The timing of the Consumer Financial Protection Bureau’s new rule pushing class action lawsuits at the expense of consumer arbitration agreements is a bit ironic. Although Congress might still block him, CFPB Director Richard Cordray is trying with this rule to force consumers and their complaints into the class action lawsuit system at the very moment Congress is making its most serious attempt in a decade to fix that system.
The Fairness in Class Action Litigation Act, or FICALA, is an effort to repair a class action system that, today, is a tool of enrichment for plaintiffs’ lawyers rather than a path to justice for consumers. Among other things, FICALA would ensure that the consumers in a class action lawsuit would get paid from a settlement or judgment first, rather than the lawyers. It would mandate that lawyers only get paid a percentage of the money consumers actually claim from these lawsuits, not of the headline dollar amount awarded, much of which might go unclaimed. And it would require that lawyers only include in their class action lawsuits those consumers who have actually been harmed.
While these principles might seem straightforward to most people, they are needed now precisely because class actions today don’t include these consumer protections.
Even the CFPB’s own study, designed to fit its own pre-determined conclusion favoring class actions over arbitration, acknowledged the serious flaws of these lawsuits. It showed that in 87 percent of the class actions it studied, consumers got no benefit at all, either because they were dismissed or settled with payments only to the named plaintiffs – and the lawyers, of course. It also showed lawyers reaped an average $1 million in fees per settled case, while the few consumers who participated in settlements, only 4% of those eligible, averaged $32.
Take Edwards v. First American, a 2016 case involving title insurance. Only 48,000 of the estimated 713,000 class members received notice of the settlement and the claims administrator reported 358 claims filed. The total payout to plaintiffs was less than $650,000, while the lawyers got $5.26 million.
Examples like this have prompted Congress to move in the opposite direction from the CFPB. Incredibly, the Bureau dismissed the clear benefits arbitration has over class actions – including how little consumers pay for the process, how they often have their claims favorably resolved, and how convenient arbitration is over the courts.
Certainly the evidence suggests consumers prefer arbitration to the courts. In 2014, the Kaiser health plan in California, whose 7 million members use arbitration to address consumer complaints, found that 90 percent who used the system said it was equal to or better than going to court. A survey of consumers who participated in class actions, meanwhile, showed that only 14 percent believed they received anything of value. These data were submitted to the CFPB for its study, and promptly ignored.
The CFPB claims its rule still allows companies to use arbitration clauses, but few if any will do so if they are also left exposed to the financially draining threat of class actions. And here’s the rub: Most consumer complaints will never even have the chance of becoming part of a class action, because they are uniquely individual and cannot easily be bundled together into a single lawsuit.
The CFPB’s anti-arbitration rule has effectively created a consumer cul-de-sac. This is reason enough for a Congressional Review Act resolution to reverse this damage by undoing the rule. And Congress has less than 60 legislative days to act, or the CRA option is dead and the rule becomes final.
The good news is that the House took the first step in July by passing its CRA resolution. The Senate, which has introduced its own CRA bill, must work quickly to follow suit and get it to the president’s desk.
If Congress is serious about showing the American people they can pass laws that will indeed help everyday consumers, stopping the CFPB’s anti-consumer arbitration rule should be one of the easiest votes they’ll take this year.
Lisa A. Rickard is president of the U.S. Chamber Institute for Legal Reform. To learn more, visit www.InstituteForLegalReform.com.
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