Signaling its intent to proceed with business as usual, despite ongoing controversy over its leadership and structure, the Consumer Financial Protection Bureau (CFPB) recently finalized a rule restricting the ability of financial services companies to use arbitration clauses in their contracts.
An arbitration clause requires the parties to the contract to take any dispute to arbitration, a privately operated hearing procedure that typically has a legally binding effect. Arbitration is often attractive because it can be quicker and less expensive than a case brought in court. It also typically means that the plaintiff cannot join together with other plaintiffs to bring a class action suit. This is the crux of the issue.
Supporters of the new rule claim that these clauses, buried in fine print and ubiquitous in almost all parts of American legal life, allow banks and credit card companies to get away with abuses that would otherwise be checked by class action litigation. An unlawful practice that costs every customer $5 is almost assuredly not worth the cost or hassle of going to court over. However, bring together a class of one million customers (most of whom will never realize they’re part of the class at all), and there’s real money at stake. Enough money to entice a lawyer to litigate and, let’s be honest, control the entire process for a chance at the typical fee of 33 percent of whatever is recovered.
Is this true? Were companies able to get away with practices that netted them cash while harming consumers because the harms were so diffuse? Maybe. Probably. Without speculating about what kinds of practices companies may have engaged in or how wide-spread any were (I have no intention of impugning an entire industry, but every industry has its bad eggs), to the extent litigation was required to check any particular misconduct, if the harm per customer was marginal, it is unlikely anyone would bother with litigation.