The Treasury Department's report is called Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule. The first sentence of the report's conclusion (on page 17 of the report) would be laughable if the topic — access to the courts — were not so serious: "The Bureau’s Rule would upend a century of federal policy favoring freedom of contract to provide for low-cost dispute resolution."
Yes, freedom of contract, that's what fine-print mandatory pre-dispute consumer arbitration is all about! (For those who'd rather live in the real world, take a look at Emily Martin's guest post earlier today entitled Forced Arbitration Protects Sexual Predators and Corporate Wrongdoing.)
The report is useful in one way, I suppose. It provides a preview of things to come –a less sophisticated version, perhaps, of industry briefs we'll see challenging the rule in court (assuming Congress doesn't override the rule before then).
Here is the report's executive summary:
Nearly a century ago, Congress made private agreements to resolve disputes through arbitration “valid, irrevocable, and enforceable” under the Federal Arbitration Act. This longstanding federal policy in favor of private dispute resolution serves the twin purposes of economic efficiency and freedom of contract. In the Dodd-Frank Act, Congress authorized the Consumer Financial Protection Bureau to limit or ban the use of arbitration agreements in consumer financial contracts only if the Bureau concludes that its restrictions are “in the public interest and for the protection of consumers.” Against this background, in July 2017, the Bureau issued its final rule (the “Rule”) prohibiting consumers and providers of financial products and services from agreeing to resolve future disputes through arbitration rather than class-action litigation.
The Rule follows the Bureau’s study of arbitration, summarized in a 2015 report to Congress. The Arbitration Study attempted an empirical analysis of both the arbitral awards and class action settlements that consumers obtained for a variety of claims. But the data the Bureau considered were limited in ways that raise serious questions about its conclusions and undermine the foundation of the Rule itself. More fundamentally, the Bureau failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest—its two statutory mandates. Neither the Study nor the Rule makes that requisite showing. Instead, on closer inspection, the Study and the Rule demonstrate that:
• The Rule will impose extraordinary costs—based on the Bureau’s own incomplete estimates. The Bureau projects that the Rule will generate more than 3,000 additional class action lawsuits over the next five years. Meanwhile, affected businesses will spend more than $500 million in additional legal defense fees, $330 million in payments to plaintiffs’ lawyers, and $1.7 billion in additional settlements. Remarkably, the Bureau’s estimates do not account for expected increases in state court litigation. Affected businesses are unlikely to simply absorb these new financial burdens. The Office of the Comptroller of the Currency recently reported that the Bureau’s own data show that the Rule’s costs will very likely be passed through to consumers in the form of higher borrowing costs for credit card users, among other burdens.
• The vast majority of consumer class actions deliver zero relief to the putative members of the class. According to the Bureau’s own data, only 13% of consumer class action lawsuits filed result in class-wide recovery—meaning that in 87% of cases, either no plaintiffs or only named plaintiffs receive relief of any kind. The Bureau projects that, out of the 3,000 additional class actions the Rule will generate, four in five cases will yield no recovery for the putative class of consumers.
• In the fraction of class actions that generate class-wide relief, few affected consumers demonstrate interest in recovery. On average, only 4% of plaintiffs entitled to claim class settlement funds actually do so. This suggests that consumers value class action litigation far less than the Bureau believes they should. This is not surprising given that plaintiffs who do claim funds from class action settlements receive, on average, $32.35 per person.
• The Rule will effect a large wealth transfer to plaintiffs’ attorneys. On average, plaintiff-side attorneys’ fees account for approximately 31% of the payments that plaintiffs receive from class action settlements—and in many types of cases, much more. In an average case,plaintiffs’ attorneys collect more than $1 million; actual plaintiffs receive $32 each. The Bureau’s data indicate that the Rule will transfer an additional $330 million over five years from affected businesses to the plaintiffs’ bar.
• The Bureau failed reasonably to consider whether improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban. The Bureau’s own data show that the financial marketplace offers choices to consumers regarding arbitration; the vast majority of contracts in the major market segments do not contain mandatory arbitration clauses. If the Bureau is concerned that consumers are unaware of arbitration clauses, more prominent disclosure of such clauses would be a lower cost, choice-preserving means to advance consumer protection.
• The Bureau did not adequately assess the share of class actions that are without merit. Courts and commentators have long recognized that defendants settle even meritless lawsuits. As Justice Ruth Bader Ginsburg has explained, the class mechanism “places pressure on the defendant to settle even unmeritorious claims.” The Bureau overlooked the force of this argument and failed to assess the costs of meritless litigation that the Rule will generate.
• The Bureau offered no foundation for its assumption that the Rule will improve compliance with federal consumer financial laws. The Bureau “assumes that the current level of compliance in consumer finance markets is generally sub-optimal”2 and insists that the Rule will protect consumers by remedying that assumed compliance gap. But after years of study, the Bureau has identified no evidence indicating that firms that do not use arbitration clauses treat their customers better or have higher levels of compliance with the law. As a result, the Bureau cannot credibly claim that the Rule would yield more efficient levels of compliance.
In view of these defects, it is clear that the Rule does not satisfy the statutory prerequisites for banning the use of arbitration agreements under the Dodd-Frank Act. The Bureau has not made a reasoned showing that increased consumer class action litigation will result in a net benefit to consumers or to the public as a whole. Based on the Bureau’s own data, it is far more likely that the Rule will generate massive economic costs—borne by businesses and consumers alike—that dwarf the speculative benefits of the Bureau’s theorized increase in compliance.
