Today the Senate struck down a new Consumer Financial Protection Bureau (“CFPB”) rule which would have prohibited providers of financial products and services from including class action waivers in their arbitration agreements with consumers. The action is a win for the financial services industry.

Background

Way back in March 2015 we blogged about the CFPB’s study of pre-dispute arbitration contracts in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The CFPB’s study culminated in a Report to Congress which found that arbitration clauses were ubiquitous in consumer financial products and services agreements, that consumers were not aware and did not understand them and that such clauses were generally detrimental to consumers. Specifically, the CFPB found that the availability of class actions served to deter companies from engaging in potentially illegal activities, consumers tended to get more relief more often in class actions rather than in individual arbitration proceedings, and there was no evidence that arbitration and class action waiver provisions lowered costs for consumers.

In May 2016, the CFPB proposed a rule that would (1) “prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action;” and (2) require such providers to submit arbitral records to the CFPB. See Arbitration Agreements, 81 Fed. Reg. 100, 32830 (May 24, 2016) (to be codified at 12 C.F.R pt. 1040). The proposed rule would have covered financial products or services offered or provided for use by consumers primarily for personal, family or household purposes, or they are delivered, offered, or provided in connection with such products or services, such as debt collection. 81 Fed. Reg. 100, 32927.

Congressional Action

In July 2017, the House of Representatives voted 231-190 on a resolution to prevent the CFPB rule from taking effect. On October 24, 2017, the resolution came before the Senate for a vote and passed 51-50. Vice President Pence cast the tie breaking vote. The resolution now goes to President Trump for signature and, based on comments by the White House, he is expected to sign.

Implications

The death of the CFPB’s rule returns providers of financial services and products to the status quo. Providers are free to continue to include and enforce arbitration agreements and class action waivers in agreements with consumers. For more information, please reach out to a Seyfarth attorney or see our One Minute Memo.

On Monday, the U.S. Supreme Court issued its highly-anticipated opinion in  DirecTV, Inc. v. Imburgia et al., 577 U.S. ___ (2015), which reaffirmed its ruling in AT&T Mobility LLC v. Concepcion, 56 U.S. 333 (2011), dealing yet another blow to California Courts’ attempts to invalidate class action waivers.

Background

The plaintiffs in Imburgia filed their lawsuit in 2008, arguing that class action arbitration waivers were per se unenforceable in California under Discover Bank v. Super. Ct., 36 Cal. 4th 148, 162-163 (2005).  Under the Discover Bank rule, California courts were free to find such provisions, when contained consumer contracts of adhesion, unconscionable and to rule that they should not be enforced. Id.

The DirecTV service agreement at issue in Imburgia provided for arbitration of customer disputes and included a class action waiver but also stated that “[i]f . . . the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration waiver] is unenforceable.”  While the Imburgia case was pending, the Supreme Court issued its decision in Concepcion, which ruled that the Discover Bank rule was preempted by the Federal Arbitration Act (“FAA”).  Despite Concepcion, the California Court of Appeals still found the class action waiver provision in the DirecTV service agreement unenforceable under the theory that the parties had chosen the law of California to govern at the time of drafting and, absent federal preemption, California law would not enforce such provisions.

Opinion

Justice Breyer delivered the opinion of the Court, which began with this “elementary” lesson:  “The Federal Arbitration Act is the law of the United States, and Concepcion is an authoritative interpretation of that Act.  Consequently, the judges of every State must follow it.”  (Slip Op. at 5). Unsurprisingly, the Supreme Court went on to rule that the California Court’s failure to do so indicated that it was not placing arbitration contracts “on equal footing with other contracts” and had therefore run afoul of the FAA.  (Id. at 10-11).

Justice Ginsburg and Justice Sotomayor dissented, opining that, given the specific language of the service agreement and the fact that it was drafted before Concepcion, the state court was free to interpret the contract as it had, and to find the class action arbitration waiver unenforceable.  (See Ginsburg Dissent at 3).  They also lamented that the Court’s recent decisions in Concepcion and Italian Colors had effectively deprived “consumers’ rights to seek redress for losses” and “insulated powerful economic interests.”  (Id. at 10-11).

Implications

Imburgia eliminates any doubt as to the enforceability of class action arbitration waivers.  Retailers and service providers wishing to avoid class action claims are encouraged to include them in their contracts and to be aggressive in enforcing them in litigation, even in the face of arguably ambiguous language.

In American Express Co. v. Italian Colors Restaurant, the Supreme Court held in a 5-3 decision that class waivers in arbitration agreements are enforceable, even if the plaintiff’s cost of arbitrating her federal statutory claim exceeds her potential recovery.

Background

Italian Colors brought a class action against American Express for alleged federal antitrust violations under the Sherman Act.  American Express sought to enforce an agreement to arbitrate all disputes individually, with no “class arbitration.”  The restaurant argued that enforcing the class arbitration waiver would bar the “effective vindication” of its federal statutory rights.  The costs to prove its antitrust claim would require several hundred thousand dollars in expert witness fees, while her maximum recovery totaled less than $40,000.  Essentially, the restaurant argued that it would not be economically feasible for plaintiffs to pursue their claims on an individual basis.

The Second Circuit sided with the merchants and found the class waiver unenforceable, but the Supreme Court reversed.

Decision

In an opinion authored by Justice Scalia, the Supreme Court ruled that the arbitration agreement must be enforced according to its terms under the Federal Arbitration Act absent a “contrary congressional command.”  Scalia wrote, “the antitrust laws do not evince an intent to preclude a class action waiver.”  The Court continued and said that although effective vindication concerns arise where there is a provision in an arbitration agreement “forbidding the assertion of certain statutory rights,” and “would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable . . . . the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”

In other words, a class waiver in an arbitration agreement cannot be found unenforceable under the Federal Arbitration Act merely because it would be too expensive for a party to prove her claims on an individual basis.  Absent exorbitantly expensive filing and administrative fees, this decision should foreclose the use of the “effective vindication” or “economic feasibility” argument that plaintiffs’ lawyers have used to circumvent the Supreme Court’s seminal class-waiver decision, AT&T Mobility LLC v. Concepcion.  Indeed, the Italian Colors majority found that its decision in Concepcion, “all but resolves this case” because the Court there “specifically rejected the argument that class arbitration was necessary to prosecute claims that might otherwise slip through the legal system.”

In her dissent, Justice Kagan (joined by Justices Ginsberg and Breyer) criticized the majority for an unwarranted attack on class actions and undue deference toward individual arbitration as an alternative.  As she put it, “To a hammer, everything looks like a nail.  And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled.”  Justice Sotomayor took no part in the consideration of the case because she was on a Second Circuit panel that heard the case.

Implications

Italian Colors sends the clear message that an arbitration agreement should be enforced according to its terms, even when it is not economically feasible for a plaintiff to pursue her claims through individual arbitration.  Although the decision arose in the antitrust context, it has a direct impact on all consumer class actions, and should allow companies to compel individual arbitration – and avoid class arbitration – if the agreement at issue clearly prohibits class procedures.