While taxes and Russia were dominating the headlines, President Trump quietly signed a bill into law that severely weakens America’s consumers—all 325 million of us. This law lets financial companies block consumers from going to court when those companies illegally take money away from them. Instead, consumers are forced into arbitration, a process rigged against them with little chance for compensation. Big banks, credit card companies, and payday lenders received a “get-out-of-jail-free” card.
Since the 1990s, more and more companies have inserted forced arbitration clauses into the fine print of contracts. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, authorized the independent Consumer Financial Protection Bureau (CFPB) to investigate forced arbitration and to take action in the public interest. Based on its multi-year study, the CFPB issued a rule in July of this year to curtail forced arbitration clauses. The CFPB approach was quite modest. The rule ensures consumers can join together in a group lawsuit, but still permits companies to require consumers acting as an individual to take disputes to arbitration.
The bill that President Trump just signed overturned this rule.
This was not Congress’s first action on forced arbitration, however—something proponents of the practice conveniently forget. Not too long ago, Congress recognized that forced arbitration is a raw deal and with bipartisan support acted to protect businesses from its harm. Indeed, the Republican champions of that earlier legislation, which freed business from forced arbitration, made a compelling case for why Congress must reverse its recent course to protect consumers.
Senators Orrin Hatch and Chuck Grassley, who recently voted to trap consumers in forced arbitration, argued convincingly against the practice of forced arbitration when the plaintiffs in question were businesses. Hatch was the lead sponsor of the Motor Vehicle Franchise Contract Arbitration Fairness Act, which became law in 2002. Upon its introduction, the Senator said, “the bill is intended to allow automobile dealers their day in court when they have disputes with the manufacturers.” It would “make arbitration of disputes in motor vehicle franchise contracts optional.” Hatch highlighted the parties’ “unequal bargaining power.”
Bill co-sponsor Grassley said, “[arbitration has] limited judicial review and less formal procedures regarding discovery and rules of evidence. When mandatory binding arbitration is forced upon a party, for example when it is placed in a boiler-plate agreement, it deprives the weaker party the opportunity to elect another forum. As a proponent of arbitration I believe it is critical to ensure that the selection of arbitration is voluntary and fair.”
He continued, “[t]he purpose of arbitration is to reduce costly, time-consuming litigation, not to force a party to an adhesion contract to waive access to judicial or administrative forums for the pursuit of rights under State law.” Grassley brought up that these are “‘take it or leave it’ contracts” and concluded, “it is essential for public policy reasons and basic fairness that both parties to this type of contract have the freedom to make their own decisions [on how to resolve disputes] based on the circumstances of the case.”
A Senate Committee report accompanying the Motor Vehicle bill pointed out that “the impartiality of arbitration providers may be affected by the knowledge that the manufacturer may be likely to bring them repeat business but the dealer is not.”
The report also referenced a precedent related to gas stations and forced arbitration. The Petroleum Marketing Practices Act was amended in 1994 to ensure that oil companies could no longer impose forced arbitration clauses on gas station retailers. The report notes that this amendment was “enacted to prevent oil companies from improperly exploiting their unequal bargaining power and to deter unfair conduct … and [the] surrendering [of] important statutory rights.”
These arguments apply many-fold to our most recent debate. It’s tough to imagine a more lopsided relationship than an individual and a big financial institution. Or more lopsided results: The CFPB study found that arbitrators side with the financial company more than nine times out of ten.
Furthermore, Equifax and Wells Fargo, among many others, have used the forced arbitration “rip-off clause” not only to defeat claims, but to prevent them from even being filed. Since 2009, Equifax has been a defendant in arbitration only five times. Claims that are never brought and the secretive nature of arbitration proceedings serve to hide massive fraud—as seen when Wells Fargo was able to open millions of unauthorized accounts over the course of several years.
After the 2008 financial crisis exposed pervasive fraud in the mortgage market, Congress prohibited forced arbitration in most residential mortgage contracts through Dodd-Frank. While critics of the CFPB rule claim that it would dramatically raise costs to consumers, this is demonstrably false. Prices did not go up by prohibiting forced arbitration clauses in housing contracts—nor did they go up as a result of Bank of America and a few other big banks dropping their clauses.
Banks and corporations led the charge against the CFPB rule and yet, they fully understand the value of being able to go to court. Big companies don’t hesitate to file class actions when they feel wronged. After the CFPB issued its rule, corporations joined together in a lawsuit to repeal it and to take away consumers’ right to join together in a lawsuit. Interesting that they chose the courts over arbitration.
Choosing a forum for seeking justice must not be a privilege only for a fortunate few. And yet, forced arbitration continues to grow: companies ranging from for-profit colleges to nursing homes use the clause to push Americans into their preferred venue for resolving disputes.
This problem requires a comprehensive solution. Congress has the ability and the moral obligation to end the exploitative practice of forced arbitration. While it may seem far-off, one proposal that aims to accomplish this goal—the Arbitration Fairness Act—has the support of 26 senators.
All Americans must be able to have their day in court. This basic right, embodied by our Constitution’s Seventh Amendment, has been whittled away in recent years. It is high time we fully restore it.