210 Law Professors Agree: Banks Should Not Be Able To Sidestep Legal System When They Break The Law

Image courtesy of Adam Fagen

Earlier this month, the Consumer Financial Protection Bureau proposed rules that would make it more difficult for banks, credit card companies, and other financial services to stripping customers of their constitutional right to file lawsuits against these companies. The 90-day public comment period has finally opened on this rule, and the first one comes from a chorus of 210 law professors who all agree that consumers deserve the right to their day in court.

Forced arbitration clauses — inserted into contracts and user agreements for everything from bank accounts to cellphone service to online retail — generally have two ways of limiting customers’ access to the legal system. First, they bar the customer from suing the company in a court of law and shunt them off into arbitration, where decisions are final (and often secretive and completely unexplained) and no legal precedents are set.

Second, most arbitration clauses have a ban on class actions, prohibiting similarly wronged customers from joining their complaints together even in arbitration. Thus, each individual customer must go through the arbitration process on their own, expending their own resources for limited damages — and ultimately no admission of liability on the company’s behalf.

The proposed CFPB rule would not outlaw arbitration, but it would severely limit pre-emptive bans on class actions in financial products.

In a letter [PDF] — 29 pages, 20 of which are the names of the signees — submitted in support of the CFPB proposal, the legal experts contend that the Bureau’s three-year study of the use of forced arbitration in financial products showed just how important it is to consider new consumer protections.

“CFPB’s study clearly shows that pre-dispute arbitration clauses are extremely common in the consumer financial context, and, indeed, are becoming standard practice across a number of different industries,” reads the letter. “As teachers and scholars in a variety of legal disciplines, we have been disturbed by recent court decisions that have allowed companies in a broad range of consumer finance areas to use pre-dispute arbitration clauses to avoid class claims and thereby elude federal and state consumer protection laws.”

Opponents of the CFPB proposal argue that class actions are so small that consumers don’t really benefit. What they gloss over is the role that class actions play in holding companies accountable.

“[T]he CFPB found that millions of financial consumers participate in class actions, recovering billions of dollars in damages as well as important non-monetary relief in the form of changes to harmful business practices,” reads the letter.

The Bureau’s report on arbitration looked at hundreds of class action settlements reached between 2008 and 2012 and found that they averaged $220 million in relief for consumers. Given the sheer number of plaintiffs involved, the average payout to consumers was small, but the cost to the companies was significant, hopefully giving them pause before repeating their bad behavior.

Additionally, some settlements included “behavioral relief,” meaning the company made changes to policies or practices to avoid future lawsuits.

“In sum, this data demonstrates that class actions against companies that market financial services and products bring substantial relief to millions of consumers,” reads the letter. “These class actions also help ensure that our financial consumer laws are enforced and thereby deter companies from engaging in future violations of these laws. Companies engage in risk management calculations and are less likely to risk violating consumer laws if they know they may be sued in class actions for such violations.”

Pro-arbitration parties have argued that the arbitration process is faster and more streamlined than going through the courts, but the law professors counter that a speedier process doesn’t make it any better. In fact, solo arbitration is something so far removed from most consumers’ experience that most choose to not enter into the process.

“[A]lthough millions of financial consumers are covered by pre-dispute arbitration clauses, the CFPB study found that just a few hundred such consumers file individual arbitration claims each year,” write the academics. “Specifically, the CFPB found that between 2010 and 2012 only a few hundred financial consumers filed arbitration claims with the American Arbitration Association, even though the AAA handles more consumer arbitration claims than any other arbitration provider. Moreover, of the arbitration claims that were brought by individual consumers, most involved claims of over $1,000. In other words, a minuscule number of consumers bring individual arbitrations to recover low-dollar claims.”

Meanwhile, a class action only requires that one or two people bring a case in their own name, so long as they can demonstrate that an entire class of plaintiffs what harmed in the same fashion.

“Nor is there reason to believe, as some have suggested, that consumers would bring more individual arbitration claims against financial service providers if only they were better educated about the purported virtues of arbitration,” reads the letter. “Rather, a consumer who was truly well-informed about consumer arbitration would likely conclude that — given the financial and other costs of arbitration and the limited likelihood of success — it makes absolutely no sense to file an individual arbitration claim. Thus, if we want to ensure the enforcement of substantive laws protecting consumers we need to preserve consumer class actions.”

If you have something to say regarding the CFPB’s proposal, you can read the full text of the rule and submit a public comment over at Regulations.gov, but you must do so before Aug. 22.

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.