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Class Action Waivers Under Scrutiny

This is an update to Goldberg Kohn's November 23, 2015 Client Alert "Class Action Waivers Under Scrutiny".  Under the auspices of the Dodd-Frank Act, the agency known as the Consumer Financial Protection Bureau ("CFPB") has now formally issued a proposed rule with a request for public comment. The proposed rule concerns arbitration provisions in agreements pertaining to consumer financial products and services, and would ban the use of class action waivers in this context. The proposed rule with explanation, commentary, support, appendices, and other materials covers 376 pages, including some 701 footnotes.  The proposed rule was published in the Federal Register on May 24, 2016 and can be found at 81 FR 32830-01, and all comments must be received by August 22,2016.  If the CFPB adopts such a final rule, it would apply to agreements entered into on and after the 211th day from the date the final rule is published in the Federal Register.  If adopted, the proposed rule will impact nearly all agreements entered into by providers and customers in the core consumer financial markets of lending, storing, and moving or exchanging money.  The CFPB's basic conclusion and rationale for the proposed rule are that "individual dispute resolution mechanisms are an insufficient means of ensuring that consumer financial protection laws and consumer financial contracts are enforced", and that class actions are far more likely to achieve these goals.  The rule as proposed will not abrogate altogether arbitration provisions in consumer financial contracts, because it permits a customer and a provider to choose arbitration to resolve claims on an individual basis.  The proposed rule, however, will not permit enforcement of class action waivers.  Although there is some slight variety in the language that the proposed rule requires providers to include in their customer agreements, the following paragraph will typically be mandatory:

We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.

The proposed rule also requires providers to submit certain records relating to any arbitrated matters to the CFPB in order to allow the CFPB to continue to study and monitor consumer finance arbitrations. The CFPB is considering publishing this information in some form so that it will be publicly available. 

On its face, the CFPB's proposed rule does not apply to businesses or industries that do not provide consumer financial products and services.  Note, however, that in the commentary accompanying the proposed rule, the CFPB stated that it "believes that mobile wireless third-party billing services that engage in transmitting funds would be covered by" the proposed rule because the CFPB "understands that such services would not typically be integral to the provision of wireless communication services."  This leads to concerns that the proposed rule, with its commentary, may create an interpretive slippery slope about what is "integral" to a particular industry, and that class action lawyers may attempt to exploit this.  For this reason and others, it is quite possible that other businesses or industries that interface with many consumers outside the financial services industry may see court rulings, or other administrative pronouncements, casting doubt on or rendering unenforceable arbitration agreements that include class action waivers. 

Because any final rule will not go into effect until some time in 2017, providers should use this time to review their existing customer agreements. Until a final rule is adopted, providers may continue to employ class action waivers in their consumer contracts because agreements entered into up to 210 days after the publication of the final rule will not be subject to its terms. If a final rule is adopted, however, providers will need to prepare for the revision of their current contracts.

Goldberg Kohn will continue to monitor developments with the CFPB's proposed rule, now subject to public comments.

   



May 25, 2016

If you have any questions or wish to discuss these issues, please feel free to contact any of the following attorneys:

Frederic R. Klein
312.201.3908
email

Steven A. Levy
312.201.3965
email

Roger A. Lewis
312.201.3981
email

Kerry D. Nelson
312.863.7135
email


The material in this client alert is based on information existing at that time. It should not be construed as legal advice or legal opinions based on any specific set of facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, an attorney-client relationship.

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