumer arbitrations filed against banks with the American Arbitration Association over a three year period 2010-2012. During that three year period, only two people brought arbitration claims for overdraft ordering/timing.

So on the one hand, we have a system – the civil justice system which allows for class actions – that provided financial restitution to millions of Americans and reformed the practices of the nation’s largest banks. And on the other hand, we have a system – private, individual, arbitration – that, at most, provided a refund to two people.

Any honest study of this topic is going to find that financial services consumer class actions have restored hundreds of millions of dollars to Americans who have been cheated by big banks. That is exactly why the U.S. Chamber and others don’t want to see the study completed.

White Red Rounded Rectangle Clip Art Myth: We don’t need consumer class actions because public agencies can fully enforce consumer protection laws.

Fact: Congress, the Justice Department, and the Federal Trade Commission all say we need private class actions to protect consumers.

The U.S. Chamber’s lawyer says we don’t need private class actions. He might think so, but it was the view of Congress that private class actions are a necessary supplement to public enforcement in the areas of fair lending and equal credit. For example, the Fair Housing Act was originally designed to be enforced primarily by private plaintiffs.[xv] In discussing the “design of the [Fair Housing] Act,” the Supreme Court has stated:

“Since HUD has no enforcement powers and since the enormity of the task of assuring fair housing makes the role of the Attorney General in the matter minimal, the main generating force must be private suits in which, the Solicitor General says, the complainants act not only on their own behalf but also ‘as private attorneys general in vindicating a policy that Congress considered to be of the highest priority.’ The role of ‘private attorneys general’ is not uncommon in modern legislative programs.”

[xvi] 

The legislation history for the Equal Credit Opportunity Act shows similarly clear intent: 

“Since discrimination is inherently insidious, almost presumptively intentional, yet often difficult to detect and ferret out, the Committee believes that strong enforcement of this Act is essential to accomplish its purposes.  … The entrusting of enforcement responsibility to the Attorney General is premised on the assumption that that office's experience in the enforcement of other civil rights legislation can be effectively expanded and built on to achieve maximum compliance with the antidiscrimination policies of the Equal Credit Opportunity Act. The chief enforcement tool, however, will continue to be private actions for actual and punitive damages.”

[xvii]

The Department of Justice and Federal Trade Commission expressed the importance of private enforcement in their amicus brief in the American Express v. Italian Colors Supreme Court case: 

Private actions are a vital supplement to government enforcement … under a wide range of other federal statutes. Those include consumer-protection statutes such as the Servicemembers Civil Relief Act; antidiscrimination statutes such as Title VII of the Civil Rights Act of 1964, and the Equal Credit Opportunity Act; and labor and employment statutes such as the FLSA, and the Uniformed Services Employment and Reemployment Rights Act of 1994.

 “Claims under many of these statutes may predictably generate only small damages awards for any particular plaintiff. Yet these statutes confer important protections from practices that are broadly harmful even if they do not result in large monetary damages to particular affected individuals. These statutes also reflect a congressional judgment that private enforcement, even of small-value claims, is an important component of the statutory scheme. …

 “Under [the] approach [of the U.S. Chamber], by contrast, companies could use a combination of class-action and joinder prohibitions, confidentiality requirements, and other procedural restrictions to increase the likelihood that a plaintiff’s cost of arbitration will exceed its projected recovery. Companies could then require assent to such unwieldy procedures as a condition of doing business, accepting employment, or purchasing products. That would deprive a range of federal statutes of their intended deterrent and compensatory effect….”[xviii]

In any case, it’s hard to take the U.S. Chamber seriously on this point. After all, they lobbied against the creation of the CFPB and continually work to undermine the ability of federal and state regulators to hold big banks accountable when they cheat and defraud the public. 


[i]

http://www.mayerbrown.com/aboutus/ (emphasis added)

[ii]

Brief of the Chamber of Commerce of the United States of America, Business Roundtable, American Bankers Association, and National Association of Manufacturers as Amici Curiae in Support of Petitioners, American Express Co. v. Italian Colors Restaurant, No. 12-133, 2012 WL 3766956 (Aug. 29, 2012); See also Brief of the Chamber of Commerce of the United States of America and Business Roundtable as Amici Curiae in Support of Petitioners, American Express Co. v. Italian Colors Restaurant, No. 12-133, 2012 WL 6759408 (Dec. 28, 2012).

[iii]

American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013); Binyamin Appelbaum, Justices Support Corporate Arbitration, New York Times (June 20, 2013)

[iv]

See, e.g., Arbitration Activism at p. 13, Alliance for Justice, 2011

[viii]

Complaint, State of Minnesota v. National Arbitration Forum, Inc., (Hennepin, Co., Fourth Judicial Dist., Minn. Dist. Ct. July 14, 2009); Robert Berner and Brian Grow, Banks vs. Consumers (Guess Who Wins), Bloomberg Business Week (June 4, 2008).

[ix]

Schwartz, David S., Mandatory Arbitration and Fairness (June 1, 2009). Notre Dame Law Review, Vol. 84, No. 3, 2009 at pp 1285-86; Univ. of Wisconsin Legal Studies Research Paper No. 1080. Available at SSRN: http://ssrn.com/abstract=1401469.    

[x]

Rustad, Michael L. and Buckingham, Richard and D'Angelo, Diane and Durlacher, Katherine, An Empirical Study of Predispute Mandatory Arbitration Clauses in Social Media Terms of Service Agreements (August 14, 2012). University of Arkansas at Little Rock Law Review, Forthcoming; Suffolk University Law School Research Paper No. 12-18. Available at SSRN: http://ssrn.com/abstract=2043199. See Section IV.

[xi]

See Section 4.4.3 “Data” As CFPB Director Cordray explained in his remarks at a public hearing on arbitration, “For those consumers who do use arbitration, we observed that very few of them filed arbitration claims for small-dollar amounts. For example, there are almost no disputes over amounts less than $1,000.” Prepared Remarks of Director Richard Cordray at the Field Hearing on Arbitration, Dec. 12, 2013, http://www.consumerfinance.gov/newsroom/prepared-remarks-of-director-richard-cordray-at-the-field-he...

[xii]

“[A]t the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights,” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) (quoting Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997)). Class actions allow for claims that are “not economically feasible” to bring individually. Without this mechanism, consumers would be left “without any effective redress unless they may employ the class-action device.” Deposit Guar. Nat’l Bank v. Roper, 445 U.S. 326, 339 (1980).

 

[xvii]

S. REP. 94-589, at 13 (1976), reprinted in 1976 U.S.C.C.A.N. 403, 415.

[xviii]

Brief for the United States as Amicus Curiae Supporting Respondents, American Express Company v. Italian Colors Restaurant, 2013 WL 367051 33-34 (Jan. 29, 2013) (citations omitted and emphasis added).