Consumer Agency Rule Would End Class Action Waivers

In May, the Consumer Financial Protection Board announced a proposed rule prohibiting providers from using a pre-dispute arbitration agreement to block consumer class actions in court.

The CFPB’s rule, if enacted, would represent a dramatic shift in arbitration law. Backed by Supreme Court precedent, companies have effectively used class action waivers in arbitration agreements to remove the risks associated with class action claims. The CFPB notes the proposed rule will apply to “most consumer financial products and services that the CFPB oversees.”

A challenge will likely reach the Supreme Court, where there is a good chance the rule will not survive, but in the meantime uncertainty will persist. For companies looking to retain some control over the costs and risks associated with class action liability while the rule is adjudicated, two options emerge. The first allows a company to provide consumers the option to litigate class claims in arbitration, where the cost should be cheaper than court. The CFPB specifically endorses this option.

A company could also provide consumers with the option to opt out of an arbitration clause that precluded class action claims. Thus, if a consumer did not opt-out but later brings a class action lawsuit, a company could compel arbitration and not only enjoy the potential costs savings of arbitration, but remove the class action liability altogether.

The CFPB says the proposed rule will apply to most consumer financial products and services that the CFPB oversees.