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CFPB to Take on Shadow Corporate Justice System

Wronged consumers often find themselves forced into arbitration proceedings where a corporation has picked the judge. 

George Zornick

April 24, 2012

The Consumer Financial Protection Bureau announced Tuesday morning a “public inquiry” into how the financial services industry uses arbitration clauses to protect itself from consumer lawsuits. These clauses are often hidden from consumers, deep in contractual fine print, and strip away basic rights to judicial review.

Banks, credit cards, cell phone companies or even employers routinely offer contracts that, in the event of a dispute, mandate an arbitration procedure in which there is not a judge or jury—but rather, a private arbitrator often chosen by the corporation being sued.

Naturally, this creates a pseudo-judicial system heavily weighted towards corporations—in California, for example, a study found that corporations won 94 percent of the arbitration proceedings. In one of the more infamous cases of an arbitrator simply rubber-stamping a corporation’s case, a Minnesota arbitrator ruled in 2006 that woman owed a credit card collection agency $7,800 for a defaulted account—except the card was taken out by an entirely different woman who happened to have the same name.

Forced arbitration has a particularly pernicious effect in allowing companies to avoid class action lawsuits. Big companies hate class action lawsuits because without them, they are free to nickel-and-dime consumers without much fear of legal action—few people would take the time to individually sue their credit card company or cell-phone provider over a couple hundred dollars in bogus fees. Twenty states do not allow companies to ban class-action suits in contracts, but in AT&T Mobility v. Concepcion, the Supreme Court said companies can ban class actions through forced arbitration clauses. (Similarly, the Supreme Court upheld forced arbitration specifically by credit card companies in a case earlier this year).

The CFPB is now inviting the public to comment on any unfairness experienced under forced arbitration and will publish a study on the findings. This was all required under the Dodd-Frank bill, which singled out forced arbitration as one area the CFPB must examine. Once the study is complete, the CFPB will “assess whether imposing conditions or prohibitions on arbitration clauses would better protect consumers and serve the public interest.”

Ideally, the CFPB will ban all forced arbitration clauses in favor of allowing the consumer to choose arbitration proceedings once they experience a violation and not before.

“Once you have a dispute with a company, if you mutually agree to take its arbitration, that’s fine,” said David Arkush of Public Citizen, which has done extensive advocacy against forced arbitration. “You then have a say in who the arbitration provider is—you won’t do it if it doesn’t look fair. It basically creates a better market where you and the company both have a say and the arbitrator has to serve both of you. If the co can force you in advance and choose the arbitrator, then the arbitrators are basically shopping for the company’s business.”

Arkush added that Public Citizen will be heavily engaged in trying to influence the CFPB to ban forced arbitration. “We think it’s one of the highest priorities for consumers of financial services,” he said.

George ZornickTwitterGeorge Zornick is The Nation's former Washington editor.


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