By Quentin Fottrell, MarketWatch
Can you take your credit-card company, bank, wireless carrier or even dating site to court as part of a class action suit if you have a dispute? The answer, which may surprise you, is probably not.
On Wednesday, the Consumer Financial Protection Bureau said it want to change this by targeting financial companies that force customers to use privately appointed arbitrators to avoid going through the public court system and, often times, banning customers from joining class action suits before the court hears the merits of the case. The CFPB — the independent government agency charged with protecting consumer financial rights — said it’s proposing rules that would ban consumer financial companies from using “free pass” arbitration clauses to block consumers from suing in groups to obtain relief.
Mandatory arbitration clauses are buried in many contracts for credit cards, bank accounts and other non-financial services, which prevent consumers from participating in group or “class action” lawsuits against companies. This benefits companies because they save time and money, avoid negative publicity, and avoid nuisance lawsuits. As CFPB Director Richard Cordray said in a statement, “Consumers should not be asked to sign away their legal rights when they open a bank account or credit card.”
These clauses typically state that the company or customer can require disputes to be resolved by privately appointed individuals (known as arbitrators) — but not through the court system. “Where such a clause exists, either side can generally block lawsuits from proceeding in court,” the CFPB says, but it also says this more often benefits the company. (The CFPB only has authority to address forced arbitration in consumer financial products, but Lisa Gilbert, director of Congress Watch at Public Citizen, a Washington, D.C.-based consumer watchdog, says it will “set a pretty important precedent” for other industries, everything from cellphones to nursing homes contracts .)
In the Dodd-Frank Wall Street Reform and Consumer Protection Act, from 2010 , Congress required the CFPB to study the use of arbitration clauses in consumer financial markets and gave the bureau the power to issue regulations that are in the public interest and for the protection of consumers. The results of the CFPB’s study — released in March 2015 — showed that arbitration clauses restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits.
“One way to think about the effect of enforced pre-dispute arbitration clauses is to recall what Sherlock Holmes described as ‘the curious incident of the dog in the night-time,’” Cordray added. “In the famous detective story, everyone except Holmes misses the fact that the dog did nothing during the night, including not barking at all, which yields the important clue that the intruder likely was recognized. What the story illustrates is that it is often hard to grasp the significance of something that does not happen and thus can easily go unnoticed.”
For their part, businesses argue there are benefits to consumers: A faster, cheaper dispute resolution process, something supported by a 2011 Supreme Court ruling — AT&T /zigman2/quotes/203165245/composite T +2.98% Mobility versus Concepcion — which upheld the phone company’s right to enforce mandatory arbitration using a private arbitrator, instead of in the courts. But this case does not forbid legislative or regulatory reform, says Elizabeth J. Cabraser, a partner with the law firm Lieff Cabraser Heimann & Bernstein. “The CFPB means to preserve the class mechanism for consumers.”
And some companies also allow customers to opt out: PayPal /zigman2/quotes/208054269/composite PYPL +1.42% requires a written opt-out notice and Time Warner Cable and T-Mobile /zigman2/quotes/204659678/composite TMUS -1.14% require consumers fill out a form within 30 days of signing up to the service. Time Warner Cable is able to resolve most customer complaints without having to resort to litigation, says Susan Leepson, a TWC spokeswoman. “In cases where an amicable solution is impossible, Time Warner Cable’s arbitration clause provides its customers with a quick and inexpensive way to resolve disputes.” Public Citizen’s Gilbert adds, “Sometimes it requires just as many bureaucratic hoops to opt out.” (T-Mobile declined to comment and PayPal was not immediately available for comment.)
There’s another major problem with opt out clauses, however: Few people are even aware mandatory arbitration exists. More than 75% of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers, a March 2015 study by the CFPB found . In the credit card market, card issuers representing more than half of all credit card debt have arbitration clauses — impacting as many as 80 million consumers. In the checking account market, banks representing 44% of insured deposits have arbitration clauses, it found.
Legal experts suggest customers do something they rarely do: Read the fine print. “Consumers who sign arbitration agreements that ban class actions are giving up their rights to use the only legal mechanism that is cost-effective when they’ve been damaged or cheated in an amount less than $100,000,” Cabraser says. “It isn’t economically feasible to litigate or arbitrate solo cases for ‘small’ claims.” And so-called small amounts can actually mean hundreds or even tens of thousands of dollars because the cost of litigation and arbitration is so high, she says.
Class action lawsuits are typically cheaper for consumers and — as Cordray mentioned in his Sherlock Holmes analogy — encourage more customers to actually move forward with a public court case against a company, Cabraser says. (To make the arbitration process more transparent, the CFPB is also considering publishing arbitration claims and awards by financial companies on its website.) “Consumers pay nothing up front to litigate, and owe lawyers nothing if they lose,” Cabraser says. “In other words, class actions level the playing field for consumers, banding together, to right a common wrong.”