Home > Uncategorized > Forced Arbitration and the CFPB

Forced Arbitration and the CFPB

This morning I’m studying up on the topic of forced arbitration clauses for my Slate Money podcast. That’s part of the fine print when you sign a corporate contract as a consumer or as an employee which states that you will not sue the company for bullshit they might pull, like unfair fees, no overtime pay, or even discriminatory practices.

What’s more, 90% of the time that “forced arbitration” clause is accompanied by an agreement that you also won’t be part of a class-action lawsuit, if by any chance you’d want to do something to address systemic injustice perpetrated by the corporation.

It’s a massively stacked deck; the calculation of how much it will cost, in terms of lawyers, versus how much you’d get if you won you case means that very few people choose the arbitration option. The arithmetic is particularly cruel since, once class-action suits are out of the way, you’re not even benefitting other people who will come after you and find the same shit being pulled.

And of those consumers or employees who do agree to arbitration, they often lose, partly because the actual arbitration process is much more favorable to corporate lawyers (which the other side has but you don’t) than a typical courtroom.

The process entirely depends on a arbitrator being fair and impartial but, believe it or not, the business in question chooses this person, and often for repeat business, which is to say they have at least indirect influence on the decision if the arbitrator wants more work.

So, here’s the good news. The CFPB has come out with strong rules this week which will render moot such forced arbitration clauses in the case of consumer financial lending products. This is great news, and well-needed, given how many of those contracts were flooded with such unfair fine print:

  • credit card issuers 53%
  • prepaid cards, 92%
  • student loans, 86%
  • payday loan 99%
  • checking accounts 44%

However, it doesn’t address other kinds of consumer products, and employee situations, that will continue to have these fine print clauses:

  • nursing home contracts
  • for-profit college contracts
  • employee contracts (22% of employees now sign such contracts)

To learn more, take a look at this fine report from the Economic Policy Institute.

Categories: Uncategorized
  1. Josh
    May 6, 2016 at 8:39 am

    I agree forced arbitration is problematic but the alternatives are hardly better if at all. Who is going to pursue a case on their own? Class actions are a racket that mostly favors the class action lawyers (I know, you’ve got your tampons case and I think that is a really good counter-example but a rare one). Also, the formal legal system is expensive and fraught with problems for regular people, as opposed to lawyers.

    So, maybe it makes more sense to try to make the arbitration system fairer.


    • May 6, 2016 at 8:43 am

      How would we do that?


      • Josh
        May 6, 2016 at 9:20 am

        First off, I do want to acknowledge that the current system is abusive as the public has essentially no choice and the corporations are designing the system. It should not be forced on people but I could imagine a system people might well prefer to a court system.

        Second, I am not an expert in this and have only read the summary of the report. And as I reply I realize that small claims court is intended to act as I describe so maybe that is the system we should focus on.

        But, a simpler system of adjudication has a lot of appeal for small damages. My impression is that arbitrators typically come from industry. Also, the report refers to companies appearing before the same arbitrator repeatedly. That is natural but could be addressed by setting up a larger pool of arbitrators who rotate — more like the jury system. It should include more reasonable compensation to the arbitrators than the jury system does today but could still be cheaper than the courts with simpler rules that would be more friendly to ordinary people.

        It should be subject to some formal review and appeal..

        Just ideas without much knowledge behind them.

        I’d also note (without a careful reading of the report) that the evidence of the problems with the arbitration system — consumers win less frequently with smaller judgments is likely, at least in part, because of the nature of the cases people are likely to bring to arbitration.


  2. May 6, 2016 at 8:57 am

    Other noteworthy facts about arbitration:
    – there is also religious arbitration, i.e. arbitration based on the Bible;
    – often, from the outset, the procedure happens under a confidentiality clause and is supposed to remain anonymous afterwards;
    – even if it does not, it does not get referenced with usual court decisions, so other plaintiffs have a harder time relying on previous cases;
    – in some types of arbitration, the company directly pays all the arbitration fees: on the plus side it is cheaper, on the down side it is not very fair…


  3. Jeff Rose
    May 6, 2016 at 12:27 pm

    This is unalloyed good news. Arbitration makes a lot of sense under certain defined conditions, most notably where sophisticated, relatively equal parties agree to it. It is entirely inappropriate for consumer contracts and most employment contracts.


  1. May 6, 2016 at 11:38 am
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