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Forced by the Fine Print: The Implications and Future Prospects of Mandatory Arbitration Clauses

June 25, 2018

Kaylee Heffelfinger of Arizona and Shahriar Jabbari of California had sued Wells Fargo for opening seven unauthorized bank accounts in their names, but their lawsuits were dismissed due to analogous mandatory arbitration clauses. Their cases were part of a larger scandal in which Wells Fargo opened at least 3.5 million unauthorized accounts on behalf of their customers but then astonishingly held those customers to the mandatory arbitration clauses they had signed for their legitimate accounts. Given the harm that mandatory arbitration may cause consumers, it is critical for policymakers to consider the implications of mandatory arbitration.

While Army National Guard Sergeant Charles Beard was valiantly serving his country in Iraq, his family’s car was being repossessed back home in California. This occurred despite the legal protections afforded to active duty service members which prohibit car lenders from repossessing a vehicle without a court order. However, when Sgt. Beard attempted to sue the car lender in court, his case was dismissed due to a clause in the fine print of his loan contract which forced him to resolve any disputes with the lender through mandatory arbitration. [1] Similarly, both Kaylee Heffelfinger of Arizona and Shahriar Jabbari of California had sued Wells Fargo for opening seven unauthorized bank accounts in their names, but their lawsuits were dismissed due to analogous mandatory arbitration clauses. [2] Their cases were part of a larger scandal in which Wells Fargo opened at least 3.5 million unauthorized accounts on behalf of their customers but then astonishingly held those customers to the mandatory arbitration clauses they had signed for their legitimate accounts. [3] Given the harm that mandatory arbitration may cause consumers, it is critical for policymakers to consider the implications of mandatory arbitration.

(Image: Substantive Outcome by Claim Type for Affirmative Consumer Claims in Arbitrator-Resolved Disputes, 2010-2011. Source: Consumer Financial Protection Bureau)

(Image: Substantive Outcome by Claim Type for Affirmative Consumer Claims in Arbitrator-Resolved Disputes, 2010-2011. Source: Consumer Financial Protection Bureau)


Mandatory arbitration requires a company and consumer to adjudicate any dispute before a neutral, third party individual (the arbitrator) rather than a judge or jury. It was first permitted in 1925 with the passage of the Federal Arbitration Act (FAA) and over the years has become pervasively used in consumer contracts. [4] For instance, a 2015 report by the Consumer Financial Protection Bureau (CFPB) found that 99% of payday loan providers in California and Texas, 92% of prepaid card agreements, 88% of mobile phone providers who allow third party charges on bills, 86% of the largest private student loan lenders, 53% of credit card issuers, and 44% of insured checking account deposits are all covered by forced arbitration clauses. This translates to tens of millions of consumers bound by such provisions. [5]

Business interests promote these clauses as a more efficient means of handling disputes since arbitration can be faster and less expensive than proceeding to trial. [6] Furthermore, since these provisions often prohibit class action litigation, they may limit costly and frivolous lawsuits which disproportionately benefit plaintiff’s attorneys through exorbitant fees at the expense of the economy. [7] Companies further assert that these cost savings enable them to ultimately provide cheaper products and services to consumers. [8]

However, consumer advocates argue that forced arbitration clauses unduly favor businesses and inhibit the resolution of legitimate disputes. Since these clauses are often hidden in the fine print of contracts, the CFPB found that more than 75 percent of consumers surveyed did not know whether they were subject to forced arbitration in their financial service contracts and fewer than 7 percent of those covered by forced arbitration clauses realized that the clauses blocked their right to sue in court. [9] Furthermore, arbitration unfortunately provides few protections for consumers since the arbitrator is not required to have a legal background, their decision does not need to be based on law or established precedent, the proceedings are kept confidential, and there are minimal opportunities for appeal. Moreover, consumers may be burdened with steep costs including long-distance travel to participate in the hearing, filing fees, and a portion of the arbitrator’s charges which are typically $200-300 per hour. [10] Additionally, companies can craft the arbitration rules to their advantage, and since the consumer has absolutely no say in the matter, neither the company nor the arbitrator has an incentive to make the process fair or balanced. This concern is exacerbated by the fact that the arbitrators depend on the companies for repeat business which may bias their decisions. [11] Most troubling is that these clauses prevent class action lawsuits which are a critical tool that enable consumers to join together and to recuperate damages when the size of one claim is too small to justify the legal costs.

In fact, data compiled by the CFPB demonstrates the chilling effect of mandatory arbitration clauses. The CFPB calculated that each year roughly 32 million consumers were eligible for financial redress totaling $2.7 billion under federal class action lawsuits. This starkly contrasts with the mere 600 arbitration cases that were filed by individuals each year. During 2010 and 2011, consumers filed 1,060 arbitration cases but only received relief in 78 cases, totaling less than $400,000. Conversely, businesses were able to recover $2.8 million from the arbitration cases they filed against consumers during that same time period. [12] These statistics clearly demonstrate that mandatory arbitration clauses favor businesses and act as a barrier to consumers pursuing disputes. Equally important, the CFPB found that there is no statistically significant evidence to support the claim that mandatory arbitration clauses result in lower prices for consumers. [13]

As a result of these disconcerting findings, the CFPB issued a final rule in July 2017 to ban clauses in consumer financial product contracts that prohibit class action lawsuits. However, in October 2017, Congress exercised its power under the Congressional Review Act to overturn this rule. [14] Unfortunately, the courts also have not been an effective venue for consumer advocates to challenge mandatory arbitration clauses. In a long series of precedents, the U.S. Supreme Court has repeatedly upheld mandatory arbitration provisions based on the FAA and overturned efforts by individual states to limit the applicability of these clauses. Most recently, on May 21, 2018, the Supreme Court once again sustained mandatory arbitration clauses in Epic Systems Corp. v. Lewis. This suit challenged such provisions in employment contracts, arguing that the ban on class action lawsuits violated the National Labor Relations Act (NLRA) by prohibiting workers from engaging in a form of collective action. However, the Court found that the NLRA provided no such right to class action lawsuits and thus did not conflict with the FAA. [15] The Court’s decision in this case and many precedents indicate that it will continue to interpret the FAA broadly. As a result, state laws and similar lawsuits will likely be unsuccessful in challenging mandatory arbitration clauses.

Consequently, the only way to address the explosion of these provisions will be for Congress to pass new legislation limiting their use. For instance, the Arbitration Fairness Act of 2017 (H.R. 1374/S. 537) would prohibit the enforcement of mandatory arbitration clauses for antitrust, civil rights, employment, or consumer disputes which occurred after the clause was signed. Similarly, the Restoring Statutory Rights and Interests of the States Act of 2017 (H.R. 1396/S. 550) would forbid the enforcement of mandatory arbitration clauses for disputes regarding the violation of federal and state statutes, the U.S. Constitution, or a state constitution if the dispute occurred after the agreement was signed. This Act would also allow courts to invalidate mandatory arbitration clauses if they are unconscionable, lack a meeting of the minds, or violate contract law or “public policy.” Finally, the Safety Over Arbitration Act of 2017 (S. 542) would ban mandatory arbitration for disputes regarding public health or safety hazards if the dispute occurred after the agreement was signed, and the Court Legal Access and Student Support Act of 2017 (H.R. 2301/S. 553) would outlaw mandatory arbitration clauses for any dispute between a student and higher education institution. [16] Evidently, unless Congress takes action by passing one of these bills or a similar piece of legislation, consumers will continue to be forced by the fine print to surrender their rights.

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  [1] https://www.nytimes.com/2015/03/17/business/wronged-troops-are-denied-recourse-by-arbitration-clauses.html

  [2] http://www.latimes.com/business/hiltzik/la-fi-hiltzik-wells-arbitration-20160926-snap-story.html

  [3]   http://fortune.com/2017/10/03/tim-sloan-testimony-forced-arbitration/

  [4] https://fas.org/sgp/crs/misc/R44960.pdf, 1.

  [5] https://files.consumerfinance.gov/f/201503_cfpb_factsheet_arbitration-study.pdf

  [6] http://www.crs.gov/LegalSidebar/Details/1574

  [7] https://fas.org/sgp/crs/misc/LSB10142.pdf

  [8] http://www.crs.gov/LegalSidebar/Details/1574

  [9] https://files.consumerfinance.gov/f/201503_cfpb_factsheet_arbitration-study.pdf

  [10] https://www.consumerreports.org/cro/shopping/the-arbitration-clause-hidden-in-many-consumer-contracts

  [11] https://consumersunion.org/wp-content/uploads/2016/08/CU-comments-CFPB-proposed-arbitration-rule-8-22-16-FINAL.pdf

  [12] https://files.consumerfinance.gov/f/201503_cfpb_factsheet_arbitration-study.pdf

  [13] https://files.consumerfinance.gov/f/201503_cfpb_factsheet_arbitration-study.pdf

  [14] https://www.wsj.com/articles/congress-votes-to-overturn-cfpb-arbitration-rule-1508897968

  [15] https://fas.org/sgp/crs/misc/LSB10142.pdf

  [16]https://fas.org/sgp/crs/misc/R44960.pdf, 16-17.


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