Time to Take on Arbitration Myths

Arbitration is back on the policy agenda now that a coalition of consumer groups have called on the CFPB to once again restrict the use of arbitration to ensure that the American consumer can have its day in court. In reality, however, this proposal has little to do with truth, justice, and the American way and everything to do with perpetuating the great American class action lawsuit industry.

In submitting a comment letter opposed to the petition, the banks and credit unions did a great job in putting the Bureau on notice that any attempt to once again outlaw class action bans in arbitration clauses will be met with a barrage of legal arguments. But even if the law clearly allowed the Bureau to eliminate class action waivers, the proposal is predicated on a host of questionable assumptions that need to be challenged head-on.

Myth 1: Consumers have no real choice but to agree to class action waivers.

Reality: Courts analyzing class action waivers have emphasized the need for consumer choice.

While the Federal Arbitration Act (FAA) mandates that valid arbitration agreements are enforceable, state law determines whether agreements containing arbitration clauses have been agreed to. This is a question of state contract law and courts have not been shy about invalidating arbitration clauses in account agreements where members have not been given adequate notice of class action waivers and the opportunity to opt out of such agreements. For instance, in 2021, the Court of Appeals for the Sixth Circuit held that an amendment to an account agreement introducing arbitration with a class action ban was invalid because the existing account agreement did not provide consumers adequate notice that it could be amended to include an arbitration clause prohibiting class action lawsuits.

In fact, since 1998, courts across the nation have gradually agreed with a decision from a state court in California, Badie v. Bank of America. Badie involved amendments to credit card and deposit account agreements. The court agreed that the FAA authorized the use of arbitration clauses containing class action waivers in consumer account agreements, but held that because consumers had so little bargaining power courts would only uphold arbitration agreements where consumers had reasonable notice that account agreements could include these clauses and a meaningful opportunity to opt out of this provision. Since Badie was decided, more than 5,000 cases have cited to it and today credit unions typically provide advance notice of arbitration clauses and a meaningful opportunity to reject these amendments without having to give up membership. In other words, the court have provided the type of meaningful consumer choice that class action advocates say they want.

Myth 2: Class actions are the only way to protect against unscrupulous banks and credit unions.

Reality: There are several ways in which consumer compliance laws are enforced.

Class action advocates argue that consumer-based class actions are the only effective means to ensure that financial institutions pay attention to the law. Class action lawsuits allow members to aggregate the harm caused by noncompliance with consumer protection laws by incentivizing lawyers to take on lawsuits that would otherwise not be cost-effective. First, this argument ignores the fact that financial institutions are among the most heavily scrutinized businesses in the country. Periodically, they must open their books to regulators who assess not only the safety and soundness of the institution but also their compliance with relevant rules and regulations. In addition, there are Attorneys General anxious to demonstrate how well they protect their constituents by investigating non-compliance with consumer protection laws.

Last but not least, of course, is the CFPB for those institutions with $10 billion or more in assets. Against this backdrop, the idea that if we did away with class actions tomorrow, compliance departments would go fishing while their executives plundered the accounts of defenseless consumers is chimerical.

Myth 3: Class Action lawsuits protect consumers.

Reality: Class action lawsuits disproportionately help lawyers.

I wouldn’t be as vehemently opposed to consumer-based class action lawsuits as I am if I really thought that they helped consumers, but common sense and the evidence suggests that the only big winners are the lawyers who bring the lawsuits. According to a research paper produced by the Jones Day Law Firm, albeit in the context of consumer protection lawsuits generally as opposed to dealing with financial institutions, class actions typically result in settlements where a disproportionate amount of the money is awarded to attorneys while consumers do not even bother filling out the paperwork to receive their relatively minor compensation.

According to the arbitration petitioners, “consumers suffer small but serious injuries, banding together in a joint or collective action is often the only practical, cost-effective path for consumers to seek and obtain corporate accountability.” Ironically, a well-run arbitration protocol is precisely the appropriate mechanism for consumers to seek compensation for relatively small but meaningful economic harm.

Myth 4: The class action system does not harm law-abiding financial institutions.

Reality: Small institutions stand to lose the most from class action litigation.

Whenever class action supporters extol the virtues of the system, they always point to the usual suspects such as Bank of America and Wells Fargo. But based on my own experience, class action litigation is no longer reserved for use against the biggest institutions. Today, if your credit union has $1 billion or more in assets, it either has or will be threatened with a class action lawsuit and anecdotally, more and more credit unions with under $1 billion in assets are being subjected to these lawsuits. Whereas Bank of America and Wells Fargo can absorb the cost of defending themselves against questionable lawsuits, smaller institutions face a much bigger risk if they choose to do so. In short, class action lawsuits often browbeat small to mid-sized institutions into settling, not because they have done something wrong but because it is too expensive and risky to prove that they have done everything right.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.