Editor's note: This post originally appeared in the September issue of American Banker Magazine.
It is always an event when the director of the Consumer Financial Protection Bureau, Richard Cordray, appears before Congress, even if his appearance follows a familiar script. Republicans attack him. Democrats praise him.
So it was notable when at Cordray's April 23 appearance before the Senate Banking Committee, Sen. Elizabeth Warren went off script. The Massachusetts Democrat expressed her desire to see the CFPB's examination of arbitration provisions in banking contracts sooner, rather than later. Why is Warren anxious about arbitration? The answer probably lies in large part with a string of Supreme Court decisions that might allow banks to cut off class actions with a well-tailored arbitration provision.
Arbitration allows a bank to settle disputes with an individual customer without going to court. Both sides can benefit, as arbitrations generally are private and are designed to move quicker than a court case, and at a lower cost. Banks can avoid plaintiff-friendly jurisdictions, where they may be forced to play roulette with a jury, and customers can avoid business-friendly jurisdictions.
If a bank and its customer are willing to arbitrate their disputes, they usually agree to do so in a contract that is entered into at the beginning of the relationship. For example, a bank may include an arbitration provision in a loan agreement or a customer deposit agreement. This provision would require the bank and the customer to arbitrate specified disputes even if one of the parties wanted to go to court.
Class actions are expensive, often slow-moving cases where an individual or small group brings a case on behalf of a large group. For example, one customer could attempt to bring a class action on behalf of all of a bank's customers.
The Supreme Court has recognized that a defendant loses the major benefits of arbitration when forced into a class action. In recent cases, the nation's highest court held that a customer with an arbitration agreement must arbitrate disputes even if a class action exists in court, and that a customer cannot start a class action in arbitration unless there was an agreement to allow for a class action in arbitration.
Based on the rulings in two cases decided in 2010 and 2011, a bank can cut off class actions by customers when (1) it has an arbitration agreement in all of its customer contracts and (2) the bank does not agree to a class action in those contracts.
But the recent Supreme Court opinion in the case of Oxford Health Plans v. Sutter, issued on June 10 of this year, emphasizes the need for banks to properly tailor their arbitration agreements.
Oxford Health Plans and Sutter entered an arbitration provision that was silent as to whether the parties intended to allow for class actions in an arbitration. Based on previous Supreme Court cases, the arbitrator should not have used this silence to find that the parties agreed to have a class action proceeding in the arbitration. But he did. The Supreme Court refused to reverse the arbitrator's ruling, finding that it was not the justices' role to question the arbitrator's interpretation of the contract.
Although there are some nuances to the Oxford Health Plans case, there are two major takeaways. First, banks can still use properly tailored arbitration provisions to cut off class actions. Second, the arbitration provisions should be explicit, leaving no question that the bank requires all customers to arbitrate and does not agree to hold a class-action arbitration. Silence is not a bank's friend when it comes to arbitration agreements.
Many banks are already explicit in avoiding class actions in their arbitration agreements, and with the recent Oxford Health Plans decision, more will be going that way. With the Supreme Court decisions effectively allowing banks to cut off class actions, it will be interesting indeed to see the CFPB's report on arbitration, which we expect this year.
If the CFPB tries to regulate away banks' ability to enter arbitration provisions, then we could see a big showdown over the power of the CFPB.
Michael Harmon is an associate at Waller in Nashville. Larry Childs is a partner and Waller's practice group co-leader in litigation and dispute resolution. He is based in Birmingham, Ala.