Today's Trends in Credit Regulation

Ready, Fire, Aim!
By Thomas B. Hudson

Over the last couple of decades, more and more businesses have adopted pre-dispute mandatory arbitration clauses in their consumer agreements as a first line of defense against class action claims. A well-drafted arbitration agreement specifically precludes class actions. Indeed, without such a preclusion, there would be little incentive for businesses to use arbitration agreements.

Consumer advocates and trial lawyers have ranted and raved about the evils of arbitration agreements for years. The consumer advocates' ranting and raving, and frequent challenges to the enforceability of arbitration agreements, have resulted in an evolution of arbitration agreements from those in the '90s, which were slanted toward business interests, to today's agreements, which bend over backward to favor consumers.

The Dodd-Frank Act reflects the consumer advocate and trial lawyer influence. It directs the Consumer Financial Protection Bureau to study the use of pre-dispute mandatory arbitration agreements in consumer financial services contracts. That survey is underway, and while the Bureau has issued a preliminary report, it has announced no conclusions.

Clearly carrying water for the consumer advocates and trial lawyers, 16 state attorneys general (all Democrats) have submitted a letter to CFPB Director Richard Cordray urging that the Bureau "protect the public interest by imposing prohibitions, conditions or limitations on the use of pre-dispute arbitration agreements for consumer financial products or services." The recommendation comes before the Bureau has reached any final conclusions on the subject. For anyone who has followed developments in this area over the past couple of decades, the letter elicits nothing but painful groans.

I don't think that it is very likely, but it's possible that the Bureau might adopt the common-sense regulatory approach we frequently recommend - to find out what responsible businesses in the marketplace are doing and determine whether the forms and practices of those businesses are fair to consumers. If the Bureau decides that such "best practices" are fair to consumers, it could fashion any rules it implements around those best practices.

If the Bureau looks at the best practices of the responsible users of pre-dispute mandatory arbitration agreements, it will see that the evils that consumer advocates and these attorneys general rail about largely disappear.

The AGs' letter argues that high arbitration costs and inconvenient venues "deter injured individuals from pursuing their rights." You have to wonder if the AGs bothered to collect even a small sample of arbitration agreements from major businesses. If they had, they would have seen that modern arbitration agreements have very generous (and sometimes very, very generous) provisions for payment of arbitration costs by the business. As for inconvenient venues, the arbitration agreements that I see (and write) call for arbitration to occur in the federal judicial district where the consumer lives or, sometimes, simply in a place convenient to the consumer. So much for those two concerns.

As another example, the letter cites "repeat-player bias," where, supposedly, an arbitration organization's arbitrators will be more likely to favor the company over the consumer because such favoritism will result in repeat business from the company. If the AGs had bothered to sample the arbitration agreements in use today by responsible businesses, they would, I believe, find that most of the arbitration agreements name an arbitration organization, but further permit the consumer to select a different organization if the named organization is not acceptable to the consumer.

Yes, there are some trade-offs to permitting arbitration. Class action prohibitions inflame trial lawyers and consumer advocates, but I have seen way too many class action settlements where the consumers involved get "awards" that are sometimes so worthless they don't bother to claim them, while their lawyers rush down to the nearest yacht dealer to order new toys.

And yes, arbitration decisions don't serve as precedent. The AGs point this out in their letter, but for some strange reason fail to mention that the arbitration decisions favoring businesses do not have precedential value either. In the real world, though, plaintiffs' lawyers have networks that spread the word of successful and unsuccessful arbitration claims. Word gets around.

Finally, perhaps close to a half of the AGs' letter consists of citations, at least two of which are to products of Public Citizen, a Washington, D.C.-based pro-consumer organization. Conspicuously absent is any mention of the several contrary academic and industry studies on the fairness of the arbitration process in connection with consumer transactions. Surely this omission was unintentional. Riiiiiiiiiight.

So, here's my advice to Director Cordray: Do what the wise old college dean did when new campus dormitories were built. He postponed sidewalk construction until he could identify the walking paths of students to and from the dorms. If Director Cordray and the Bureau take the time and effort to see what the "best-in-class" companies are doing with mandatory pre-dispute arbitration, and fashion any regulation of arbitration agreements around those best practices, they will protect consumers while retaining the ability of businesses to avoid the high cost of class litigation, a cost that consumers end up paying in the form of higher prices.

The only ones who will suffer from this approach will be the yacht dealers.

Thomas B. Hudson is a partner in the Hanover, MD office of Hudson Cook, LLP. Tom can be reached at 410-865-5411 or by email at

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