# Arbitration Agreements

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-10961

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** May 24, 2016
- **Citation:** 81 FR 32830

## Text

BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1040
[Docket No. CFPB-2016-0020]
RIN 3170-AA51
Arbitration Agreements

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Proposed rule with request for public comment.

SUMMARY:

Pursuant to section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203), the Bureau of Consumer Financial Protection (Bureau) is proposing to establish 12 CFR part 1040, which would contain regulations governing two aspects of consumer finance dispute resolution. First, the proposed rule would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service. Second, the proposal would require a covered provider that is involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau. The Bureau proposes that the rulemaking would apply to certain consumer financial products and services. The Bureau is also proposing to adopt official interpretations to the proposed regulation.

DATES:

Comments must be received on or before August 22, 2016.

ADDRESSES:

You may submit comments, identified by Docket No. CFPB-2016-0020 or RIN 3170-AA51, by any of the following methods:

•
Email:

FederalRegisterComments@cfpb.gov
. Include Docket No. CFPB-2016-0020 or RIN 3170-AA51 in the subject line of the email.

•
Electronic:

http://www.regulations.gov
. Follow the instructions for submitting comments.

•
Mail:
Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 20552.

•
Hand Delivery/Courier:
Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1275 First Street NE., Washington, DC 20002.

Instructions:
All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to
http://www.regulations.gov
. In addition, comments will be available for public inspection and copying at 1275 First Street NE., Washington, DC 20002, on official business days between the hours of 10 a.m. and 5 p.m. eastern time. You can make an appointment to inspect the documents by telephoning (202) 435-7275.

All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or Social Security numbers, should not be included. Comments generally will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT:

Owen Bonheimer, Benjamin Cady, Lawrence Lee, Nora Rigby, Counsels; Eric Goldberg, Senior Counsel, Office of Regulations, Consumer Financial Protection Bureau, at 202-435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

The Bureau of Consumer Financial Protection (Bureau) is proposing regulations governing agreements that provide for the arbitration of any future disputes between consumers and providers of certain consumer financial products and services. Congress directed the Bureau to study these pre-dispute arbitration agreements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or Dodd-Frank Act).
1

In 2015, the Bureau published and delivered to Congress a study of arbitration.
2

In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the Study (hereinafter Study), to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers.
3

Congress also required that the findings in any such rule be consistent with the Bureau's Study.
4

1
Public Law 111-203, 124 Stat. 1376 (2010), section 1028(a).

2
Bureau of Consumer Fin. Prot.,
Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a)
(2015),
available at http://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf
. Specific portions of the Study are cited in this proposal where relevant, and the entire Study will be included in the docket for this rulemaking at
www.regulations.gov
.
See
Bureau of Consumer Fin. Prot., Request for Information Regarding Scope, Methods and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements, 77 FR 25148 (Apr. 27, 2012) (hereinafter Arbitration Study RFI). Before releasing the Study, the Bureau released preliminary results in late 2013. Bureau of Consumer Fin. Prot.,
Arbitration Study Preliminary Results
(Dec. 12, 2013) (hereinafter Preliminary Results),
available at

http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf
.

3
Dodd-Frank section 1028(b).

4

Id.

In accordance with this authority, the Bureau is now issuing this proposal and request for public comment. The proposed rule would impose two sets of limitations on the use of pre-dispute arbitration agreements by covered providers of consumer financial products and services. First, it would prohibit providers from using a pre-dispute arbitration agreement to block consumer class actions in court and would require providers to insert language into their arbitration agreements reflecting this limitation. This proposal is based on the Bureau's preliminary findings—which are consistent with the Study—that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.

Second, the proposal would require providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral proceedings to the Bureau. The Bureau intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action. The Bureau intends to publish these materials on its Web site in some form, with appropriate redactions or aggregation as warranted, to provide greater transparency into the arbitration of consumer disputes.

The proposal would apply to providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money, including most providers that are engaged in:

• Extending or regularly participating in decisions regarding consumer credit under Regulation B implementing the Equal Credit Opportunity Act (ECOA), engaging primarily in the business of providing referrals or selecting creditors for consumers to obtain such credit, and the acquiring, purchasing, selling, or servicing of such credit;

• extending or brokering of automobile leases as defined in Bureau regulation;

• providing services to assist with debt management or debt settlement, modify the terms of any extension of consumer credit, or avoid foreclosure;

• providing directly to a consumer a consumer report as defined in the Fair Credit Reporting Act, a credit score, or other information specific to a consumer from a consumer report, except for adverse action notices provided by an employer;

• providing accounts under the Truth in Savings Act and accounts and remittance transfers subject to the Electronic Fund Transfer Act;

• transmitting or exchanging funds (except when integral to another product or service not covered by the proposed rule), certain other payment processing services, and check cashing, check collection, or check guaranty services consistent with the Dodd-Frank Act; and

• collecting debt arising from any of the above products or services by a provider of any of the above products or services, their affiliates, an acquirer or purchaser of consumer credit, or a person acting on behalf of any of these persons, or by a debt collector as defined by the Fair Debt Collection Practices Act.

Consistent with the Dodd-Frank Act, the proposed rule would apply only to agreements entered into after the end of the 180-day period beginning on the regulation's effective date.
5

The Bureau is proposing an effective date of 30 days after a final rule is published in the
Federal Register
. To facilitate implementation and ensure compliance, the Bureau is proposing language that providers would be required to insert into such arbitration agreements to explain the effect of the rule. The proposal would also permit providers of general-purpose reloadable prepaid cards to continue selling packages that contain non-compliant arbitration agreements, if they give consumers a compliant agreement as soon as consumers register their cards and the providers comply with the proposed rule's requirement not to use an arbitration agreement to block a class action.

5
Dodd-Frank section 1028(d).

II. Background

Arbitration is a dispute resolution process in which the parties choose one or more neutral third parties to make a final and binding decision resolving the dispute.
6

Parties may include language in their contracts, before any dispute has arisen, committing to resolve future disputes between them in arbitration rather than in court or allowing either party the option to seek resolution of a future dispute in arbitration. Such pre-dispute arbitration agreements—which this proposal generally refers to as “arbitration agreements”
7

—have a long history, primarily in commercial contracts, where companies typically bargain to create agreements tailored to their needs.
8

In 1925, Congress passed what is now known as the Federal Arbitration Act (FAA) to require that courts enforce agreements to arbitrate, including those entered into both before and after a dispute has arisen.
9

6

Arbitration,
Black's Law Dictionary (10th ed. 2014).

7
Proposed § 1040.2(d) would define the phrase “pre-dispute arbitration agreement.” When referring to the definition, in proposed § 1040.2(d), this proposal will use the full term or otherwise clarify the intended usage.

8

See infra
Part II.C.

9
9 U.S.C. 1
et seq.

In the last few decades, companies have begun inserting arbitration agreements in a wide variety of standard-form contracts, such as in contracts between companies and consumers, employees, and investors. The use of arbitration agreements in such contracts has become a contentious legal and policy issue due to concerns about whether the effects of arbitration agreements are salient to consumers, whether arbitration has proved to be a fair and efficient dispute resolution mechanism, and whether arbitration agreements effectively discourage the filing or resolution of certain claims in court or in arbitration.

In light of these concerns, Congress has taken steps to restrict the use of arbitration agreements in connection with certain consumer financial products and services and other consumer and investor relationships. Most recently, in the 2010 Dodd-Frank Act, Congress prohibited the use of arbitration agreements in connection with mortgage loans,
10

authorized the Securities and Exchange Commission (SEC) to regulate arbitration agreements in contracts between consumers and securities broker-dealers or investment advisers,
11

and prohibited the use of arbitration agreements in connection with certain whistleblower proceedings.
12

10
Dodd-Frank section 1414(e) (codified as 15 U.S.C. 1639c(e)).

11
Dodd-Frank sections 921(a) and 921(b) (codified as 15 U.S.C. 78o(o) and 15 U.S.C. 80b-5(f)).

12
Dodd-Frank section 922(b) (codified as 18 U.S.C. 1514A(e)).

In addition, and of particular relevance here, Congress directed the Bureau to study the use of arbitration agreements in connection with other, non-mortgage consumer financial products and services and authorized the Bureau to prohibit or restrict the use of such agreements if it finds that such action is in the public interest and for the protection of consumers.
13

Congress also required that the findings in any such rule be consistent with the Study.
14

The Bureau solicited input on the appropriate scope, methods, and data sources for the Study in 2012
15

and released results of its three-year study in March 2015.
16

Part III of this proposed rule summarizes the Bureau's process for completing the Study and its results. To place these results in greater context, this Part provides a brief overview of: (1) Consumers' rights under Federal and State laws governing consumer financial products and services; (2) court mechanisms for seeking relief where those rights have been violated, and, in particular, the role of the class action device in protecting consumers; and (3) the evolution of arbitration agreements and their increasing use in markets for consumer financial products and services.

13
Dodd-Frank section 1028(b).

14

Id.

15
Arbitration Study RFI,
supra
note 2.

16
Study,
supra
note 2. The Bureau also delivered the Study to Congress.
See also
Letter from Catherine Galicia, Ass't Dir. of Legis. Aff., Bureau of Consumer Fin. Prot. to Hon. Jeb Hensarling, Chairman, Comm. on Fin. Serv. (Mar. 10, 2015) (on file with the Bureau).

A. Consumer Rights Under Federal and State Laws Governing Consumer Financial Products and Services

Companies often provide consumer financial products and services under the terms of a written contract. In addition to being governed by such contracts and the relevant State's contract law, the relationship between a consumer and a financial service provider is typically governed by consumer protection laws at the State level, Federal level, or both, as well as by other State laws of general applicability (such as tort law). Collectively, these laws create legal rights for consumers and impose duties on the providers of financial products and services that are subject to those laws.

Early Consumer Protection in the Law

Prior to the twentieth century, the law generally embraced the notion of
caveat emptor
or “buyer beware.”
17

State

common law afforded some minimal consumer protections against fraud, usury, or breach of contract, but these common law protections were limited in scope. In the first half of the twentieth century, Congress began passing legislation intended to protect consumers, such as the Wheeler-Lea Act of 1938.
18

The Wheeler-Lea Act amended the Federal Trade Commission Act of 1914 (FTC Act) to provide the FTC with the authority to pursue unfair or deceptive acts and practices.
19

These early Federal laws did not provide for private rights of action, meaning that they could only be enforced by the government.

17

Caveat emptor
assumed that buyer and seller conducted business face to face on roughly equal

terms (much as English common law assumed that civil actions generally involved roughly equal parties in direct contact with each other). J.R. Franke & D.A. Ballam,
New Applications of Consumer Protection Law: Judicial Activism or Legislative Directive?,
32 Santa Clara L. Rev. 347, 351-55 (1992).

18
Wheeler-Lea Act of 1938, Public Law 75-447, 52 Stat. 111 (1938).

19

See
FTC Act section 5. Prior to the Wheeler-Lea Act, the FTC had the authority to reach “unfair methods of competition in commerce” but only if they had an anticompetitive effect.
See FTC
v.
Raladam Co.,
283 U.S. 643, 649 (1931).

Modern Era of Federal Consumer Financial Protections

In the late 1960s, Congress began passing consumer protection laws focused on financial products, beginning with the Consumer Credit Protection Act (CCPA) in 1968.
20

The CCPA included the Truth in Lending Act (TILA), which imposed disclosure and other requirements on creditors.
21

In contrast to earlier consumer protection laws such as the Wheeler-Lea Act, TILA permits private enforcement by providing consumers with a private right of action, authorizing consumers to pursue claims for actual damages and statutory damages and allowing consumers who prevail in litigation to recover their attorney's fees and costs.
22

20
Public Law 90-321, 82 Stat. 146 (1968).

21

Id.
at Title I.

22
15 U.S.C. 1640(a).

Congress followed the enactment of TILA with several other consumer financial protection laws, many of which provided private rights of action for at least some statutory violations. For example, in 1970, Congress passed the Fair Credit Reporting Act (FCRA), which promotes the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies, as well as providing consumers access to their own information.
23

In 1976, Congress passed ECOA to prohibit creditors from discriminating against applicants with respect to credit transactions.
24

In 1977, Congress passed the Fair Debt Collection Practices Act (FDCPA) to promote the fair treatment of consumers who are subject to debt collection activities.
25

23
Public Law 91-508, 84 Stat. 1114-2 (1970).

24
Public Law 94-239, 90 Stat. 251 (1976).

25
Public Law 95-109, 91 Stat. 874 (1977). Other such Federal consumer protection laws include those enumerated in the Dodd-Frank Act and made subject to the Bureau's rulemaking, supervision, and enforcement authority: Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. 3801; Consumer Leasing Act of 1976, 15 U.S.C. 1667; Electronic Fund Transfer Act (EFTA), 15 U.S.C. 1693 (except with respect to § 920 of that Act); Fair Credit Billing Act, 15 U.S.C. 1666; Home Mortgage Disclosure Act of 1975, 12 U.S.C. 2801; Home Owners Protection Act of 1998, 12 U.S.C. 4901; Federal Deposit Insurance Act, 12 U.S.C. 1831t (b)-(f); Gramm-Leach-Bliley Act 15 U.S.C. 6802-09 (except with respect to section 505 as it applies to section 501(b) of that Act); Home Ownership and Equity Protection Act of 1994 (HOEPA), 15 U.S.C. 1601; Interstate Land Sales Full Disclosure Act, 15 U.S.C. 1701; Real Estate Settlement Procedures Act of 1974 (RESPA), 12 U.S.C. 2601; S.A.F.E. Mortgage Licensing Act of 2008, 12 U.S.C. 5101; Truth in Savings Act (TISA), 12 U.S.C. 4301, and section 626 of the Omnibus Appropriations Act of 2009, 15 U.S.C. 1638. Federal consumer protection laws also include the Bureau's authority to take action to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, and abusive acts or practices, Dodd-Frank section 1031, and its disclosure authority, Dodd-Frank section 1032.

Also in the 1960s, States began passing their own consumer protection statutes modeled on the FTC Act to prohibit unfair and deceptive practices. Unlike the Federal FTC Act, however, these State statutes typically provide for private enforcement.
26

The FTC encouraged the adoption of consumer protection statutes at the State level and worked directly with the Council of State Governments to draft the Uniform Trade Practices Act and Consumer Protection Law, which served as a model for many State consumer protection statutes.
27

Currently, forty-nine of the fifty States and the District of Columbia have State consumer protection statutes modeled on the FTC Act that allow for private rights of action.
28

26
Victor E. Schwartz & Cary Silverman,
Common-Sense Construction of Consumer Protection Acts,
54 U. Kan. L. Rev. 1, 15-16 (2005).

27

Id.

28

Id.
at 16. Every State that adopted a version of FTC Act prohibits deception; some prohibit unfair practices as well.
See
Carolyn L. Carter,
Consumer Protection in the States,
Nat'l Consumer L. Ctr. (2009) at 5,
available at

https://www.nclc.org/images/pdf/udap/report_50_states.pdf
.

Class Actions Pursuant to Federal Consumer Protection Laws

In 1966, shortly before Congress first began passing consumer financial protection statutes, the Federal Rules of Civil Procedure (Federal Rules or FRCP) were amended to make class actions substantially more available to litigants, including consumers. The class action procedure in the Federal Rules, as discussed in detail in Part II.B below, allows a representative individual to group his or her claims together with those of other, absent individuals in one lawsuit under certain circumstances. Because TILA and the other Federal consumer protection statutes discussed above permitted private rights of action, those private rights of action were enforceable through a class action, unless the statute expressly prohibited it.
29

29

See, e.g., Wilcox
v.
Commerce Bank of Kansas City,
474 F.2d 336, 343-44 (10th Cir. 1973).

Congress calibrated enforcement through private class actions in several of the consumer protection statutes by specifically referencing class actions and adopting statutory damage schemes that are pegged to a percentage of the defendants' net worth.
30

For example, when consumers initially sought to bring TILA class actions, a number of courts applying Federal Rule 23 denied motions to certify the class because of the prospect of extremely large damages resulting from the aggregation of a large number of claims for statutory damages.
31

Congress addressed this by amending TILA in 1974 to cap class action damages in such cases to the lesser of 1 percent of the defendant's assets or $100,000.
32

Congress has twice increased the cap on class action damages in TILA: To $500,000 in 1976 and $1,000,000 in 2010.
33

Many other statutes similarly cap damages in class actions.
34

Further, the legislative history of other statutes indicates a particular intent to permit class actions given the

potential for a small recovery in many consumer finance cases for individual damages.
35

Similarly, many States permit class action litigation to vindicate violations of their versions of the FTC Act.
36

A minority of States expressly prohibit class actions to enforce their FTC Acts.
37

30
A minority of Federal statutes provide private rights of action but do not cap damages in class action cases. For example, the Telephone Consumer Protection Act (47 U.S.C. 227(b)(3)), the FCRA (15 U.S.C. 1681n, 1681o), and the Credit Repair Organizations Act (15 U.S.C. 1679g) do not cap damages in class action cases.

31

See, e.g., Ratner
v.
Chem. Bank N.Y. Trust Co.,
54 FRD. 412, 416 (S.D.N.Y. 1972).

32

See
Public Law 93-495, 88 Stat. 1518, section 408(a).

33
Truth in Lending Act Amendments, Public Law 94-240, 90 Stat. 260 (1976); Dodd-Frank section 1416(a)(2).

34
For example, ECOA provides for the full recovery of actual damages on a class basis and caps punitive damages to the lesser of $500,000 or 1 percent of a creditor's net worth; RESPA limits total class action damages (including actual or statutory damages) to the lesser of $1,000,000 or 1 percent of the net worth of a mortgage servicer; the FDCPA limits class action recoveries to the lesser of $500,000 or 1 percent of the net worth of the debt collector; and EFTA provides for a cap on statutory damages in class actions to the lesser of $500,000 or 1 percent of a defendant's net worth and lists factors to consider in determining the proper amount of a class award.
See
15 U.S.C. 1691e(b) (ECOA), 12 U.S.C. 2605(f)(2) (RESPA), 15 U.S.C. 1692k(a)(2)(B) (FDCPA), and 15 U.S.C. 1693m(a)(2)(B) (EFTA).

35

See, e.g.,
Electronic Fund Transfer Act, H. Rept. No. 95-1315, at 15 (1978). The Report stated: “Without a class-action suit an institution could violate the title with respect to thousands of consumers without their knowledge, if its financial impact was small enough or hard to discover. Class action suits for damages are an essential part of enforcement of the bill because, all too often, although many consumers have been harmed, the actual damages in contrast to the legal costs to individuals are not enough to encourage a consumer to sue. Suits might only be brought for violations resulting in large individual losses while many small individual losses could quickly add up to thousands of dollars.”

36
The laws of at least 14 States expressly permit class action lawsuits.
See, e.g.,
Cal. Bus. & Professions Code 17203 (2016); Haw. Rev. Stat. Ann. sec. 480-13.3 (2015); Idaho Code Ann. sec. 48-608(1) (2015); Ind. Code Ann. sec. 24-5-0.5-4(b) (2015); Kan. Stat. Ann. sec. 50-634(c) and (d) (2012); Mass. Gen. Laws ch. 93A, sec. 9(2) (2016); Mich. Comp. Laws sec. 445.911(3) (2015); Mo. Rev. Stat. sec. 407.025(2) and (3) (2015); N.H. Rev. Stat. sec. 358-A:10-a (2015); N.M. Stat. sec. 57-12-10(E) (2015); Ohio Rev. Code sec. 1345.09(B) (2016); R.I. Gen. Laws sec. 6-13.1-5.2(b) (2015); Utah Code sec. 13-11-19 and 20 (2015); Wyo. Stat. sec. 40-12-108(b) (2015).

37

See, e.g.,
Ala. Code sec. 8-19-10(f) (2002); Ga. Code Ann. sec. 10-1-399 (2015); La. Rev. Stat. Ann. sec. 51:1409(A) (2006); Mont. Code Ann. sec. 30-14-133(1) (2003); S.C. Code Ann. sec. 37-5-202(1) (1999).

B. History and Purpose of the Class Action Procedure

The default rule in United States courts, inherited from England, is that only those who appear as parties to a given case are bound by its outcome.
38

As early as the medieval period, however, English courts recognized that litigating many individual cases regarding the same issue was inefficient for all parties and thus began to permit a single person in a single case to represent a group of people with common interests.
39

English courts later developed a procedure called the “bill of peace” to adjudicate disputes involving common questions and multiple parties in a single action. The process allowed for judgments binding all group members—whether or not they were participants in the suit—and contained most of the basic elements of what is now called class action litigation.
40

38

Ortiz
v.
Fibreboard Corp.,
527 U.S. 815, 832-33 (1999).

39
For instance, in early English cases, a local priest might represent his parish, or a guild might be represented by its formal leadership. Samuel Issacharoff,
Assembling Class Actions,
90 Wash U. L. Rev. 699, 704 (2014) (citing Stephen C. Yeazell, From Medieval Group Litigation to the Modern Class Action 40 (1987)).

40
Wright, Miller & Kane, 7A Fed. Prac. & Proc. Civ. 1751 (3d. ed.).

The bill of peace was recognized in early United States case law and ultimately adopted by several State courts and the Federal courts.
41

Nevertheless, the use and impact of that procedure remained relatively limited through the nineteenth and into the twentieth centuries. In 1938, the Federal Rules were adopted to govern civil litigation in Federal court, and Rule 23 established a procedure for class actions.
42

That procedure's ability to bind absent class members was never clear, however.
43

41

Id.
Federal Equity Rule 48, in effect from 1842 to 1912, officially recognized representative suits where parties were too numerous to be conveniently brought before the court, but did not bind absent members to the judgment.
Id.
In 1912, Federal Equity Rule 38 replaced Rule 48 and allowed absent members to be bound by a final judgment.
Id.

42

See
Fed. R. Civ. P. 23 (1938).

43

See American Pipe & Constr. Co.
v.
Utah,
414 U.S. 538, 545-46 (1974) (“The Rule [prior to its amendment] . . . contained no mechanism for determining at any point in advance of final judgment which of those potential members of the class claimed in the complaint were actual members and would be bound by the judgment.”).

That changed in 1966, when Rule 23 was amended to create the class action mechanism that largely persists in the same form to this day.
44

Rule 23 was amended at least in part to promote efficiency in the courts and to provide for compensation of individuals when many are harmed by the same conduct.
45

The 1966 revisions to Rule 23 prompted similar changes in most States. As the Supreme Court has since explained, class actions promote efficiency in that “the . . . device saves the resources of both the courts and the parties by permitting an issue potentially affecting every [class member] to be litigated in an economical fashion under Rule 23.”
46

As to small harms, class actions provide a mechanism for compensating individuals where “the amounts at stake for individuals may be so small that separate suits would be impracticable.”
47

Class actions have been brought not only by individuals, but also by companies, including financial institutions.
48

44

See, e.g.,
Robert H. Klonoff,
The Decline of Class Actions,
90 Wash. U. L. Rev. 729, 746-47 (2013) (“The Rule 23(a) and (b) criteria, by their terms, have not changed in any significant way since 1966, but some courts have become increasingly skeptical in reviewing whether a particular case satisfies those requirements”).

45

See American Pipe,
414 U.S. at 553 (“A contrary rule allowing participation only by those potential members of the class who had earlier filed motions to intervene in the suit would deprive Rule 23 class actions of the efficiency and economy of litigation which is a principal purpose of the procedure.”).

46

Califano
v.
Yamasaki,
442 U.S. 682, 701 (1979).

47

Amchem Prod., Inc.
v.
Windsor,
521 U.S. 591, 616 (1997),
citing
Fed. R. Civ. P. 23 advisory committee's note, 28 U.S.C. app. at 698 (stating that a class action may be justified under Rule 23 where “the class may have a high degree of cohesion and prosecution of the action through representatives would be quite unobjectionable, or the amounts at stake for individuals may be so small that separate suits would be impracticable”).
See also id.
at 617 (citing
Mace
v.
Van Ru Credit Corp.,
109 F.3d 338, 344 (7th Cir. 1997) (“The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her own rights. A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor.”).

48

See, e.g.,
Financial Institution Plaintiffs' Consol. Class Action Compl. at 1, 5,
In re: The Home Depot, Inc. Customer Data Breach Litig.,
MDL No. 14-02583 (N.D. Ga. May 27, 2015), Dkt. No. 104 (complaint filed on behalf of putative class of “similarly situated banks, credit unions, and other financial institutions” that had “issued and owned payment cards compromised by the Home Depot data breach”); Mem. & Order at 2, 14,
In re: Target Corp. Customer Data Security Breach Litig.,
MDL No. 14-2522 (D. Minn. Sept. 15, 2015), Dkt No. 589 (granting certification to plaintiff class made up of banks, credit unions, and other financial institutions that had “issued payment cards such as credit and debit cards to consumers who, in turn, used those cards at Target stores during the period of the 2013 data breach,” noting that “given the number of financial institutions involved and the similarity of all class members' claims, Plaintiffs have established that the class action device is the superior method for resolving this dispute”);
In re TJX Cos. Retail Security Breach Litig.,
246 FRD. 389 (D. Mass. 2007) (denying class certification in putative class action by financial institutions).

Class Action Procedure Pursuant to Rule 23

A class action can be filed and maintained under Rule 23 in any case where there is a private right to bring a civil action, unless otherwise prohibited by law. Pursuant to Rule 23(a), a class action must meet all of the following requirements: (1) A class of a size such that joinder of each member as an individual litigant is impracticable; (2) questions of law or fact common to the class; (3) a class representative whose claims or defenses are typical of those of the class; and (4) that the class representative will adequately represent those interests.
49

The first two prerequisites—numerosity and commonality—focus on the absent or represented class, while the latter two tests—typicality and adequacy—address the desired qualifications of the class representative. Pursuant to Rule 23(b), a class action also must meet one of the following requirements: (1) Prosecution of separate actions risks either inconsistent adjudications that would establish incompatible standards of

conduct for the defendant or would, as a practical matter, be dispositive of the interests of others; (2) defendants have acted or refused to act on grounds generally applicable to the class; or (3) common questions of law or fact predominate over any individual class member's questions, and a class action is superior to other methods of adjudication.

49
Fed. R. Civ. P. 23(a)(1) through (4).

These and other requirements of Rule 23 are designed to ensure that class action lawsuits safeguard absent class members' due process rights because they may be bound by what happens in the case.
50

Further, the courts may protect the interests of absent class members through the exercise of their substantial supervisory authority over the quality of representation and specific aspects of the litigation. In the typical Federal class action, an individual plaintiff (or sometimes several individual plaintiffs), represented by an attorney, files a lawsuit on behalf of that individual and others similarly situated against a defendant or defendants.
51

Those similarly situated individuals may be a small group (as few as 40 or even less) or as many as millions that are alleged to have suffered the same injury as the individual plaintiff. That individual plaintiff, typically referred to as a named or lead plaintiff, cannot properly proceed with a class action unless the court certifies that the case meets the requirements of Rule 23, including the requirements of Rule 23(a) and (b) discussed above. If the court does certify that the case can go forward as a class action, potential class members who do not opt out of the class are bound by the eventual outcome of the case.
52

If not certified, the case proceeds only to bind the named plaintiff.

50

See, e.g., Amchem Prod., Inc.,
521 U.S. at 619-21.

51
Rule 23 also permits a class of defendants.

52
In some circumstances, absent class members are not given an opportunity to opt out.
E.g.,
Fed. R. Civ. P. 23(b)(1)(B) (providing for “limited fund” class actions when claims are made by numerous persons against a fund insufficient to satisfy all claims); Fed. R. Civ. P. 23(b)(2) (providing for class actions in which the plaintiffs are seeking primarily injunctive or corresponding declaratory relief).

A certified class case proceeds similarly to an individual case, except that the court has an additional responsibility in a class case, pursuant to Rule 23 and the relevant case law, to actively supervise classes and class proceedings and to ensure that the lead plaintiff keeps absent class members informed.
53

Among its tasks, a court must review any attempts to settle or voluntarily dismiss the case on behalf of the class,
54

may reject any settlement agreement if it is not “fair, reasonable and adequate,”
55

and must ensure that the payment of attorney's fees is “reasonable.”
56

The court also addresses objections from class members who seek a different outcome to the case (
e.g.,
lower attorney's fees or a better settlement). These requirements are designed to ensure that all parties to class litigation have their rights protected, including defendants and absent class members.

53
Fed. R. Civ. P. 23(g).

54

See, e.g.,
Fed. R. Civ. P. 23(e) (“The claims, issues, or defenses of a certified class may be settled, voluntarily dismissed, or compromised only with the court's approval.”). This does not apply to settlements with named plaintiffs reached prior to the certification of a class.

55
Fed. R. Civ. P. 23(e)(2).

56
Fed. R. Civ. P. 23(h).

Developments in Class Action Procedure Over Time

Since the 1966 amendments, Rule 23 has generated a significant body of case law as well as significant controversy.
57

In response, Congress and the Advisory Committee on the Federal Rules of Civil Procedure (which has been delegated the authority to change Rule 23 under the Rules Enabling Act) have made a series of targeted changes to Rule 23 to calibrate the equities of class plaintiffs and defendants. Meanwhile, the courts have also addressed concerns about Rule 23 in the course of interpreting the rule and determining its application in the context of particular types of cases.

57

See, e.g.,
David Marcus,
The History of the Modern Class Action, Part I: Sturm und Drang, 1953-1980,
90 Wash. U. L. Rev. 587, 610 (participants in the debate “quickly exhausted virtually every claim for and against an invigorated Rule 23”).

For example, Congress passed the Private Securities Litigation Reform Act (PSLRA) in 1995. Enacted partially in response to concerns about the costs to defendants of litigating class actions, the PSLRA reduced discovery burdens in the early stages of securities class actions.
58

In 2005, Congress again adjusted the class action rules when it adopted the Class Action Fairness Act (CAFA) in response to concerns about abuses of class action procedure in some State courts.
59

Among other things, CAFA expanded the subject matter jurisdiction of Federal courts to allow them to adjudicate most large class actions.
60

The Advisory Committee also periodically reviews and updates Rule 23. In 1998, the Advisory Committee amended Rule 23 to permit interlocutory appeals of class certification decisions, given the unique importance of the certification decision, which can dramatically change the dynamics of a class action case.
61

In 2003, the Advisory Committee amended Rule 23 to require courts to define classes that they are certifying, increase the amount of scrutiny that courts must apply to class settlement proposals, and impose additional requirements on class counsel.
62

In 2015, the Advisory Committee further identified several issues that “warrant serious examination” and presented “conceptual sketches” of possible further amendments.
63

58
Private Securities Litigation Reform Act of 1995, Public Law 104-67, 109 Stat. 737 (1995).

59
Class Action Fairness Act of 2005, Public Law 109-2, 119 Stat. 4 (2005).

60
28 U.S.C. 1332(d), 1453, and 1711-15.

61
Fed. R. Civ. P. 23(f).
See also
Newberg on Class Actions § 7:41; Committee Notes on Rules, 1998 Amendment (“This permissive interlocutory appeal provision is adopted under the power conferred by 28 U.S.C. 1292(e). Appeal from an order granting or denying class certification is permitted in the sole discretion of the court of appeals. No other type of Rule 23 order is covered by this provision.”).
See
28 U.S.C. app. at 163 (2014).

62
Fed. R. Civ. P. 23(c)(2)(B).
See also
28 U.S.C. app. at 168 (2014) (“Rule 23(c)(2)(B) is revised to require that the notice of class certification define the certified class in terms identical to the terms used in (c)(1)(B).”).

63

See, e.g.,
Rule 23 Subcomm. Rept.,
in
Adv. Comm. on Civil Rules Agenda Book for April 9-10, 2015 at 243-97,
available at

http://www.uscourts.gov/rules-policies/archives/agenda-books/advisory-committee-rules-civil-procedure-april-2015
.

Federal courts have also shaped class action practice through their interpretations of Rule 23. In the last five years, the Supreme Court has decided several major cases refining class action procedure. In
Wal-Mart Stores, Inc.
v.
Dukes,
the Court interpreted the commonality requirement of Rule 23(a)(2) to require that the common question that is the basis for certification be central to the disposition of the case.
64

In
Comcast Corp.
v.
Behrend,
the Court reaffirmed that district courts must undertake a “rigorous analysis” of whether a putative class satisfies the predominance requirements in Rule 23(b)(3) and reinforced that individual damages issues may foreclose class certification altogether.
65

In
Campbell-Ewald Co.
v.
Gomez,
decided this term, the Court held that a defendant cannot moot a class action by offering complete relief to an individual plaintiff before class certification (unless the individual plaintiff agrees to accept that relief).
66

In
Tyson Foods, Inc.
v.
Bouaphakeo,
the Court held that statistical techniques presuming that all class members are identical to the average observed in a sample can be used to establish

classwide liability where each class member could have relied on that sample to establish liability had each brought an individual action.
67

Finally, in a case not yet decided as of the date of this proposal with implications for certain types of class actions,
Spokeo, Inc.
v.
Robins,
the Court is considering whether a plaintiff has standing to sue if they allege a violation of a Federal statute that allows for statutory damages—in this case, FCRA—and claim only those damages without making a claim for actual damages.
68

64
564 U.S. 338, 131 S. Ct. 2541 (2011);
see also
Klonoff,
supra
note 44, at 775.

65
133 S. Ct. 1426 (2013).

66

Campbell-Ewald Co.
v.
Gomez,
136 S. Ct. 1036, 1046-48 (Jan. 20, 2016).

67

Tyson Foods, Inc.
v.
Bouaphakeo,
136 S. Ct. 663, 670 (Mar. 22, 2016).

68

Spokeo Inc.
v.
Robins,
135 S. Ct. 1892 (2015) (noting that the question before the court is “[w]hether Congress may confer Article III standing upon a plaintiff who suffers no concrete harm, and who therefore could not otherwise invoke the jurisdiction of a Federal court, by authorizing a private right of action based on a bare violation of a Federal statute”).

C. Arbitration and Arbitration Agreements

As described above at the beginning of Part II, arbitration is a dispute resolution process in which the parties choose one or more neutral third parties to make a final and binding decision resolving the dispute.
69

The typical arbitration agreement provides that the parties shall submit any disputes that may arise between them to arbitration. Arbitration agreements generally give each party to the contract two distinct rights. First, either side can file claims against the other in arbitration and obtain a decision from the arbitrator.
70

Second, with some exceptions, either side can use the arbitration agreement to require that a dispute proceed in arbitration instead of court.
71

The typical agreement also specifies an organization called an arbitration administrator. Administrators, which may be for-profit or non-profit organizations, facilitate the selection of an arbitrator to decide the dispute, provide for basic rules of procedure and operations support, and generally administer the arbitration.
72

Parties usually have very limited rights to appeal from a decision in arbitration to a court.
73

Most arbitration also provides for limited or streamlined discovery procedures as compared to those in many court proceedings.
74

69

See supra
note 6.

70

Id.

71
As described in the Study, however, most arbitration agreements in consumer financial contracts contain a “small claims court carve-out” that provides the parties with a contractual right to pursue a claim in small claims court. Study,
supra
note 2, section 2 at 33-34.

72

See id.,
section 2 at 34.

73

See
9 U.S.C. 9.
See also Hall Street Assocs., L.L.C.
v.
Mattel, Inc.,
552 U.S. 576, 584 (2008) (holding that parties cannot expand the grounds for vacating arbitration awards in Federal court by contract); Preliminary Results, supra note 2 at 6, n.4.

74

See
Study,
supra
note 2, section 4 at 16-17.

History of Arbitration

The use of arbitration to resolve disputes between parties is not new.
75

In England, the historical roots of arbitration date to the medieval period, when merchants adopted specialized rules to resolve disputes between them.
76

English merchants began utilizing arbitration in large numbers during the nineteenth century.
77

However, English courts were hostile towards arbitration, limiting its use through doctrines that rendered certain types of arbitration agreements unenforceable.
78

Arbitration in the United States in the eighteenth and nineteenth centuries reflected both traditions: it was used primarily by merchants, and courts were hostile toward it.
79

Through the early 1920s, U.S. courts often refused to enforce arbitration agreements and awards.
80

75
The use of arbitration appears to date back at least as far as the Roman Empire.
See, e.g.,
Amy J. Schmitz,
Ending a Mud Bowl: Defining Arbitration's Finality Through Functional Analysis,
37 Ga. L. Rev. 123, 134-36 (2002); Derek Roebuck, Roman Arbitration (2004).

76

See, e.g.,
Jeffrey W. Stempel,
Pitfalls of Public Policy: The Case of Arbitration Agreements,
22 St. Mary's L.J. 259, 269-70 (1990).

77

Id.

78

See, e.g.,
Schmitz,
supra
note 75, at 137-39.

79

See, e.g.,
Stempel,
supra
note 76 at 273-74.

80
David S. Clancy & Matthew M.K. Stein,
An Uninvited Guest: Class Arbitration and the Federal Arbitration Act's Legislative History,
63 Bus. Law. 55, 58 & n.11 (2007) (citing,
inter alia, Haskell
v.
McClintic-Marshall Co.,
289 F. 405, 409 (9th Cir. 1923) (refusing to enforce arbitration agreement because of a “settled rule of the common law that a general agreement to submit to arbitration did not oust the courts of jurisdiction, and that rule has been consistently adhered to by the federal courts”);
Dickson Manufacturing Co.
v.
Am. Locomotive Co.,
119 F. 488, 490 (C.C.M.D. Pa. 1902) (refusing to enforce an arbitration agreement where plaintiff revoked its consent to arbitration).

In 1920, New York enacted the first modern arbitration statute in the United States, which strictly limited courts' power to undermine arbitration decisions and arbitration agreements.
81

Under that law, if one party to an arbitration agreement refused to proceed to arbitration, the statute permitted the other party to seek a remedy in State court to enforce the arbitration agreement.
82

In 1925, Congress passed the United States Arbitration Act, which was based on the New York arbitration law and later became known as the Federal Arbitration Act (FAA).
83

The FAA remains in force today. Among other things, the FAA makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
84

81
43 N.Y. Stat. 833 (1925).

82

Id.

83
9 U.S.C. 1,
et seq.
The FAA was codified in 1947. Public Law 282, 61 Stat. 669 (July 30, 1947). James E. Berger & Charlene Sun,
The Evolution of Judicial Review Under the Federal Arbitration Act,
5 N.Y.U. J. Law & Bus. 745, 754 n.45 (2009).

84
9 U.S.C. 2.

Expansion of Consumer Arbitration and Arbitration Agreements

From the passage of the FAA through the 1970s, arbitration continued to be used in commercial disputes between companies.
85

Beginning in the 1980s, however, companies began to use arbitration agreements in contracts with consumers, investors, employees, and franchisees that were not negotiated.
86

By the 1990s, some financial services providers began including arbitration agreements in their form consumer agreements.
87

85

See, e.g.,
Soia Mentschikoff,
Commercial Arbitration,
61 Colum. L. Rev. 846, 850 (1961) (noting that, as of 1950, nearly one-third of trade associations used a mechanism like the American Arbitration Association as a means of dispute resolution between trade association members, and that over one-third of other trade associations saw members make their own individual arrangements for arbitrations);
see also id.
at 858 (noting that AAA heard about 240 commercial arbitrations a year from 1947 to 1950, comparable to the volume of like cases before the U.S. District Court of the Southern District of New York in the same time period). Arbitration was also used in the labor context where unions had bargained with employers to create specialized dispute resolution mechanisms pursuant to the Labor Management Relations Act. 29 U.S.C. 401-531.

86
Stephen J. Ware,
Arbitration Clauses, Jury-Waiver Clauses and Other Contractual Waivers of Constitutional Rights,
67 Law & Contemp. Problems 179 (2004).

87
Sallie Hofmeister,
Bank of America is Upheld on Consumer Arbitration,
N.Y. Times, Aug. 20, 1994 (“ `The class action cases is where the real money will be saved [by arbitration agreements],' Peter Magnani, a spokesman for the bank, said.”); John P. Roberts,
Mandatory Arbitration by Financial Institutions,
50 Cons. Fin. L.Q. Rep. 365, 367 (1996) (identifying an anonymous bank “ABC” as having adopted arbitration provisions in its contracts for consumer credit cards, deposit accounts, and safety deposit boxes); Hossam M. Fahmy,
Arbitration: Wiping Out Consumers Rights?,
64 Tex. B.J. 917, 917 (2001) (citing Barry Meier,
In Fine Print, Customers Lose Ability to Sue,
N.Y. Times, Mar. 10, 1997, at A1 (noting in 2001 that “[t]he use of consumer arbitration expanded eight years ago when Bank of America initiated its current policy,” when “notices of the new arbitration requirements were sent along with monthly statements to 12 million customers, encouraging thousands of other companies to follow the same policy”).

One notable feature of these agreements it that they could be used to block class action litigation and often class arbitration as well.
88

The

agreements could block class actions filed in court because, when sued in a class action, companies could use the arbitration agreement to dismiss or stay the class action in favor of arbitration. Yet the agreements often prohibited class arbitration as well, rendering plaintiffs unable to pursue class claims in either litigation or arbitration.
89

More recently, some consumer financial providers themselves have disclosed in their filings with the SEC that they rely on arbitration agreements for the express purpose of shielding themselves from class action liability.
90

88

See, e.g.,
Alan S. Kaplinsky & Mark J. Levin,
Excuse Me, But Who's the Predator? Banks Can Use Arbitration Clauses as a Defense,
7 Bus. L. Today 24 (1998) (“Lenders that have not yet implemented arbitration programs should promptly consider doing so, since each day that passes brings with it

the risk of additional multimillion-dollar class action lawsuits that might have been avoided had arbitration procedures been in place.”);
see also
Bennet S. Koren,
Our Mini Theme: Class Actions,
7 Bus. L. Today 18 (1998) (industry attorney recommends adopting arbitration agreements because “[t]he absence of a class remedy ensures that there will be no formal notification and most claims will therefore remain unasserted.”).

89
Even if a pre-dispute arbitration agreement does not prohibit class arbitration, an arbitrator may not permit arbitration to go forward on a class basis unless the arbitration agreement itself shows the parties agreed to do so.
See Stolt-Nielsen S.A.
v.
AnimalFeeds Int'l Corp.,
559 U.S. 662, 684 (2010) (“[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party
agreed
to do so.”) (emphasis in original). Both the AAA and JAMS class arbitration procedures reflect the law; both require an initial determination as to whether the arbitration agreement at issue provides for class arbitration before a putative class arbitration can move forward.
See
AAA, Supplementary Rules for Class Arbitrations, Rule 3 (effective Oct. 8, 2003) (“Upon appointment, the arbitrator shall determine as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class (the “Clause Construction Award.”); JAMS Class Action Procedures, Rule 2: Construction of the Arbitration Clause (effective May 1, 2009) (“[O]nce appointed, the Arbitrator, following the law applicable to the validity of the arbitration clause as a whole, or the validity of any of its terms, or any court order applicable to the matter, shall determine as a threshold matter whether the arbitration can proceed on behalf of or against a class.”).

90

See, e.g.,
Discover Financial Services, Annual Report (Form 10-K) (Feb. 25, 2015) at 43 (“[W]e have historically relied on our arbitration clause in agreements with customers to limit our exposure to consumer class action litigation . . .”); Synchrony Financial, Annual Report (Form 10-K) (Feb. 23, 2015) at 45 (“[H]istorically the arbitration provision in our customer agreements generally has limited our exposure to consumer class action litigation . . . .”).

Since the early 1990s, the use of arbitration agreements in consumer financial contracts has become widespread, as shown by Section 2 of the Study (which is discussed in detail in Part III.D below). By the early 2000s, a few consumer financial companies had become heavy users of arbitration proceedings to obtain debt collection judgments against consumers. For example, in 2006 alone, the National Arbitration Forum (NAF) administered 214,000 arbitrations, most of which were consumer debt collection proceedings brought by companies.
91

91
Carrick Mollenkamp, et al.,
Turmoil in Arbitration Empire Upends Credit-Card Disputes,
Wall St. J., Oct. 16, 2009.
See also
Public Citizen,
The Arbitration Trap: How Credit Card Companies Ensnare Consumers
(2007),
available at

http://www.citizen.org/publications/publicationredirect.cfm?ID=7545
.

Legal Challenges to Arbitration Agreements

The increase in the prevalence of arbitration agreements coincided with various legal challenges to their use in consumer contracts. One set of challenges focused on the use of arbitration agreements in connection with debt collection disputes. In the late 2000s, consumer groups began to criticize the fairness of debt collection arbitration proceedings administered by the NAF, the most widely used arbitration administrator for debt collection.
92

In 2008, the San Francisco City Attorney's office filed a civil action against NAF alleging that NAF was biased in favor of debt collectors.
93

In 2009, the Minnesota Attorney General sued NAF, alleging an institutional conflict of interest because a group of investors with a 40 percent ownership stake in an affiliate of NAF also had a majority ownership stake in a debt collection firm that brought a number of cases before NAF.
94

A few days after the filing of the lawsuit, NAF reached a settlement with the Minnesota Attorney General pursuant to which it agreed to stop administering consumer arbitrations completely, although NAF did not admit liability.
95

Further, a series of class actions filed against NAF were consolidated in a multidistrict litigation and NAF settled those in 2011 by agreeing to suspend $1 billion in pending debt collection arbitrations.
96

The American Arbitration Association (AAA) likewise announced a moratorium on administering company-filed debt collection arbitrations, articulating significant concerns about due process and fairness to consumers subject to such arbitrations.
97

92

See
Mollencamp,
supra
note 91. In addition to cases relating to debt collection arbitrations, NAF was later added as a defendant to the
Ross
v.
Bank of America
case, a putative class action pertaining to non-disclosure of foreign currency conversion fees; NAF was alleged to have facilitated an antitrust conspiracy among credit card companies to adopt arbitration agreements. NAF settled those allegations.
See
Order Preliminarily Approving Class Action Settlement as to Defendant National Arbitration Forum Inc.,
In re Currency Conversion Fee Antitrust Litig.,
MDL 1409 (S.D.N.Y. Dec. 13, 2011).

93

California
v.
National Arbitration Forum, Inc.,
No. 473-569 (S.F. Sup. Ct. Mar. 2009).

94

See
Complaint at 2,
State of Minnesota
v.
National Arbitration Forum, Inc.
No. 27-cv-0918550 (4th Jud. Dist. Minn. July 14, 2009),
available at

https://www.nclc.org/images/pdf/unreported/naf_complaint.pdf
.

95
Press Release, State of Minnesota, Office of the Attorney General,
National Arbitration Forum Barred from Credit Card and Consumer Arbitrations Under Agreement with Attorney General Swanson
(July 19, 2009),
available at

http://pubcit.typepad.com/files/nafconsentdecree.pdf
. NAF settled the City of San Francisco's claims in 2011 by agreeing to cease administering consumer arbitrations in California in perpetuity and to pay a $1 million penalty. News Release, City Attorney Dennis Herrera,
Herrera Secures $5 Million Settlement, Consumer Safeguards Against BofA Credit Card Subsidiary
(Aug. 22, 2011).

96
Mem. and Order,
In re National Arbitration Forum Trade Practices Litigation,
No. 10-md-02122 (D. Minn. Aug. 8, 2011).

97

See
AAA Press Release,
The American Arbitration Association Calls for Reform of Debt Collection Arbitration
(July 23, 2009),
available at

https://www.nclc.org/images/pdf/arbitration/testimonysept09-exhibit3.pdf
.
See also
American Arbitration Association,
Consumer Debt Collection Due Process Protocol Statement of Principles
(2010),
available at

https://www.adr.org/aaa/ShowProperty?nodeId=%2FUCM%2FADRSTG_003865
. JAMS has reported to the Bureau that it only handles a small number of debt collection claims and often those arbitrations are initiated by consumers.

A second group of challenges asserted that the invocation of arbitration agreements to block class actions was unlawful. Because the FAA permits challenges to the validity of arbitration agreements on grounds that exist at law or in equity for the revocation of any contract,
98

challengers argued that provisions prohibiting arbitration from proceeding on a class basis—as well as other features of particular arbitration agreements—were unconscionable under State law or otherwise unenforceable.
99

Initially, these challenges yielded conflicting results. Some courts held that class arbitration waivers were not unconscionable.
100

Other courts held that such waivers were unenforceable on unconscionability grounds.
101

Some of

these decisions also held that the FAA did not preempt application of a state's unconscionability doctrine.
102

98
9 U.S.C. 2 (providing that agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”).

99

See, e.g.,
Opening Br. on the Merits,
Discover Bank
v.
Superior Court,
No. S113725, 2003 WL 26111906, at 5 (Cal. 2005) (“[A] ban on class actions in an adhesive consumer contract such as the one at issue here is unconscionable because it is one-sided and effectively non-mutual—that is, it benefits only the corporate defendant, and could never operate to the benefit of the consumer.”)

100

See, e.g., Strand
v.
U.S. Bank N.A.,
693 NW.2d 918 (N.D. 2005);
Edelist
v.
MBNA America Bank,
790 A.2d 1249 (Sup. Ct. of Del., New Castle Cty. 2001).

101

See, e.g., Brewer
v.
Missouri Title Loans, Inc.,
323 SW.3d 18 (Mo. 2010) (en banc);
Feeney
v.
Dell, Inc.,
908 NE.2d 753 (Mass. 2009);
Fiser
v.
Dell Computer Corp.,
188 P.3d 1215 (N.M. 2008);
Tillman
v.
Commercial Credit Loans, Inc.,
655 SE.2d 362 (N.C. 2008);
Dale
v.
Comcast Corp.,
498 F.3d 1216 (11th Cir. 2007) (holding that class action ban in arbitration agreement substantively unconscionable under Georgia law);
Scott
v.
Cingular Wireless,
161 P.3d 1000 (Wash. 2007) (en banc);
Kinkel
v.
Cingular Wireless LLC,
857 NE.2d 250 (Ill. 2006);
Muhammad
v.

Cnty. Bank of

Rehoboth Beach, Del.,

912 A.2d 88 (N.J. 2006);
Discover Bank
v.
Superior Court,
113 P.3d 1100 (Cal. 2005).

102

See, e.g., Feeney,
908 NE.2d at 767-69;
Scott,
161 P.3d at 1008-09;
Discover Bank,
113 P.3d at 1110-17.

Before 2011, courts were divided on whether arbitration agreements that bar class proceedings were unenforceable because they violated some states' laws. Then, in 2011, the Supreme Court held in
AT&T Mobility
v.
Concepcion
that the FAA preempted application of California's unconscionability doctrine to the extent it would have precluded enforcement of a consumer arbitration agreement with a provision prohibiting the filing of arbitration on a class basis. The Court concluded that any State law—even one that serves as a general contract law defense—that “[r]equir[es] the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
103

The Court reasoned that class arbitration eliminates the principal advantage of arbitration—its informality—and increases risks to defendants (due to the high stakes of mass resolution combined with the absence of multilayered review).
104

As a result of the Court's holding, parties to litigation could no longer prevent the use of an arbitration agreement to block a class action in court on the ground that a prohibition on class arbitration in the agreement was unconscionable under the relevant State law.
105

The Court further held, in a 2013 decision, that a court may not use the “effective vindication” doctrine—under which a court may invalidate an arbitration agreement that operates to waive a party's right to pursue statutory remedies—to invalidate a class arbitration waiver on the grounds that the plaintiff's cost of individually arbitrating the claim exceeds the potential recovery.
106

103

AT&T Mobility LLC
v.
Concepcion,
563 U.S. 333, 344 (2011).

104

Id.
at 348-51.

105

See
Robert Buchanan Jr.,
The U.S. Supreme Court's Landmark Decision in AT&T Mobility
v.
Concepcion: One Year Later,
Bloomberg Law, May 8, 2012,
available at

http://www.bna.com/att-v-concepcion-one-year-later/
(noting that 45 out of 61 cases involving a class waiver in an arbitration agreement were sent to arbitration). The Court did not preempt all State law contract defenses under all circumstances; rather, these doctrines remain available provided that they are not applied in a manner that disfavors arbitration.

106

American Express Co.
v.
Italian Colors Restaurant,
133 S. Ct. 2304, 2309 (2013).

Regulatory and Legislative Activity

As arbitration agreements in consumer contracts became more common, Federal regulators, Congress, and State legislatures began to take notice of their impact on the ability of consumers to resolve disputes. One of the first entities to regulate arbitration agreements was the National Association of Securities Dealers—now known as the Financial Industry Regulatory Authority (FINRA)—the self-regulating body for the securities industry that also administers arbitrations between member companies and their customers.
107

Under FINRA's Code of Arbitration for customer disputes, FINRA members have been prohibited since 1992 from enforcing an arbitration agreement against any member of a certified or putative class unless and until the class treatment is denied (or a certified class is decertified) or the class member has opted out of the class or class relief.
108

FINRA's code also requires this limitation to be set out in any member company's arbitration agreement. The SEC approved this rule in 1992.
109

In addition, since 1976, the regulations of the Commodities Futures Trading Commission (CFTC) implementing the Commodity Exchange Act have required that arbitration agreements in commodities contracts be voluntary.
110

In 2004, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—government-sponsored enterprises that purchase a large share of mortgages—ceased purchasing mortgages that contained arbitration agreements.
111

107

See
FINRA Arbitration and Mediation,
https://www.finra.org/arbitration-and-mediation
.

108
FINRA Code of Arbitration Procedure for Customer Disputes 12204(d). For individual disputes between brokers and customers, FINRA requires individual arbitration.

109

See
SE.C., Order Approving Proposed Rule Change Relating to the Exclusion of Class Actions From Arbitration Proceedings, 57 FR 52659-52661 (Nov. 4, 1992) (citing Securities and Exchange Act, section 19(b)(1) and Rule 19b-4). In a separate context, the SEC has opposed attempts by companies to include arbitration agreements in their securities filings in order to force shareholders to arbitrate disputes rather than litigate them in court.
See, e.g.,
Carl Schneider,
Arbitration Provisions in Corporate Governance Documents,
Harv. L. Sch. Forum on Corp. Governance and Fin. Reg. (Apr. 27, 2012),
available at

https://corpgov.law.harvard.edu/2012/04/27/arbitration-provisions-in-corporate-governance-documents/
(“According to published reports, the SEC advised Carlyle that it would not grant an acceleration order permitting the registration statement to become effective unless the arbitration provision was withdrawn.”). Carlyle subsequently withdrew its arbitration provision.

110
Arbitration or Other Dispute Settlement Procedures, 41 FR 42942, 42946 (Sept. 29, 1976); 17 CFR 166.5(b).

111

See
Kenneth Harney,
Fannie Follows Freddie in Banning Mandatory Arbitration,
Wash. Post., Oct. 9, 2004,
available at

http://www.washingtonpost.com/wp-dyn/articles/A18052-2004Oct8.html
.

Since 1975, FTC regulations implementing the Magnuson-Moss Warranty Act (MMWA) have barred the use, in consumer warranty agreements, of arbitration agreements that would result in binding decisions.
112

Some courts in the late 1990s disagreed with the FTC's interpretation, but the FTC promulgated a final rule in 2015 that “reaffirm[ed] its long-held view” that the MMWA “disfavors, and authorizes the Commission to prohibit, mandatory binding arbitration in warranties.”
113

In doing so, the FTC noted that the language of the MMWA presupposed that the kinds of informal dispute settlement mechanisms the FTC would permit would not foreclose the filing of a civil action in court.
114

112
10 CFR 703.5(j). The FTC's rules do permit warranties that require consumers to resort to an informal dispute resolution mechanism before proceeding in a court, but decisions from such informal proceedings are not binding and may be challenged in court. (By contrast, most arbitration awards are binding and may only be challenged on very limited grounds as provided by the FAA.) The FTC's rulemaking was based on authority expressly delegated by Congress in its passage of the MMWA pertaining to informal dispute settlement procedures. 15 U.S.C. 2310(a)(2). Until 1999, courts upheld the validity of the rule.
See
80 FR 42719;
see also
Jonathan D. Grossberg,
The Magnuson-Moss Warranty Act, the Federal Arbitration Act, and the Future of Consumer Protection,
93 Cornell L. Rev. 659, 667 (2008). After 1999, two appellate courts questioned whether the MMWA was intended to reach arbitration agreements.
See
Final Action Concerning Review of the Interpretations of Magnuson-Moss Warranty Act, 80 FR 42710, 42719 & nn.115-116 (July 20, 2015) (citing
Davis
v.
Southern Energy Homes, Inc.,
305 F.3d 1268 (11th Cir. 2002);
Walton
v.
Rose Mobile Homes, LLC,
298 F.3d 470 (5th Cir. 2002)).

113

See
FTC Final Action Concerning Review of the Interpretations of Magnuson-Moss Warranty Act, 80 FR 42710, 42719 (July 20, 2015).

114

See id.

More recently, the Centers for Medicare and Medicaid Services (CMS) proposed a rule that would revise the requirements that long-term health care facilities must meet to participate in the Medicare and Medicaid programs.
115

Among the new proposed rules are a number of requirements for any arbitration agreements between long-term care facilities and residents of those facilities, including that there be a stand-alone agreement signed by the resident; that care at the facility not be conditioned on signing the agreement; and that the agreement be clear in form, manner and language as to what arbitration is and that the resident is waiving a right to judicial relief and that arbitration be conducted by a neutral arbitrator in a location that is

convenient to both parties.
116

Finally, the Department of Education recently announced that it is proposing options in the context of a negotiated rulemaking to limit the impact of arbitration agreements in certain college enrollment agreements, specifically by addressing the use of arbitration agreements to bar students from bringing group claims.
117

115
Centers for Medicare & Medicaid Services, Medicare and Medicaid Programs, Reform of Requirements for Long-Term Care Facilities, 80 FR 42168 (July 16, 2015).

116

See id.
at 42264-65;
see also id.
at 42211.

117

See
U.S. Dep't of Education Press Release,
U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions
(Mar. 11, 2016),
available at

https://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions
.

Congress has also taken several steps to address the use of arbitration agreements in different contexts. In 2002, Congress amended Federal law to require that, whenever a motor vehicle franchise contract contains an arbitration agreement, arbitration may be used to resolve the dispute only if, after a dispute arises, all parties to the dispute consent in writing to the use of arbitration.
118

In 2006, Congress passed the Military Lending Act (MLA), which, among other things, prohibited the use of arbitration provisions in extensions of credit to active servicemembers, their spouses, and certain dependents.
119

As first implemented by Department of Defense (DoD) regulations in 2007, the MLA applied to “[c]losed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000.”
120

In July 2015, DoD promulgated a final rule that significantly expanded that definition of “consumer credit” to cover closed-end loans that exceeded $2,000 or had terms longer than 91 days as well as various forms of open-end credit, including credit cards.
121

In 2008, Congress amended federal agriculture law to require, among other things, that livestock or poultry contracts containing arbitration agreements disclose the right of the producer or grower to decline the arbitration agreement; the Department of Agriculture issued a final rule implementing the statute in 2011.
122

118
21st Century Department of Justice Appropriations Authorization Act, Public Law 107-273, section 11028(a)(2), 116 Stat. 1835 (2002), codified at 15 U.S.C. 1226(a)(2). The statute defines “motor vehicle franchise contract” as “a contract under which a motor vehicle manufacturer, importer, or distributor sells motor vehicles to any other person for resale to an ultimate purchaser and authorizes such other person to repair and service the manufacturer's motor vehicles.”
Id.
at section 11028(a)(1)(B), 116 Stat. 1835, codified at 15 U.S.C. 1226(a)(1)(B).

119
John Warner National Defense Authorization Act for Fiscal Year 2007, Public Law 109-364, 120 Stat. 2083 (2006).

120
Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FR 50580 (Aug. 31, 2007) (codified at 32 CFR 232).

121

See
32 CFR 232.8(c). Creditors must comply with the requirements of the rule for transactions or accounts established or consummated on or after October 3, 2016, subject to certain exemptions. 32 CFR 232.13(a). The rule applies to credit card accounts under an open-end consumer credit plan only on October 3, 2017. 32 CFR 232.13(c)(2). Earlier, Congress passed an appropriations provision prohibiting Federal contractors and subcontractors receiving Department of Defense funds from requiring employees or independent contractors arbitrate certain kinds of employment claims.
See
Department of Defense Appropriations Act of 2010, Public Law 111-118, 123 Stat. 3454 (2010), section 8116.

122
Food, Conservation, and Energy Act of 2008, Public Law 110-234, section 11005, 122 Stat. 1356-58 (2008), codified at 7 U.S.C. 197c; Implementation of Regulations Required Under Title XI of the Food, Conservation and Energy Act of 2008; Suspension of Delivery of Birds, Additional Capital Investment Criteria, Breach of Contract, and Arbitration, 76 FR 76874, 76890 (Dec. 9, 2011).

As previously noted, Congress again addressed arbitration agreements in the 2010 Dodd-Frank Act. Dodd-Frank section 1414(a) prohibited the use of arbitration agreements in mortgage contracts, which the Bureau implemented in its Regulation Z.
123

Section 921 of the Act authorized the SEC to issue rules to prohibit or impose conditions or limitations on the use of arbitration agreements by investment advisers.
124

Section 922 of the Act invalidated the use of arbitration agreements in connection with certain whistleblower proceedings.
125

Finally, and as discussed in greater detail below, section 1028 of the Act required the Bureau to study the use of arbitration agreements in contracts for consumer financial products and services and authorized this rulemaking.
126

The authority of the Bureau and the SEC are similar under the Dodd-Frank Act except that the SEC does not have to complete a study before promulgating a rule. State legislatures have also taken steps to regulate the arbitration process. Several States, most notably California, require arbitration administrators to disclose basic data about consumer arbitrations that take place in the State.
127

States are constrained in their ability to regulate arbitration because the FAA preempts conflicting State law.
128

123

See
Dodd-Frank section 1414(a) (codified as 15 U.S.C. 1639c(e)(1)) (“No residential mortgage loan and no extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.”); 12 CFR 1026.36(h)(1).

124
Dodd-Frank section 921(b).

125
Dodd-Frank section 922(c)(2).

126
Dodd-Frank section 1028(a).

127
Cal. Civ. Proc. Code sec. 1281.96 (amended effective Jan. 1, 2015); DC Code secs. 16-4430; Md. Comm. L. Code, secs. 14-3901-05; 10 M.R.S.A. sec. 1394 (Maine).

128

See Doctor's Assocs., Inc.
v.
Casarotto,
517 U.S. 681, 687 (1996) (“Courts may not, however, invalidate arbitration agreements under state laws applicable only to arbitration provisions.”);
Perry
v.
Thomas,
482 U.S. 483, 492 n.9 (1987) (“[S]tate law, whether of legislative or judicial origin, is applicable
if
that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of [FAA] sec. 2.”).

Arbitration Today

Today, the AAA is the primary administrator of consumer financial arbitrations.
129

The AAA's consumer financial arbitrations are governed by the AAA Consumer Arbitration Rules, which includes provisions that, among other things, limit filing and administrative costs for consumers.
130

The AAA also has adopted the AAA Consumer Due Process Protocol, which creates a floor of procedural and substantive protections and affirms that “[a]ll parties are entitled to a fundamentally-fair arbitration process.”
131

A second entity, JAMS, administers consumer financial arbitrations pursuant to the JAMS Streamlined Arbitration Rules & Procedures
132

and the JAMS Consumer Minimum Standards. These administrators' procedures for arbitration differ in several respects from the procedures found in court, as discussed in Section 4 of the Study and summarized below at Part III.D.

129

See infra
Part III.D.

130
AAA,
Consumer Arbitration Rules.

131
AAA,
Consumer Due Process Protocol Statement of Principles,
Principle 1. Other principles include that all parties are entitled to a neutral arbitrator and administrator (Principle 3), that all parties retain the right to pursue small claims (Principle 5), and that face-to-face arbitration should be conducted at a “reasonably convenient” location (Principle 6). The AAA explained that it adopted these principles because, in its view, “consumer contracts often do not involve arm's length negotiation of terms, and frequently consist of boilerplate language.” The AAA further explained that “there are legitimate concerns regarding the fairness of consumer conflict resolution mechanisms required by suppliers. This is particularly true in the realm of binding arbitration, where the courts are displaced by private adjudication systems.”
Id.
at 4.

132
JAMS,
Streamlined Arbitration Rules & Procedures
(effective July 1, 2014),
available at

http://www.jamsadr.com/rules-streamlined-arbitration/
. If a claim or counterclaim exceeds $250,000, the JAMS Comprehensive Arbitration Procedures, not the Streamlined Rules & Procedures, apply.
Id.
Rule 1(a).

Further, although virtually all arbitration agreements in the consumer financial context expressly preclude arbitration from proceeding on a class basis, the major arbitration administrators do provide procedures for administering class arbitrations and

have occasionally administered them in class arbitrations involving providers of consumer financial products and services.
133

These procedures, which are derived from class action litigation procedures used in court, are described in Section 4.8 of the Study. These class arbitration procedures will only be used by the AAA or JAMS if the arbitration administrator first determines that the arbitration agreement can be construed as permitting class arbitration. These class arbitration procedures are not widely used in consumer financial services disputes: Reviewing consumer financial arbitrations pertaining to six product types filed over a period of three years, the Study found only three.
134

Industry has criticized class arbitration on the ground that it lacks procedural safeguards. For example, class arbitration generally has limited judicial review of arbitrator decisions (for example, on a decision to certify a class or an award of substantial damages).
135

133

See
AAA Class Arbitration dockets,
available at

https://www.adr.org/aaa/faces/services/disputeresolutionservices/casedocket?_afrLoop=368852573510045&_afrWindowMode=0&_afrWindowId=null
.

134
Study,
supra
note 2, section 5, at 86-87. The review of class action filings in five of these markets also identified one of these two class arbitrations, as well as an additional class action arbitration filed with JAMS following the dismissal or stay of a class litigation.
Id.,
section 6, at 59.

135
In a recent amicus curiae filing, the U.S. Chamber of Commerce argued that “[c]lass arbitration is a worst-of-all-worlds Frankenstein's monster: It combines the enormous stakes, formality and expense of litigation that are inimical to bilateral arbitration with exceedingly limited judicial review of the arbitrators' decisions.” Br. of the Chamber of Commerce of the United States of America as Amicus Curiae in Support of Pl.-Appellants at 9,
Marriott Ownership Resorts, Inc.
v.
Sterman,
No. 15-10627 (11th Cir. Apr. 1, 2015).

III. The Arbitration Study

Section 1028(a) of the Dodd-Frank Act directed the Bureau to study and provide a report to Congress on “the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.” Pursuant to section 1028(a), the Bureau conducted a study of the use of pre-dispute arbitration agreements in contracts for consumer financial products and services and, in March 2015, delivered to Congress its
Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a).
136

136
Study,
supra
note 2.

This Part describes the process the Bureau used to carry out the Study and summarizes the Study's results.

A. April 2012 Request for Information

At the outset of its work, on April 27, 2012, the Bureau published a Request for Information (RFI) in the
Federal Register
concerning the Study.
137

The RFI sought public comment on the appropriate scope, methods, and data sources for the Study. Specifically, the Bureau asked for input on how it should address three topics: (1) The prevalence of arbitration agreements in contracts for consumer financial products and services; (2) arbitration claims involving consumers and companies; and (3) other impacts of arbitration agreements on consumers and companies, such as impacts on the incidence of consumer claims against companies, prices of consumer financial products and services, and the development of legal precedent. The Bureau also requested comment on whether and how the Study should address additional topics. In response to the RFI, the Bureau received and reviewed 60 comment letters. The Bureau also met with numerous commenters and other stakeholders to obtain additional feedback on the RFI.

137
Arbitration Study RFI,
supra
note 2.

The feedback received through this process substantially affected the scope of the study the Bureau undertook. For example, several industry trade association commenters suggested that the Bureau study not only consumer financial arbitration but also consumer financial litigation in court. The Study incorporates an extensive analysis of consumer financial litigation—both individual litigation and class actions.
138

Commenters also advised the Bureau to compare the relationship between public enforcement actions and private class actions. The Study included extensive research into this subject, including an analysis of public enforcement actions filed over a period of five years by State and Federal regulators and the relationship, or lack of relationship of these cases to private class litigation.
139

Commenters also recommended that the Bureau study whether arbitration reduces companies' dispute resolution costs and the relationship between any such cost savings and the cost and availability of consumer financial products and services. To investigate this, the Study includes a “difference-in-differences” regression analysis using a representative random sample of the Bureau's Credit Card Database (CCDB), to look for price impacts associated with changes relating to arbitration agreements for credit cards, an analysis that had never before been conducted.
140

138

See generally
Study,
supra
note 2, sections 6 and 8.

139

Id.,
section 9.

140

Id.,
section 10 at 7-14.

In some cases, commenters to the RFI encouraged the Bureau to study a topic, but the Bureau did not do so because certain effects did not appear measurable. For example, some commenters suggested that the Bureau study the effect of arbitration agreements on the development, interpretation, and application of the rule of law. The Bureau did not identify a robust data set that would allow empirical analysis of this phenomenon. Nonetheless, legal scholars have subsequently attempted to quantify this effect in relation to consumer law.
141

141

See
Myriam Gilles,
The End of Doctrine: Private Arbitration, Public Law and the Anti-Lawsuit Movement,
(Benjamin N. Cardozo Sch. of L. Faculty Research Paper No. 436, 2014),
available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2488575
(analyzing cases under “counterfactual scenarios” as to “what doctrinal developments in antitrust and consumer law . . . would not have occurred over the past decade if arbitration clauses had been deployed to the full extent now authorized by the Supreme Court”).

B. December 2013 Preliminary Report

In December 2013, the Bureau issued a 168-page report summarizing its preliminary results on a number of topics (Preliminary Results).
142

One purpose of releasing the Preliminary Results was to solicit additional input from the public about the Bureau's work on the Study to date. In the Preliminary Results, the Bureau also included a section that set out a detailed roadmap of the Bureau's plans for future work, including the Bureau's plans to address topics that had been suggested in response to the RFI.
143

142
Preliminary Results,
supra
note 2.

143

Id. at
129-31.

In February 2014, the Bureau invited stakeholders for in-person discussions with staff regarding the Preliminary Results, as well as the Bureau's future work plan. Several external stakeholders, including industry associations and consumer groups, took that opportunity and provided additional input regarding the Study.

C. Comments on Survey Design Pursuant to the Paperwork Reduction Act

In the Preliminary Results, the Bureau indicated that it planned to conduct a survey of consumers. The purpose of the survey was to assess consumer awareness of arbitration agreements, as well as consumer perceptions of, and expectations about, dispute resolution with respect to disputes between consumers and financial services

providers.
144

Pursuant to the Paperwork Reduction Act, the Bureau also undertook an extensive public outreach and engagement process in connection with its consumer survey (the results of which are published in Section 3 of the Study). The Bureau obtained approval for the consumer survey from the Office of Management and Budget (OMB), and each version of the materials submitted to OMB during this process included draft versions of the survey instrument.
145

In June 2013, the Bureau published a
Federal Register
notice that solicited public comment on its proposed approach to the survey and received 17 comments in response. In July 2013, the Bureau hosted two roundtable meetings to consult with various stakeholders including industry groups, banking trade associations, and consumer advocates. After considering the comments and conducting two focus groups to help refine the survey, but before undertaking the survey, the Bureau published a second
Federal Register
notice in May 2014, which generated an additional seven comments.

144

Id.
at 129.

145
The survey was assigned OMB control number 3170-0046.

D. The March 2015 Arbitration Study

The Bureau ultimately focused on nine empirical topics in the Study:

1. The prevalence of arbitration agreements in contracts for consumer financial products and services and their main features (Section 2 of the Study);

2. Consumers' understanding of dispute resolution systems, including arbitration and the extent to which dispute resolution clauses affect consumer's purchasing decisions (Section 3 of the Study);

3. How arbitration procedures differ from procedures in court (Section 4 of the Study);

4. The volume of individual consumer financial arbitrations, the types of claims, and how they are resolved (Section 5 of the Study);

5. The volume of individual and class consumer financial litigation, the types of claims, and how they are resolved (Section 6 of the Study);

6. The extent to which consumers sue companies in small claims court with respect to disputes involving consumer financial services (Section 7 of the Study);

7. The size, terms, and beneficiaries of consumer financial class action settlements (Section 8 of the Study);

8. The relationship between public enforcement and consumer financial class actions (Section 9 of the Study); and

9. The extent to which arbitration agreements lead to lower prices for consumers (Section 10 of the Study).

As described further in each subsection below, the Bureau's research on several of these topics drew in part upon data sources previously unavailable to researchers. For example, the AAA voluntarily provided the Bureau with case files for consumer arbitrations filed from the beginning of 2010, approximately when the AAA began maintaining electronic records, to the end of 2012. Compared to data sets previously available to researchers, the AAA case files covered a much longer period and were not limited to case files for cases resulting in an award. Using this data set, the Bureau conducted the first analysis of arbitration frequency and outcomes specific to consumer financial products and services.
146

Similarly, the Bureau submitted orders to financial service providers in the checking account and payday loan markets, pursuant to its market monitoring authority under Dodd-Frank section 1022(c)(4), to obtain a sample set of agreements of those institutions. Using these agreements, among others gathered from other sources, the Bureau conducted the most comprehensive analysis to date of the arbitration content of contracts for consumer financial products and services.
147

146
Study,
supra
note 2, section 5 at 19-68.

147

See generally id.,
section 2.

The results of the Study also broke new ground because the Study, compared to prior research, generally considered larger data sets than had been reviewed by other researchers while also narrowing its analysis to consumer financial products and services. In total, the Study included the review of over 850 agreements for certain consumer financial products and services; 1,800 consumer financial services arbitrations filed over a three-year period; a random sample of the nearly 3,500 individual consumer finance cases identified as having been filed over a period of three years; and all of the 562 consumer finance class actions identified in Federal and selected State courts of the same time period. The study also included over 40,000 small claims court filings over the course of a single year. The Bureau supplemented this research by assembling and analyzing all of the more than 400 consumer financial class action settlements in Federal courts over a five-year period and more than 1,100 State and Federal public enforcement actions in the consumer finance area.
148

The Study also includes the findings of the Bureau's survey of over 1,000 credit card consumers, focused on exploring their knowledge and understanding of arbitration and other dispute resolution mechanisms. The sections below describe in detail the process the Bureau followed in undertaking each section of the Study and summarize the main results of each section.
149

148
Since the publication of the Study, the Bureau determined that 41 FDIC enforcement actions were inadvertently omitted from the results published in Section 9 of the Study. The corrected total number of enforcement actions reviewed in Section 9 was 1,191. Other figures, including the identification of public enforcement cases with overlapping private actions, were not affected by this omission.

149
Overall, the markets assessed in the Study represent lending money (
e.g.,
small-dollar open-ended credit, small-dollar closed-ended credit, large-dollar unsecured credit, large-dollar secured credit), storing money (
i.e.,
consumer deposits), and moving or exchanging money. The Study also included debt relief and debt collection disputes arising from these consumer financial products and services. Study,
supra
note 2, section 1 at 7-9. While credit scoring and credit monitoring were not included in these product categories, settlements regarding such products were included in the Study's analysis of class action settlements, as well as the Study's analysis of the overlap between public enforcement actions and private class action litigation.

Prevalence and Features of Arbitration Agreements (Section 2 of Study)

Section 2 of the Study addresses two central issues relating to the use of arbitration agreements: How frequently such agreements appear in contracts for consumer financial products and services and what features such agreements contain. Among other findings, the Study determined that arbitration agreements are commonly used in contracts for consumer financial products and services and that the AAA is the primary administrator of consumer financial arbitrations.

To conduct this analysis, the Bureau reviewed contracts for six product markets: Credit cards, checking accounts, general purpose reloadable (GPR) prepaid cards, payday loans, private student loans, and mobile wireless contracts governing third-party billing services.
150

Previous studies that analyzed the prevalence and features of arbitration agreements in contracts for consumer financial products and services either relied on small samples or limited their study to one market.
151

As a result, the Bureau's inquiry in Section 2 of the Study represents the most comprehensive analysis to date of the arbitration content of contracts for consumer financial products and services.

150
Study,
supra
note 2, section 2 at 3.

151

Id.,
section 2 at 4-6.

The Bureau's sample of credit card contracts consisted of contracts filed by 423 issuers with the Bureau as required by the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) as implemented by Regulation Z.
152

Taken together, these contracts covered nearly all consumers in the credit card market. For deposit accounts, the Bureau identified the 100 largest banks and the 50 largest credit unions, and constructed a random sample of 150 small and mid-size banks. The Bureau obtained the deposit account agreements for these institutions by downloading them from the institutions' Web sites and through orders sent to institutions using the Bureau's market monitoring authority.

152
12 CFR 1026.58(c) (requiring credit card issuers to submit their currently-offered credit card agreements to the Bureau to be posted on the Bureau's Web site).

For prepaid cards, the Bureau's sample included agreements from two sources. The Bureau gathered agreements for 52 GPR prepaid cards that were listed on the Web sites of two major card networks and a Web site that provided consolidated card information as of August 2013. The Bureau also obtained agreements from GPR prepaid card providers that had been included in several recent studies of the terms of GPR prepaid cards and that continued to be available as of August 2014.
153

For the storefront payday loan market, the Bureau again used its market monitoring authority to obtain a sample of 80 payday loan contracts from storefront payday lenders in California, Texas, and Florida.
154

For the private student loan market, the Bureau sampled seven private student loan contracts plus the form contract used by 250 credit unions that use a leading credit union service organization.
155

For the mobile wireless market, the Bureau reviewed the wireless contracts of the eight largest facilities-based providers of mobile wireless services
156

which also govern third-party billing services.
157

153
Study,
supra
note 2, section 2 at 18.

154

Id.,
section 2 at 21-22. This data was supplemented with a smaller, non-random sample of payday loan contracts from tribal, offshore, and other online payday lenders, which is reported in Appendix C of the Study.

155

Id,
section 2 at 24.

156
Facilities-based mobile wireless service providers are wireless providers that “offer mobile voice, messaging, and/or data services using their own network facilities,” in contrast to providers that purchase mobile services wholesale from facilities-based providers and resell the services to consumers, among other types of providers. Federal Communications Commission,
Annual Report and Analysis of Competitive Market Conditions with Respect to Mobile Wireless,
at 37-39 (2013),
available at

https://www.fcc.gov/document/16th-mobile-competition-report
.

157
Study,
supra
note 2, section 2 at 25-26. In mobile wireless third-party billing, a mobile wireless provider authorizes third parties to charge consumers, on their wireless bill, for services provided by the third parties. Because mobile wireless third-party billing involves the extension of credit to, and processing of payments for, consumers in connection with goods and services that the provider does not directly sell and that consumers do not purchase from the provider, the provision of mobile wireless third-party billing is a “consumer financial product or service” under the Dodd-Frank Act. 12 U.S.C. 5481(6), 15(A)(i) and (vii).

The analysis of the agreements that the Bureau collected found that tens of millions of consumers use consumer financial products or services that are subject to arbitration agreements, and that, in some markets such as checking accounts and credit cards, large providers are more likely to have the agreements than small providers.
158

In the credit card market, the Study found that small bank issuers were less likely to include arbitration agreements than large bank issuers.
159

Likewise, only 3.3 percent of credit unions in the credit card sample used arbitration agreements.
160

As a result, while 15.8 percent of credit card issuers included such agreements in their contracts, 53 percent of credit card loans outstanding were subject to such agreements.
161

In the checking account market, the Study again found that larger banks tended to include arbitration agreements in their consumer checking contracts (45.6 percent of the largest 103 banks, representing 58.8 percent of insured deposits).
162

In contrast, only 7.1 percent of small-and mid-sized banks and 8.2 percent of credit unions used arbitration agreements.
163

In the prepaid card and payday loan markets, the Study found that the substantial majority of contracts—92.3 percent of GPR prepaid card contracts and 83.7 percent of the storefront payday loan contracts—included such agreements.
164

In the private student loan and mobile wireless markets, the Study found that most of the large companies—85.7 percent of the private student loan contracts, and 87.5 percent of the mobile wireless contracts—used arbitration agreements.
165

158
Study,
supra
note 2, section 1 at 9.

159

Id.,
section 2 at 10.

160

Id.

161

Id.
As the Study notes, the
Ross
settlement—a 2009 settlement in which four of the ten largest credit card issuers agreed to remove their arbitration agreements—likely impacts these results. Had the settling defendants in
Ross
continued to use arbitration agreements, 93.6 percent of credit card loans outstanding would be subject to arbitration agreements.
Id.
section 2 at 11.

162

Id.,
section 2 at 14.

163

Id.

164

Id.,
section 2 at 19, 22.

165

Id.,
section 2 at 24, 26.

In addition to examining the prevalence of arbitration agreements, Section 2 of the Study reviewed 13 features sometimes included in such agreements.
166

One feature the Bureau studied was which entity or entities were designated by the contract to administer the arbitration. The Study found that the AAA was the predominant arbitration administrator for all the consumer financial products the Bureau examined in the Study. The contracts studied specified the AAA as at least one of the possible arbitration administrators in 98.5 percent of the credit card contracts with arbitration agreements; 98.9 percent of the checking account contracts with arbitration agreements; 100 percent of the GPR prepaid card contracts with arbitration agreements; 85.5 percent of the storefront payday loan contracts with arbitration agreements; and 66.7 percent of private student loan contracts with arbitration agreements.
167

The contracts specified the AAA as the sole option in 17.9 percent of the credit card contracts with arbitration agreements; 44.6 percent of the checking account contracts with arbitration agreements; 63.0 percent to 72.7 percent of the GPR prepaid card contracts with arbitration agreements; 27.4 percent of the payday loan contracts with arbitration agreements; and one of the private student loan contracts the Bureau reviewed.
168

166

Id.,
section 2 at 30.

167

Id.,
section 2 at 38.

168

Id.,
section 2 at 36. The prevalence of GPR prepaid cards with arbitration agreements specifying AAA as the sole option is presented as a range because two GPR prepaid firms studied each used two different form cardholder agreements, with different agreements pertaining to different features. Because of this it was unclear precisely how much of the prepaid market share represented by each provider was covered by a particular cardholder agreement. As such, for GPR prepaid cards, prevalence by market share is presented as a range rather than a single figure.

In contrast, JAMS is specified in relatively fewer arbitration agreements. The Study found that the contracts studied specified JAMS as at least one of the possible arbitration administrators in 40.9 percent of the credit card contracts with arbitration agreements; 34.4 percent of the checking

account contracts with arbitration agreements; 52.9 percent of the GPR prepaid card contracts with arbitration agreements; 59.2 percent of the storefront payday loan contracts with arbitration agreements; and 66.7 percent of private student loan contracts with arbitration agreements. JAMS was specified as the sole option in 1.5 percent of the credit card contracts with arbitration agreements (one contract); 1.6 percent of the checking account contracts with arbitration agreements (one contract); 63.0 percent to 72.7 percent of the GPR prepaid card contracts with arbitration agreements; and none of the payday loan or private student loan contracts the Bureau reviewed.
169

169

Id.

The Bureau's analysis also found, among other things, that nearly all the arbitration agreements studied included provisions stating that arbitration may not proceed on a class basis. Across each product market, 85 percent to 100 percent of the contracts with arbitration agreements—covering over 99 percent of market share subject to arbitration in the six product markets studied—included such no-class-arbitration provisions.
170

Most of the arbitration agreements that included such provisions also contained an “anti-severability” provision stating that, if the no-class-arbitration provision were to be held unenforceable, the entire arbitration agreement would become unenforceable as a result.
171

170

Id.,
section 2 at 44-47.

171

Id.,
section 2 at 46-47.

The Study found that most of the arbitration agreements contained a small claims court “carve-out,” permitting either the consumer or both parties to file suit in small claims court.
172

The Study similarly explored the number of arbitration provisions that allowed consumers to “opt out” or otherwise reject an arbitration agreement. To exercise the opt-out right, consumers must follow stated procedures, which usually requires all authorized users on an account to physically mail a signed written document to the issuer (electronic submission is permitted only rarely), within a stated time limit. With the exception of storefront payday loans and private student loans, the substantial majority of arbitration agreements in each market studied generally did not include opt-out provisions.
173

172

Id.,
section 2 at 33-34.

173

Id.,
section 2 at 31-32.

The Study analyzed three different types of cost provisions: provisions addressing the initial payment of arbitration fees; provisions that addressed the reallocation of arbitration fees in an award; and provisions addressing the award of attorney's fees.
174

Most arbitration agreements reviewed in the Study contained provisions that had the effect of capping consumers' up front arbitration costs at or below the AAA's maximum consumer fee thresholds. These same arbitration agreements took noticeably different approaches to the reallocation of arbitration fees in the arbitrator's award (approximately one-fifth of the arbitration agreements in credit card, checking account, and storefront payday loan markets permitted shifting company fees to consumers).
175

The Study also found only negligible market shares of relevant markets directed or permitted arbitrators to award attorney's fees to prevailing companies.
176

A significant share of arbitration agreements across almost all markets did not address attorney's fees.
177

174

Id.,
section 2 at 58. Many contracts—particularly checking account contracts—included general provisions about the allocation of costs and expenses arising out of disputes that were
not
specific to arbitration costs. Indeed, such provisions were commonly included in contracts without arbitration agreements as well. While such provisions could be relevant to the allocation of expenses in an arbitration proceeding, the Study did not address such provisions because they were not specific to arbitration agreements.

175

Id.,
section 2 at 62-66.

176

Id.,
section 2 at 67.

177

Id.,
section 2 at 66-76. As described
supra
when the arbitration agreement did not address the issue, the arbitrator is able to award attorney's fees when permitted elsewhere in the agreement or by applicable law.

The Study found that many arbitration agreements permit the arbitrator to reallocate arbitration fees from one party to the other. About one-third of credit card arbitration agreements, one-fourth of checking account arbitration agreements, and half of payday loan arbitration agreements expressly permitted the arbitrator to shift arbitration costs to the consumer.
178

However, as the Study pointed out, the AAA's consumer arbitration fee schedule, which became effective March 1, 2013, restricts such reallocation.
179

With respect to another type of provision that affects consumers' costs in arbitration—where the arbitration must take place—the Study noted that most, although not all, arbitration agreements contained provisions requiring or permitting hearings to take place in locations close to the consumer's place of residence.
180

178

Id.,
section 2 at 62-66.

179

Id.,
section 2 at 61-62.

180

Id.,
section 2 at 53.

Further, most of the arbitration agreements the Bureau studied contained disclosures describing the differences between arbitration and litigation in court. Most agreements disclosed expressly that the consumer would not have a right to a jury trial, and most disclosed expressly that the consumer could not be a party to a class action in court.
181

Depending on the product market, between one-quarter and two-thirds of the agreements disclosed four key differences between arbitration and litigation in court: no jury trial is available in arbitration; parties cannot participate in class actions in court; discovery is typically more limited in arbitration; and appeal rights are more limited in arbitration.
182

The Study found that this language was often capitalized or in boldfaced type.
183

181

Id.,
section 2 at 72.

182

Id.,
section 2 at 72-79.

183

Id.,
section 2 at 72 and n.144.

The Study also examined whether arbitration agreements limited recovery of damages—including punitive or consequential damages—or specified the time period in which a claim had to be brought. The Study determined that most agreements in the credit card, payday loan, and private student loan markets did not include damages limitations. However, the opposite was true of agreements in checking account contracts, where more than three-fourths of the market included damages limitations; prepaid card contracts, almost all of which included such limitations; and mobile wireless contracts, all of which included such limitations. A review of consumer agreements
without
arbitration agreements revealed a similar pattern, albeit with damages limitations being somewhat less common.
184

184

Id.,
section 2 at 49. More than one-third (35 percent) of large bank checking account contracts without arbitration agreements included either a consequential damages waiver or a consequential damages waiver together with a punitive damages waiver. Similarly a third of prepaid card contracts without arbitration agreements included a consequential damages waiver, a punitive damages waiver, or both. The only mobile wireless contract without an arbitration agreement limited any damages recovery to the amount of the subscriber's bill.
Id.

The Study also found that a minority of arbitration agreements in two markets set time limits other than the statute of limitations that would apply in a court proceeding for consumers to file claims in arbitration. Specifically, these types of provisions appeared in 28.4 percent and 15.8 percent of the checking account and mobile wireless agreements by market share, respectively.
185

Again, a review of consumer agreements without arbitration agreements showed that 10.7 percent of checking account

agreements imposed a one-year time limit for consumer claims.
186

No storefront payday loan, private student loan, or mobile wireless contracts in the sample without arbitration agreements had such time limits.
187

185

Id.,
section 2 at 50.

186

Id.,
section 2 at 51.

187

Id.

The Study assessed the extent to which arbitration agreements included contingent minimum recovery provisions, which provide that consumers would receive a specified minimum recovery if an arbitrator awards the consumer more than the amount of the company's last settlement offer. The Study found that such provisions were uncommon; they appeared in three out of the six private student loan agreements the Bureau reviewed, but, in markets other than student loans, they appeared in 28.6 percent or less of the agreements the Bureau studied.
188

188

Id.,
section 2 at 70-71 (albeit covering 43.0 percent of the storefront payday loan market subject to arbitration agreements and 68.4 percent of the mobile wireless market subject to arbitration agreements).

Consumer Understanding of Dispute Resolution Systems, Including Arbitration (Section 3 of Study)

Section 3 of the Study presented the results of the Bureau's telephone survey of a nationally representative sample of credit card holders.
189

The survey examined two main topics: (1) The extent to which dispute resolution clauses affected consumer's decisions to acquire credit cards; and (2) consumers' awareness, understanding, and knowledge of their rights in disputes against their credit card issuers. In late 2014, the Bureau's contractor completed telephone surveys with 1,007 respondents who had credit cards.
190

189
The Bureau focused its survey on credit cards because credit cards offer strong market penetration with consumers across the nation. Further, because major credit card issuers are required to file their agreements with the Bureau (12 CFR 1026.58(c)), limiting the survey to credit cards permitted the Bureau to verify the accuracy of many of the respondents' default assumptions about their dispute resolution rights by examining the actual credit card agreements to which the consumers were subject to at the time of the survey.
Id.,
section 3 at 2.

190
Based on the size of the Bureau's sample, its results were representative of the national population, with a sampling error of plus or minus 3.1 percent, though the sampling error is larger in connection with sample sets of fewer than the 1,007 respondents.
Id.,
section 3 at 10.

The consumer survey found that when presented with a hypothetical situation in which their credit card issuer charged them a fee they knew to be wrongly assessed and in which they exhausted efforts to obtain relief from the company through customer service, only 2.1 percent of respondents stated that they would seek legal advice or consider legal proceedings.
191

Almost the same proportion of respondents stated that they would simply pay for the improperly assessed fee (1.7 percent).
192

A majority of respondents (57.2 percent) said that they would cancel their cards.
193

191

Id.,
section 3 at 18.

192

Id.

193

Id.

Respondents also reported that factors relating to dispute resolution—such as the presence of an arbitration agreement—played little to no role when they were choosing a credit card. When asked an open-ended question about all the factors that affected their decision to obtain the credit card that they use most often for personal use, no respondents volunteered an answer that referenced dispute resolution procedures.
194

When presented with a list of nine features of credit cards—features such as interest rates, customer service, rewards, and dispute resolution procedures—and asked to identify those features that factored into their decision, respondents identified dispute resolution procedures as being relevant less often than any other option.
195

194

Id.,
section 3 at 15.

195

Id.

As for consumers' knowledge and default assumptions as to the means by which disputes between consumers and financial service providers can be resolved, the survey found that consumers generally lack awareness regarding the effects of arbitration agreements. Of the survey's 1,007 respondents, 570 respondents were able to identify their credit card issuer with sufficient specificity to enable the Bureau to find the issuer's standard credit card agreement and thus to compare the respondents' beliefs with respect to the terms of their agreements with the agreements' actual terms.
196

Among the respondents whose credit card contracts did not contain an arbitration agreement, when asked if they could sue their credit card issuer in court, 43.7 percent answered “Yes,” 7.7 percent answered “No,” and 47.8 percent answered “Don't Know.”
197

At the same time, among the respondents whose credit card agreements
did
contain arbitration requirements, 38.6 percent of respondents answered “Yes,” while 6.8 percent answered “No,” and 54.4 percent answered “Don't Know.”
198

Even the 6.8 percent of respondents who stated that they could not sue their credit card issuers in court may not have had knowledge of the arbitration agreement: As noted above, a similar proportion of respondents
without
an arbitration agreement in their contract—7.7 percent compared to 6.8 percent—reported that they could not sue their issuers in court.
199

When asked if they could participate in class action lawsuits against their credit card issuer, more than half of the respondents whose contracts had pre-dispute arbitration agreements thought they could participate (56.7 percent).
200

196

Id.,
section 3 at 18.

197

Id.,
section 3 at 18-20.

198

Id.
These respondents were asked additional questions to account for the possibility that respondents who answered “Yes” meant suing their issuers in small claims court; that they meant they could bring a lawsuit even though they are subject to an arbitration agreement; or that they had previously “opted-out” of their arbitration agreements with their issuers. With those caveats in mind and after accounting for demographic weighting, the Study found that the consumers whose credit cards included arbitration requirements were wrong at least 79.8 percent of the time.
Id.,
section 3 at 20-21.

199

Id.,
section 3 at 18-20.

200

Id.,
section 3 at 25.

Respondents were also generally unaware of any opt-out opportunities afforded by their issuer. Only one respondent whose current credit card contract permitted opting out of the arbitration agreement recalled being offered such an opportunity.
201

201

Id.,
section 3 at 21 & 21 n.44. Eighteen other respondents recalled being offered an opportunity to opt out of their arbitration requirements. But, for the respondents whose credit card agreements the Bureau could identify, none of their 2013 agreements actually contained opt-out provisions. In fact, four of the agreements did not even contain pre-dispute arbitration provisions.

Comparison of Procedures in Arbitration and in Court (Section 4 of Study)

While the Study generally limited its scope to empirical analysis of dispute resolution, Section 4 of the Study compared the procedural rules that apply in court and in arbitration. Particularly given changes to the AAA consumer fee schedule that took effect March 1, 2013, the procedural rules are relevant to understanding the context from which the Study's empirical findings arise.

The Study's procedural overview described court litigation as reflected in the Federal Rules and, as an example of a small claims court process, the Philadelphia Municipal Court Rules of Civil Practice. It compared those procedures to arbitration procedures as set out in the rules governing consumer arbitrations administered by the two leading arbitration administrators in the United States, the AAA and JAMS. The Study compared arbitration and court procedures according to eleven factors: The process for filing a claim, fees, legal

representation, the process for selecting the decision maker, discovery, dispositive motions, class proceedings, privacy and confidentiality, hearings, judgments and awards, and appeals.

Filing a Claim and Fees.
The Study described the processes for filing a claim in court and in arbitration. With respect to fees, the Study noted that the fee for filing a case in Federal court is $350 plus a $50 administrative fee—paid by the party filing suit, regardless of the amount being sought—and the fee for a small claims filing in Philadelphia Municipal Court ranges from $63 to $112.38.
202

In arbitration, under the AAA consumer fee schedule that took effect March 1, 2013, the consumer pays a $200 administrative fee, regardless of the amount of the claim and regardless of the party that filed the claim; in JAMS arbitrations, when a consumer initiates arbitration against the company, the consumer is required to pay a $250 fee.
203

Prior to March 1, 2013, arbitrators in AAA consumer arbitrations had discretion to reallocate fees in the ultimate award. After March 1, 2013, arbitrators can only reallocate arbitration fees in the award if required by applicable law or if the claim “was filed for purposes of harassment or is patently frivolous.”
204

202

Id.,
section 4 at 10. As the Study noted, a federal statute permits indigent plaintiffs filing in Federal court to seek to have the court waive the required filing fees.
Id.
(citing 28 U.S.C. 1915(a)).

203

Id.,
section 4 at 11-12.

204

Id.,
section 4 at 11-12.

Parties in court generally bear their own attorney's fees, unless a statute or contract provision provides otherwise or a party is shown to have acted in bad faith. However, under several consumer protection statutes, providers may be liable for attorney's fees.
205

Under the AAA's Consumer Rules, “[t]he arbitrator may grant any remedy, relief, or outcome that the parties could have received in court, including awards of attorney's fees and costs, in accordance with the law(s) that applies to the case.”
206

205

See, e.g.,
15 U.S.C. 1640(a)(3) (TILA).

206
Study,
supra
note 2, section 4 at 12.

Representation.
The Study noted that in most courts, individuals can either represent themselves or hire a lawyer as their representative.
207

In arbitration, the rules are more flexible than in many courts about the identity of any party representative. For example, the AAA Consumer Rules permit a party to be represented “by counsel or other authorized representative, unless such choice is prohibited by applicable law.”
208

Some states, however, prohibit non-attorneys to represent parties in arbitration.
209

207

Id.,
section 4 at 13.

208

Id.,
section 4 at 13-14.

209

Id.,
section 4 at 14.

Selecting the Decisionmaker.
The Study noted that court rules generally do not permit parties to reject the judge assigned to hear their case.
210

In arbitration, if the parties agree on the individual they want to serve as arbitrator, they can choose that person to decide their dispute; if the parties cannot agree on the arbitrator, the arbitrator is selected following the procedure specified in their contract or in the governing arbitration rules.
211

210

Id.

211

Id.,
section 4 at 15.

Discovery.
The Study stated that the Federal Rules provide a variety of means by which a party can discover evidence in the possession of the opposing party or a third party, while the right to discovery in arbitration is more limited.
212

212
Arbitration rules on discovery give the arbitrator authority to manage discovery “with a view to achieving an efficient and economical resolution of the dispute, whil

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-10961. Public record. Not legal advice.