Jessica Karmasek May 25, 2016, 8:28am


CHICAGO (Legal Newsline) - The recent media “barnstorm” against arbitration clauses that prevent class action lawsuits doesn’t paint a complete picture, a Chicago attorney says, though the federal Consumer Financial Protection Bureau is planning to ban them.

Matt Stromquist, a partner at the Chicago-based Pilgrim Christakis -- a nine-person litigation boutique firm focused on consumer finance and class action litigation -- says the CFPB's own research shows that arbitration is more helpful to class members.

“I think arbitration can, in many ways, be a much better avenue for people, consumers especially, than joining a class action,” he recently told Legal Newsline. “And I think statistics from the Consumer Financial Protection Bureau’s own study bear that out.”

The CFPB, which was created to regulate the financial services industry, released its set of proposed rules prohibiting mandatory arbitration clauses that prevent class action lawsuits in conjunction with a field hearing in Albuquerque, N.M., earlier this month. The field hearing was the third such hearing it has held on arbitration. The first was held last March and the second was held in October.

Under the CFPB’s proposal, companies would be prohibited from putting mandatory arbitration clauses in new contracts.

“We have investigated arbitration, and our research found that very few consumers know anything about these 'gotcha' clauses,” CFPB Director Richard Cordray said at the Albuquerque hearing. “Even fewer consumers know how they actually work.

“Based on our research, we believe that any prospect of meaningful relief for groups of consumers is effectively extinguished by forcing them to fight their legal disputes as lone individuals.”

Companies would still be able to include arbitration clauses in their contracts. However, for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court.

The proposal would provide the specific language that companies must use.

The proposal also would require companies with arbitration clauses to submit to the CFPB claims, awards and certain related materials that are filed in arbitration cases. This would allow the bureau to monitor consumer finance arbitrations.

The bureau also is considering publishing information it would collect in some form, so the public can monitor the arbitration process as well.

Stromquist contends the CFPB has bent its study -- the basis of the proposed rules -- to fit its own agenda.

“If you look at the number of cases the study examined, only a tiny percentage (of consumers) benefited from class actions,” he said.

According to the bureau, the study indicates that arbitration agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions, and that very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements.

The CFPB study has been met with criticism from academics, industry and federal lawmakers in recent months.

Just last week, the U.S. House Subcommittee on Financial Institutions and Consumer Credit held a hearing on the bureau’s proposed rules and its study.

U.S. Rep. Randy Neugebauer, chairman of the subcommittee, said, similar to Stromquist, the CFPB’s study demonstrates more favorable outcomes for consumers using arbitration as compared to class actions.

“For example, arbitration produces a significantly higher recovery for individual consumers and has a shorter resolution timeline for recovery,” Neugebauer, R-Texas, said Wednesday.

“In testimony before this committee, the agency has stated that banning the use of class action waivers in arbitration agreements, the main provision in the bureau’s rule, would achieve a primary bureau objective -- ‘to give consumers their day in court.’ Nothing could be further from the truth.

“I fear a single, unelected bureaucrat has directed agency action that is arbitrary and capricious. The bureau has failed to articulate a rational connection between the facts found in its May 2015 study and the agency action before us today.”

Many of the witnesses that testified before the subcommittee last week contend the proposed rules only will lead to higher costs for consumers and less access to credit and new products.

“Due in part to consumers paying little to nothing for arbitration proceedings, they recover significantly higher sums than they do through class actions -- $5,389 vs. $32.35 average recovery,” said Dong Hong, vice president and regulatory counsel for the Consumer Bankers Association. “In contrast, litigation can be complicated, time-consuming and requires a lawyer to navigate the process.”

Not to mention, Hong said, many consumer claims may be too small to attract contingency fee lawyers.

Witnesses seemed to agree that the CFPB’s quest to prohibit arbitration has nothing to do with what is in the best interest of consumers, but rather is done with the intention of lining plaintiffs attorneys’ pockets.

“The CFPB finding that is entirely out of line with my own ongoing research is that attorney fees are only 21 percent of the aggregate payment to the class,” said Jason Johnston, a law professor at University of Virginia who teaches courses on contracts, economic regulation and torts, among others.

“In class settlements under federal consumer protection statutes that I have studied, attorney fees are rarely less than 75 percent of the total amount paid to the class and often are equal to three or four times that amount paid to the class. This finding indicates that class action settlements are an extremely costly and inefficient way of getting money to class members.

“To see how inefficient, one needs only to ask the question: ‘Who would pay their lawyer three times the amount that they themselves actually recovered?’”

Stromquist agreed.

“This is a very, very lucrative area of practice for them (the plaintiffs bar),” he said.

Cordray, a former Ohio attorney general, said businesses use these mandatory arbitration clauses to avoid being held “directly accountable” for their actions.

“Indeed, the study found that class actions supplement government enforcement actions and seldom overlap with them,” he said.

“And several state attorneys general have told us they favor limitations on arbitration clauses because their enforcement resources are also limited.”

But what do the proposed rules mean for Stromquist's clients, such as financial and creditor institutions? No doubt, a significant uptick in litigation, he said.

“For a lot of companies, it (class action litigation) is a huge burden in terms of expense,” Stromquist said. “But the time and people power and everything that goes into defending a case like that also can be a burden.

“Arbitration is less expensive and typically faster for both parties.”

However, Stromquist said arbitration has been wrongly portrayed as a “shadowy, other world” outside of the civil justice system.

“If you read some reports, especially of late, arbitration is described almost as this back room operation,” he said. “That’s simply not the case. It’s subject to laws and rules and is respectful to due process rights.

“Arbitration is not this zero-sum game, where any benefit to the financial industry is a negative to consumers.”

In light of the CFPB’s proposed rules, Stromquist suggests companies consider including arbitration clauses in their agreements before the rules take effect, which most likely won’t happen until 2017.

“Part of our practice is not just picking up the phone and defending companies, but looking at things happening and broader trends and advising them on how things are changing and how they can fix things before a lawsuit is filed,” he explained. “Sometimes, like in this case, that means changing the language in their contracts.”

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

Organizations in this Story

Consumer Financial Protection Bureau
1700 G St NW
Washington, DC 20552

Pilgrim Christakis LLP
321 North Clark Street
Chicago, IL 60654

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