Post Midterm Elections Effect On Consumer Arbitration

The Elections are over: What it means for Consumer Arbitration
Five things to look for in 2015
By George H. Friedman*

 

Back when I was Director of Arbitration at FINRA, we used to have a “Crystal Ball Contest” where the staff would weigh in on predictions for the coming year. I usually did pretty well. Maybe that’s because I belong to the World Future Society[1] and have a blog there, and love thinking and writing[2] about the future. Or maybe it’s because people can disagree with you, but they cannot state categorically that you are wrong, unless they claim to be time travelers. My colleagues at Arbitration Resolution Services call me “The Oracle of Teaneck.” For example, my followers may recall that about a year ago, I said “I have no doubt the Republicans will retake the Senate and add to their majority in the House in the mid-terms next year.” So, pay attention. Here are my views on what the election results mean for consumer arbitration:

 

• The Arbitration Fairness Act is DOA; so is the Investor Choice Act
• The Consumer Financial Protection Bureau will ban mandatory arbitration in many types of consumer financial contracts
• The SEC will finally act on mandatory investor-broker arbitration; so will FINRA
• SCOTUS will rebuke the National Labor Relations Board on its anti-arbitration policy
• Web-based ADR will become much more prevalent

 

1. The Arbitration Fairness Act is DOA; so is the Investor Choice Act

 

In 1925, what’s now called the Federal Arbitration Act (“FAA”) was enacted. It made mandatory predispute arbitration agreements (“PDAAs”) enforceable as a matter of federal law, and the Supreme Court in recent years has steadfastly supported the FAA. Legislation called the Arbitration Fairness Act (“AFA”)[3] has been introduced in both houses of Congress that would amend the FAA to ban PDAAs outright in consumer contracts. While Senator Franken held hearings on the Senate bill, nothing else of consequence has happened.

 

Prediction: The AFA bills will die when this Congress fades to black the end of this year. And there is zero chance they will be enacted in the next Congress. The same fate is in store for the Investor Choice Act (H.R. 2998) introduced earlier this year by Rep. Keith Ellison (D-MN). This legislation, would end the use of mandatory pre-dispute agreements by broker-dealers and investment advisers, and would guarantee class action participation.

 

Why these predictions? Several attempts were made over the years to amend the FAA to limit or ban use of mandatory arbitration in consumer contracts. These failed when the Republicans controlled the White House and Congress, and have met a similar fate under Democratic control of these institutions as well. For example, in 2009 the Democrats regained the White House and control of both houses of Congress. The capital markets tanked, there were the Madoff and other scandals, and the economy crashed. But the Arbitration Fairness Act didn’t make it out of the House Financial Services Committee, which at the time was chaired by Barney Frank, an avowed critic of PDAAs in consumer contracts. If it didn’t happen then, it’s not going to happen next year with a Republican controlled Congress. You can book that one.

 

2. The Consumer Financial Protection Bureau will ban mandatory arbitration in many types of consumer financial contracts

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act addressed fundamental consumer protection issues involving securities, banking, and indeed the US economy. The Act, known as Dodd-Frank, contains language governing the use of predispute arbitration agreements in consumer financial and investor contracts.[4] Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB”) and charged the new federal agency with studying the use of PDAAs in consumer financial transactions and addressing PDAAs “if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers…” Note that the CFPB’s choices are not binary, “yes-or-no” decisions; it can ban PDAAs outright or limit their use or impose conditions for their use. For example, the CFPB could promulgate a rule that limited PDAA use to a class of transactions (limitation on use) or required that consumers separately initial or click a PDAA (condition for use).

 

The uproar earlier this year over General Mills’ decision to adopt and later retract a new policy by which consumers, by engaging in activities such as downloading a recipe, or participating in a contest, or “liking” the firm on Facebook, would unwittingly be agreeing to arbitrate, certainly refocused the spotlight on the prevalent use of mandatory, predispute arbitration in consumer transactions. Indeed arbitration clauses abound in the consumer context, showing up in a vast array of contracts for consumer goods and services. Applied for a credit card? You’ve likely agreed to arbitrate disputes with your bank. Got a new cell phone? Payday loan? Rented a car? Opened a checking or stock brokerage account? Arbitration is likely right there in your contract.

 

Prediction: CFPB has been busy this year, holding field hearings, issuing reports, and conducting surveys. It will very shortly be issuing the report to Congress required by Dodd-Frank. Based on what I have seen, there’s no doubt in my mind that the Bureau will promulgate regulations banning use of PDAAs in a range of consumer contracts, specifically credit cards, bank accounts, car loans and payday loans. At a minimum, CFPB will impose conditions on PDAA use. For example, I’ve proposed recently that CFPB write rules that impose conditions on the use of PDAAs in contracts for consumer financial products and services – but not ban PDAAs outright. Specifically, the rules should:

 

• Give the individual a choice of agreeing to arbitrate, but at the time of contracting. My plan would state that no individual would be denied goods or services or employment if he or she declined the arbitration option. This would provide the consumer/employee a choice of whether to accept arbitration, but move it up to the time when the contract is signed to avoid the practical realities of getting a bi-lateral post-dispute agreement to arbitrate. This requirement would give the dominant party a reason to offer incentives to the weaker party to agree to arbitrate, and – dare I say it – sell the process. By following this approach, there would be meaningful choice, but in a practical way.

 

• Ensure that there is a knowing and voluntary agreement to arbitrate by requiring that the consenting individual separately initial/click the arbitration agreement. The Friedman plan would deal with the problem of ensuring a truly “knowing and voluntary” agreement to arbitrate by requiring that the arbitration agreement be separately acknowledged. By so doing, we would eliminate any uncertainty that the weaker party didn’t know what they were getting into.

 

• Ensure procedural fairness safeguards. We should also require that any consumer or employee arbitration system adhere to basic tenets of procedural fairness. These are not hard to find; the challenge if anything will be narrowing down the list.

 

While CFPB funding may be an issue in a Republican Congress (the agency is widely perceived to be anti-business), I don’t think Congressional animus will include the CFPB’s arbitration activities.

 

3. The SEC will finally act on mandatory investor-broker arbitration; so will FINRA

 

Dodd-Frank takes a different approach to PDAAs used in securities customer-broker contracts. Although the operative language in Dodd-Frank provides similar guidance and direction to both the CFPB and SEC about what the agencies are to do about mandatory or forced use of PDAAs, there is a key difference: Dodd-Frank section 921 does not require the SEC to do anything about PDAAs in customer-broker contracts. Given the more than 90 mandatory study and rulemaking requirements the SEC has under Dodd-Frank, it is not at all surprising that arbitration is not high on the agency’s priorities list.

 

Prediction: In my view, it is politically untenable for the SEC to do absolutely nothing about PDAAs, especially in light of the pressure that’s been brought to bear on this issue by some in Congress, NASAA (the association of state and Canadian securities administrators), PIABA (the bar association for lawyers who represent customers in securities arbitrations), and others (for example the AFL-CIO). My view is that, at a minimum, the SEC will study the subject (it has since 2010 been accepting comments on the topic), and eventually require some changes (impose limits or conditions). It will not, in my opinion, ban PDAAs outright. Think about it. To ban PDAAs in customer-broker contracts, the SEC would have to find that doing so is “in the public interest and for the protection of investors.” Essentially, the SEC would be saying: “We’ve been supervising customer-broker arbitration for decades. But, you know, we just realized it’s a terribly unfair system.” On the other hand, a finding that says, “We’ve studied customer-broker arbitration and we’ve concluded that it’s a fair process. But, you know, these few changes will make it even better” is politically tenable. What might such changes be?

 

• Give the investor a choice of agreeing to arbitrate, but at the time of contracting.

 

• Ensure that there is a knowing and voluntary agreement to arbitrate by requiring that the consenting investor separately initial/click the arbitration agreement.

 

• Ensure procedural fairness safeguards.

 

Sound familiar?

Et tu, FINRA?

During the summer, FINRA formed a Dispute Resolution Task Force to “suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum.” The Task Force’s area on the FINRA Website already reports news of the group’s first in-person meeting, held October 10^th. The Task Force “agreed that it would be open to examine any issues that may affect the face of arbitration and mediation in the next 20 years and that no issue was off the table for discussion.” It also identified the initial topics it will examine, and created subcommittees to “gather information and viewpoints” on the topics and to report back to the full Task Force. The Task Force is soliciting written comments and may, based on the written submissions, conduct interviews with organizations and individuals. The update also advises that the Task Force plans to wrap up its work next fall.

 

Prediction: I believe the group will finally tackle the remaining major criticism of FINRA’s arbitration: the mandatory use of PDAAs in investor-broker contracts. In fact, I predict they will adopt he plan I’ve already articulated twice in this blog post.

 

4. SCOTUS will rebuke the National Labor Relations Board on its anti-arbitration policy

 

OK, this one involves employment arbitration and not consumer, but it’s close enough. What’s happening here? The Supreme Court has upheld class action waivers in consumer arbitrations, and at least one federal circuit – the Fifth – has ruled the same way as to the employment context. Specifically, the Fifth Circuit reversed the Board’s policy in D.R. Horton, Inc. v. NLRB, No. 12-60031 (5^th Cir. Dec. 3, 2013). “[W]e disagree and conclude that the Board’s decision did not give proper weight to the Federal Arbitration Act….The NLRA [National Labor Relations Act] should not be understood to contain a congressional command overriding application of the FAA. The burden is with the party opposing arbitration, Gilmer, 500 U.S. at 26, and here the Board has not shown that the NLRA’s language, legislative history, or purpose support finding the necessary congressional command. Because the Board’s interpretation does not fall within the FAA’s ‘saving clause,’ and because the NLRA does not contain a congressional command exempting the statute from application of the FAA, the Mutual Arbitration Agreement must be enforced according to its terms.”

 

Strong stuff, but despite the fact that a federal circuit court, relying heavily on several Supreme Court holdings, has expressly overruled the NLRB’s take on class action waivers, some of the Board’s administrative law judges have apparently not gotten the message, issuing several rulings ignoring Horton.

 

Prediction: There’s not much I remember from civics class or law school, but I do remember this: Congress passes laws, the president signs laws, the courts interpret laws, and, federal administrative agencies carry out and apply federal laws. It is my view that the NLRB is having a bit of an identity crisis, and that sooner or later, the Supreme Court will – in “read our lips” fashion – deliver the message that class action waivers in PDAAs are enforceable under the FAA … and the NLRA. Specifically, sooner or later, the Supreme Court is going to hit the NLRB with a 2 x 4 over its rulings on class action waivers in arbitration clauses in employment agreements. Now, I’m not predicting violence toward a federal agency; the Supremes’ actions will be entirely legal.

 

5. Web-based ADR will become much more prevalent

 

There’s a great scene in the classic 1967 movie The Graduate where a family friend of new college graduate Ben Braddock (played by Dustin Hoffman) gives some sage advice about the future to young Ben. With great fanfare, he leads up to a one word prediction: “Plastics!”

 

Prediction: Here’s my one-word prediction on technology and ADR: “C-ODR” which stands for complete – online dispute resolution services.  This is a term developed by Arbitration Resolution Services, Inc., whose Board I chair. On what basis do I make this prediction? The dramatic and rapid advances in technology will make this choice an easy one for consumers, much like Amazon and other web-based entities have challenged brick-and-mortar shopping as the preferred method of commerce.[5] Put differently, why drag yourself to a hearing and wait around for snail-mail when you can accomplish the same things via the cloud in a fraction of the time and cost?[6] At a minimum, I see this as a breakthrough year for web-based ADR. Case administration, from filing to conclusion – including hearings – will be done online, and paper will become passé. It doesn’t take a Nostradamus to see that improving technology will drive this change.

 

In fact, I see changes happening even before arbitrations are filed. That’s right, before. Insurance companies, securities firms, credit-based companies, and just about any firm that processes claims online will start to build web-based ADR into their claims handling processes. For example, if a customer’s claim is denied in whole or in part, I can see the company offering cloud-based ADR on a voluntary basis as the next online step. Oh, wait, that one has already happened! ARS did that earlier this fall.

 

Conclusion

 

If nothing else, the arbitration world is constantly changing. No doubt there are some things that will happen this year that I just don’t see coming right now. And of course, some of my predictions may not come to pass, at least not yet. We can compare notes in a year. In the meantime, see you in the future!

 

 

 

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*George H. Friedman, an ADR consultant, retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman is Chairman of the Board of Directors of Arbitration Resolution Services, Inc. and serves on the Board of Editors of the Securities Arbitration Commentator. Friedman holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional (Wharton-FINRA Institute).

 

[1] I am also an environmentalist. Thus, I have recycled some material from my past blog posts and articles.

[2] See Friedman, George, Technology, Alternative Dispute Resolution, and the Insurance Industry: the Future Has Arrived (Really this Time), 2014:1 Journal of American Law 22 (Fall 2014), available at http://journaloflaw.epubxp.com/i/397972/22 <visited Nov. 17, 2014>.

[3] See Friedman, George, The Arbitration Fairness Act: a Well-intentioned but Potentially Dangerous Overreaction to a Legitimate Concern, 2013:1 Securities Arbitration Commentator 1 (June 2013), available at http://www.proffriedman.com/files/SAC_AFA_Article__final_06-2013_.pdf <visited Nov. 17, 2014>.

[4] For an in-depth analysis on what CFPB can and should do, see Friedman, George, What’s a Regulator to do? Mandatory Consumer Arbitration, Dodd-Frank, and the Consumer Financial Protection Bureau, 20:4 ABA Dispute Resolution Magazine 4 (Summer 2014), available at http://www.americanbar.org/publications/dispute_resolution_magazine/2014/summer/what-s-a-regulator-to-do–mandatory-consumer-arbitration–dodd-f.html <visited Nov. 17, 2014>.

[5] See Retailers, Are You Ready? Cyber Monday Overtakes Black Friday (Nov. 30, 2012), available at http://blogs.teradata.com/teradata-applications/retailers-are-you-ready-cyber-monday-overtakes-black-friday/ <visited 4/4/2014>. Also Cheng, Andria, UPS, FedEx Forecasts Suggest Black Friday Weekend will Again be Key for Retailers, Marketwatch.com (Nov. 17, 2014), available at http://blogs.marketwatch.com/behindthestorefront/2013/10/25/ups-fedex-forecasts-suggest-black-friday-weekend-will-again-be-key-for-retailers/ < visited 4/4/2014>, and Cyber Monday to be Busiest Day Ever for FedEx, CNN Money (Oct. 24, 2013), available at http://money.cnn.com/2013/10/23/pf/fedex-cyber-monday/ <visited Nov. 17, 2014>.

[6] See Friedman, George, “Road Trips” in Consumer Arbitration: there Must be a Better Way (Sep. 15, 2013) available at https://www.arbresolutions.com/road-trips-consumer-arbitration-must-better-way/#.VGo-x_ldX84 <visited 4/4/2014>.