Earlier this month, the Consumer Financial Protection Bureau (CFPB), a bureau of the Federal Trade Commission, released its Arbitration Study Report to Congress. The report suggests that pre-dispute arbitration clauses and class action waivers in consumer financial agreements are unfair to consumers. The position in this report is contrary to the direction taken by Supreme Court in American Express Co. v. Italian Colors Restaurant, where the Court permitted the use of arbitration clauses incorporating class action waivers (see previous alert here). The report came about as a result of Section 1028(a) of the Dodd-Frank Act, which instructed the CFPB to study the use of pre-dispute arbitration agreements in the consumer financial industry. Most notably, the report found little support for the idea that pre-dispute arbitration clauses result in consumer cost savings. The report is yet another attempt to discredit the once-dominant idea that arbitration is preferable over litigation for business disputes.

The report's data appears to give the CFPB the traction it needs to impose new regulations on the use of mandatory pre-dispute arbitration agreements in consumer financial contracts. While any restrictions on the use of arbitration agreements and/or class action waivers will take years to implement, given the CFPB's broad regulatory mandate, this report is a clear signal that it intends to begin exercising that mandate in the area of pre-dispute arbitration agreements. Thus, companies must have a strategy in place concerning arbitration provisions and jurisdiction/venue clauses in their consumer finance agreements.

Proponents of pre-dispute arbitration clauses commonly assert that they benefit consumers by lowering the costs of doing business by 1) reducing costly discovery in small-scale consumer litigation and 2) precluding expensive consumer class action lawsuits. Detractors of such clauses argue that pre-dispute arbitration clauses hurt consumers by restricting consumer remedies. With this debate ongoing, Congress instructed the CFPB to study the use of pre-dispute arbitration clauses and to report back on their use and effects on the industry.

Pre-dispute arbitration clauses (contract clauses that require the parties to submit a dispute to binding arbitration rather than a court) are popular in the consumer finance industry. The CFPB report found that more than 50% of outstanding credit card loans contain such a clause. The study also found that:

• More than 75 percent of consumers surveyed were unaware that their contracts contain mandatory arbitration clauses, and less than 7 percent of consumers understood that these clauses limit their ability to sue in court.
• Very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class actions.
• Despite industry claims, there was no evidence to support the proposition that mandatory arbitration saves consumers money. The CFPB examined contracts and pricing and determined that the presence or absence of arbitration clauses in contracts did not affect the prices companies offered to consumers or consumer's access to credit.

The CFPB's negative view of pre-dispute arbitration clauses should concern businesses in the consumer financial industry for at least two reasons:

• First, this report may signal a move by government regulators to ban pre-dispute arbitration clauses in consumer financial contracts.
• Second, the report's findings should prompt businesses that currently use pre-dispute arbitration clauses in their consumer contracts to reconsider whether such clauses actually provide the cost-savings that arbitration advocates have touted.

The report found a significant difference in the monetary relief received by consumers under arbitration versus class action lawsuits. Of the 1,060 arbitrations cases filed between 2010 and 2012, consumers received $365,000 in damages from the companies, while the companies received $2.8 million from consumers. In contrast, over a five year period, approximately 160 million consumers have received $2.7 billion in damages resulting from class actions. The report stopped short of a full-scale attack on the use of pre-dispute arbitration clauses in the consumer financial industry, but the report takes a dim view of their use. The CFPB's findings appear to set the groundwork for initiating new regulations on the use of mandatory pre-dispute arbitration clauses in consumer financial contracts. CFPB Director Richard Cordray promised: "Now that our study has been completed, we will consider what next steps are appropriate."

Although the CFPB did not say what direction it plans to take, the findings of the study indicate that the CFPB may consider new regulations that could restrict the use of mandatory pre-dispute arbitration clauses in consumer financial contracts. Some commentators speculate that the CFPB will choose to prohibit class action waivers, which would prevent consumers from waiving their right to join a class action. Other commentators, however, believe that the CFPB will enact an outright ban on arbitration clauses in general.

Under Italian Colors, businesses can still successfully manage their legal risks with a well-drafted arbitration agreement. Given the changing regulatory landscape, however, businesses should revisit their consumer contracts to ensure that contractual terms mean what they say now and in the future.