Congress shouldn’t delay CFPB’s forced-arbitration rule.
Justice delayed is justice denied.
Corporate lobbyists are at it again, trying to delay an inevitable federal crackdown on pre-dispute forced arbitration agreements. I’m referring to those fine-print clauses found nowadays in virtually every consumer contract and end-user license agreement we sign, the ones that waive our constitutional right to a jury trial in civil cases in the event the corporation wrongs us.
Such clauses are unjust, unnecessary and unconstitutional. But corporations love them, for obvious reasons. And they’re determined to preserve them.
A banking-related spending bill now moving through the House includes a provision designed to shield pre-dispute forced arbitration in the financial services industry. Almost certainly drafted by banking interests, and formally inserted at the request of Rep. Steve Womack, R-Ark., the provision would put on hold a forthcoming federal regulation that would limit the use of pre-dispute forced arbitration agreements in credit-card and other consumer-finance agreements. My guess is the provision, which demands another study of the issue and massive data collection by the Consumer Financial Protection Bureau before the regulation can be issued, would delay the regulation for at least another two years, perhaps longer.
The spending bill is scheduled to come before the full House this week. House leaders should resist the temptation to shield the Womack provision from scrutiny. Instead, they should allow a full and fair debate on the issue, and a vote on whether to remove it from the bill.
The banking lobby’s strategy is to delay a forthcoming Consumer Financial Protection Bureau regulation, pending another study of the issue. In Washington, when you call for a study, it’s often because you are losing the debate and groping for more time. Below, I’ll explain why the provision deserves to be debated and voted on. But first, let’s stop to review the underlying issue.
A pre-dispute forced arbitration clause is one that requires the consumer to use an arbitrator instead of going to court in the event of a dispute. There’s no problem with a post-dispute agreement, provided the agreement is truly voluntary and both sides have roughly equal bargaining power. But when the agreement ties the consumer’s hands before he or she knows the nature and extent of the harm, it should not be enforceable, as a matter of procedural justice. And when the clause is forced on the consumer on a take-it-or-leave-it basis, it’s simply unconstitutional.
Unconstitutional? Yes. The U.S. Constitution guarantees every American the right to trial by jury in not just criminal but also in civil cases. The Framers considered this right so important, they mentioned it twice (in the Sixth and Seventh Amendments).
Individuals may of course choose not to exercise that right. We can waive our constitutional rights voluntarily by contract. (Up to a point. We can’t sell ourselves into slavery, for example.)
For the first 130 years after the Constitution was ratified, federal courts rarely agreed to enforce contract clauses that purported to waive the right to sue, because they knew that sometimes individuals err in waiving their constitutional rights before having full information about the nature and extent of the wrongs done to them.
In 1925, Congress passed the Federal Arbitration Act, restricting the courts’ freedom to disregard arbitration clauses. Since then, the Supreme Court in a series of cases has expanded the scope of that act to cover not just agreements between large corporations of roughly equal bargaining power, but also agreements between corporations and individual consumers. That’s why forced arbitration clauses have become ubiquitous. They’re in nearly every consumer agreement we sign these days. And they’re almost always non-negotiable: Take it or leave it.
Arbitration isn’t a perfect substitute for litigation. Typically, the arbitrator is paid by the company being challenged, finds in favor of the company that hired him, is secretive, and doesn’t publish the reasons for his decision. He doesn’t have to follow the normal rules of due process. Arbitration is often arbitrary.
Imagine signing a contract with your (monopoly) cable company that includes a clause saying any dispute regarding overcharges on your monthly cable bill are to be settled by the CEO’s son Elmer, and only by Elmer. Now, perhaps Elmer is a good and honest man. But then again, maybe he’s a crook or a wimp. Maybe he’s secretly worried about his inheritance and afraid of the old man. Who knows? With arbritation, that’s the kind of uncertainty you get. If you agree to it voluntarily, that’s fine. But it should be your choice, and that means it should never be on a “take it or leave it” basis. You should be free to retain your constitutional right to sue.
As I’ve mentioned, the Consumer Financial Protection Bureau is poised to issue a regulation later this year eliminating pre-dispute forced arbitration clauses in credit card and other consumer lending contracts. Note the adjective “pre-dispute.” Consumers would still be free to accept an arbitrator after the dispute has arisen.
But that, as we’ve seen, is not acceptable to the banking lobby. The offending provision deserves to be debated and voted on for two reasons.
1. It’s unnecessary. K Street’s delaying language would require the bureau, before it issues the expected regulation, to conduct another lengthy and detailed study (it has already done a very extensive one) on the following questions: 1) Is litigation or arbitration the more affordable, accessible, efficient, and fair option for consumers? 2) Is arbitration or litigation the better tool for encouraging companies to resolve disputes before their customers file formal claims? 3) Do consumers lack sufficient information about arbitration to help them see its virtues compared to litigation? 4) Do consumers really need to be able to sue, since government agencies like the bureau are around to address their concerns via regulation? 5) How much harm would be done to consumers and small businesses if pre-dispute arbitration were curtailed?
Shorter version: We really like the status quo.
The existing study answers all of the questions posed by the K Street language. The agency found that: 1) forced-arbitration clauses reduce litigation, but only by denying consumers access to justice; 2) there’s no good evidence that forced arbitration reduces the prices of goods and services; and 3) forced arbitration doesn’t improve companies’ incentive to remedy consumer complaints when first raised.
2. It’s harmful. The worst harm the regulation would do is give consumers more options for defending their rights. By contrast, delaying it would deny them their rights. A tie should go to the regulation. If said reg turns out to be poorly framed or excessive, Congress can always use the power of the purse to suppress it, or pass a law revising it. To insist that the regulation not be issued at all, when no one has seen it yet, is to acknowledge that one’s real goal is to preserve the status quo. Incidentally, as I’ve explained elsewhere, ending forced arbitration agreements should be a no-brainer for conservatives.
Of late, some corporations have been voluntarily dropping pre-dispute forced arbitration clauses. That’s a good sign. But it’s not enough. Our constitutional rights shouldn’t be left to the whims of corporations.
We don’t need more information. We have enough information. We know the Constitution is being violated. Justice is being denied.
The burden of proof is on those who would delay the forthcoming regulation. The House should allow a free and full debate on the issue, and vote on it.
Justice delayed is justice denied.