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End to Mandatory Arbitration?

The Consumer Protection Financial Bureau has been on a roll in the last year trying to pass new rules to protect consumers. A rule they proposed recently, if passed, would stop credit card companies, banks, payday lenders and student loan companies among others from including mandatory arbitration provisions in their contracts. What is a mandatory arbitration provision and why does that matter? A mandatory arbitration provision is a portion of a contract which provides that instead of suing the other party to the contract if they break it, the parties will instead go to legally binding arbitration. There is nothing inherently unfair with arbitration however the process is expensive, complicated and tends to favor large companies as a result. Arbitrators are usually retired judges or older attorneys and the process can be quicker and cheaper for businesses than going to court but can pose a serious problem for consumers.

Suppose a person signs a contract to open a bank account and the contract contains a mandatory arbitration provision. Suppose also that the bank charges every person who opened an account who signed that contractor a $3.00 fee which they are not authorized by the contract. The consumer can’t sue the company to resolve the issue, they have to take it to arbitration if there is a mandatory arbitration clause in their contract. These clauses generally provide that the winning side does not get any of the money they spent bringing the dispute to arbitration. This means that for a consumer to win over the $3.00 issue they may have to spend hundreds or even thousands of dollars to get their money back. Since none of the consumers can sue and it is never worthwhile to bring the matter to arbitration, this incentivizes companies to take a little bit from every consumer. This also makes class action cases impossible, an important tool for stopping companies who try to rip off many members of the public for just a little bit each.

This problem has been plaguing consumers for years. However if the new CFPB rule is passed this may become a thing of the past. Without mandatory arbitration clauses a consumer could potentially sue a company who is ripping them off for a small amount and potentially recover their attorney fees. The rule has not been passed yet and it can be a slow process but we can hope for the best and hope that mandatory arbitration provisions become a thing of the past.

This document has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorney in connection with any legal issues related to the matters discussed in this article as the applicability of state, local and federal laws may vary.

  • ABC News
  • American Civil Liberties Union
  • CBS 4
  • CNN
  • Daily Business Review
  • Florida Trend's - Florida Legal Elite 2014
  • Florida Trend's - Florida Legal Elite 2014
  • National Association of Consumer Advocates
  • National Association of Consumer Bankruptcy Attorneys
  • NBC News
  • National Consumer Law Center
  • The New York Times
  • Avvo
  • Avvo
  • Avvo
  • Avvo
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