As expected, yesterday the Consumer Finance Protection Bureau (CFPB) announced a proposed rule that would effectively ban class action waivers in pre-dispute arbitration agreements for a broad range of consumer financial products and services, and end the confidentiality often associated with individual arbitrations. The proposed rule would forbid a covered financial product or service provider sued in a class action lawsuit from relying “in any way” on a pre-dispute arbitration agreement “unless and until the presiding court has ruled that the case may not proceed as a class action” and any interlocutory appeals of that ruling have been exhausted. The proposed rule would also require every pre-dispute arbitration agreement entered into after the effective date to include specific language acknowledging the consumer’s right to sue using the class action device and to participate in any class action filed by someone else. And, both for individual arbitrations and for arbitrations commenced by any party to a class action after the denial of class certification, the CFPB will require companies with covered agreements to provide various documents related to the arbitration proceeding.

Because the proposed rule does not become effective for a while yet, companies have a chance to think strategically and get ahead of the rule. Companies that may be covered by the new rule should evaluate their arbitration clauses, which will likely need to be rewritten. They also may want to rethink whether arbitration clauses continue to serve a worthwhile purpose should the new rule come into effect. Likewise, companies wishing to comment on the proposed rule, and attempt to steer the CFPB away from the proposed rule’s most onerous provisions, have a three-month window to do so.

Summary of the Proposed Rule

The CFPB’s proposed rule would apply generally to pre-dispute arbitration agreements for certain consumer financial products or services:

• Extending credit to a consumer, participating in a credit decision, referring prospective applicants to creditors, trading in extensions of consumer credit, or servicing an extension of consumer credit
• Extending or brokering automobile leases
• Providing services to assist with debt management or debt settlement, modify the terms of any consumer credit, or avoid foreclosure
• Providing a consumer credit report directly to a consumer
• Providing accounts subject to the Truth in Savings Act or the Electronic Fund Transfer Act
• Transmitting or exchanging funds as defined by 15 U.S.C. 5481(29)
• Accepting financial or banking data for purposes of initiating a payment by a consumer via a payment instrument or initiating a credit card or charge card transaction (except when the person accepting the financial or banking data also is selling or marketing the nonfinancial good or service for which the credit card or charge card transaction is being made)
• Check cashing or collection
• Collecting debts arising from any of the above products or services

The proposed rule exempts: broker dealers already subject to rules promulgated by the U.S. Securities and Exchange Commission that prohibit the use of pre-dispute arbitration agreements in class action litigation; federal, state, local or tribal governments and their affiliates; persons providing covered services to fewer than 25 customers per year; and merchants, retailers or other sellers of nonfinancial goods or services.

The proposed rule effectively disallows the use of pre-dispute arbitration agreements as a defensive mechanism in class action lawsuits. It states that “a provider shall not seek to rely in any way on a pre-dispute arbitration agreement entered into after [the effective date] with respect to any aspect of a class action that is related to any of the [covered products or services] including to seek a stay or dismissal of particular claims or the entire action, unless and until the presiding court has ruled that the case may not proceed as a class action and, if that ruling may be subject to appellate review on an interlocutory basis, the time to seek such review has elapsed or the review has been resolved.” In comments on the proposed rule, the CFPB clarifies that this prohibition extends not only to any effort to use a pre-dispute arbitration agreement to support an effort to dismiss, defer or stay any aspect of a class action, but also (and without limitation) to any effort to seek to exclude any putative class member, object to discovery or seek a protective order intended to avoid responding to such discovery, or to file claims in arbitration against the class representative. Though not specifically addressed, this language raises questions about whether the availability of individual arbitration pursuant to an arbitration clause could even arguably be a potentially superior alternative to class litigation under Rule 23.

The language to be used in pre-dispute arbitration agreements for covered products or services entered into after the effective date of the rule is, in essence, as follows: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”

The proposed rule also contains a mandatory compliance regime for those providers who enter into pre-dispute arbitration agreements after the effective date of the rule. Providers must send the CFPB certain records in connection with any claim filed in arbitration by or against the provider concerning any of the covered products or services, including the initial claim and any counterclaim, the pre-dispute arbitration agreement, the judgment or award issued by the arbitrator, and certain communications from the arbitrator or the arbitration administrator.

Opportunity for Public Comment

After publication of the proposed rule in the Federal Register, which should occur soon, a 90-day period for public comment will begin. Companies that provide any of the covered products or services, or that use class action waivers in their arbitration provisions, should carefully study the proposed rule and its impact and consider a public comment to the CFPB. For example, the proposed rule is accompanied by a lengthy summary of the study conducted by the CFPB regarding the effectiveness of class litigation in enforcing consumer rights. Others studies, however, have called into question whether the use of the class action device actually benefits the public. The Lawyers for Civil Justice recently cited a study by Professor Joanna M. Shepherd of Emory University School of Law concluding that, in the last 10 years, “no-injury class action cases … resulted in approximately $4 billion worth of settlements and judgments, yet provided a mere 9 percent – or less – of that amount to class members.” The recent example of the $520,000 class settlement paid by Subway for selling “foot-long” sandwiches that measured only 11 or 11.5 inches is illustrative: no monetary benefits ended up in the hands of class members.

Other aspects of the proposed rule provide additional opportunities for public comment.  For example, the proposed rule states that a provider cannot rely on a pre-dispute arbitration agreement “in any way” until a certain stage in the case. How is a provider supposed to preserve an arbitration-related defense? May it raise the defense in its answer without running afoul of the “rely in any way” language? Further, under the proposed rule, the provider cannot rely on the arbitration agreement until after class certification has been denied “and, if that ruling may be subject to appellate review on an interlocutory basis, the time to seek such review has elapsed or the review has been resolved.” It is unclear, however, how that requirement would be applied in state courts that do not allow an appeal as of right from a class certification decision. Would the availability of mandamus relief or discretionary interlocutory appeal require a disappointed putative class representative to petition for such relief before the pre-dispute arbitration agreement could take effect? It is similarly unclear what it might mean that “appellate review on an interlocutory basis … has been resolved.” Would the federal Court of Appeals’ denial of a petition for interlocutory review of a class certification decision under Rule 23(f) qualify as the requisite resolution? Or would the fact that appellate review must await final judgment effectively prevent enforcement of the arbitration clause at all unless there has been full litigation on the merits and a post-judgment appeal is exhausted? Consider also the class action defendant whose petition for interlocutory appellate review was denied, but whose later merits appeal (after the entry of judgment) results in the reversal of class certification. In that situation, the class representative’s individual claim would already have been determined by a judge and jury – what benefit then would come from the pre-dispute arbitration agreement?

The CFPB invites comments by email, mail, hand delivery and electronic submission via website. It also provides contacts for further information. Bradley lawyers can assist with this process.

How to Prepare

In addition to the opportunity to comment publicly, the proposed rule raises a number of issues for companies that provide the covered products and services. Companies should determine whether they might be covered by the new rule, recognizing that many companies may be covered for some of their lines of business and not for others. If the rule might impact you:

• First, analyze your company’s existing pre-dispute arbitration agreements, if any. If the agreement contains class waiver language, consider using that agreement, without amendment, as long as possible since the rule applies only to pre-dispute arbitration agreements entered into after the effective date (211 days after the final rule is printed in the Federal Register, which means the rule could become effective as early as the spring of 2017). If the existing arbitration language does not include a class waiver, consider amending the agreement to add that language before the effective date of the rule.
• Second, consider whether, after the effective date, arbitration clauses are desirable at all. By definition, this rule means that arbitration clauses will have no application to the largest and most costly cases, and it creates implicit incentives for plaintiffs to bring as purported class actions claims that would otherwise have been brought individually simply to avoid arbitration while utilizing the specter of class discovery as leverage for settlement. In the smaller individual cases in which arbitration clauses may still have effect, efficiencies once available through arbitration will now be undermined by a new layer of regulatory reporting and compliance costs and the elimination of confidentiality.
• Third, if you decide to continue using arbitration clauses, start planning for the new regime. This will involve not only drafting new pre-dispute arbitration agreements, for use after the effective date, that comply with the new rule and contain the required language, but also hiring or training personnel to fulfill the new reporting obligations created by the rule.
• Fourth, prepare for an increase in class action litigation. There is no other way to spin it—if this rule goes into effect, class action filings against covered companies will go up.

Bradley lawyers can assist companies in working through these and other issues raised by the proposed rule. Given the scope of the proposed rule, we expect to see a wide range of responses to it. Some industry players will likely challenge the rule and the CFPB’s sweeping assertion of regulatory power. Others will provide comments. Some companies might determine to embrace the rule’s provisions and narrow their arbitration clauses. Others might jettison arbitration altogether. Deciding the proper course of action requires carefully weighing business objectives, litigation risks and consumer expectations in a rapidly changing regulatory environment.

A link to the CFPB’s proposed rule, and the lengthy material the CFPB published in support of it, can be found here.