Supreme Court's Arbitration Opinion in CompuCredit Corp. Underscores Importance of CFPB's Upcoming Review of Arbitration Clauses
The good news for proponents of arbitration in consumer contracts is that the United States Supreme Court's opinion in CompuCredit Corp. v. Greenwood, No. 10-948 (Jan. 10, 2012) continued the run of arbitration-friendly decisions that included AT&T Mobility v. Concepcion, No. 09-893, 563 U.S. ____ (Apr. 27, 2011) ("Concepcion"). CompuCredit clearly held that any attempt by Congress to exempt certain categories of contracts from application of the Federal Arbitration Act ("FAA") must be explicit. Under a little-noticed provision of Dodd-Frank, however, the holdings in both CompuCredit and Concepcion may be subject to congressional or regulatory review based on a study that the Consumer Financial Protection Bureau ("CFPB") is directed to carry out.
In CompuCredit, consumers urged that language in the federal Credit Repair Organization Act ("CROA"), stating that a consumer has "a right to sue a credit repair organization" that violated CROA provisions, exempted contracts with credit repair organizations from the general federal policy favoring arbitration. After CompuCredit moved to compel arbitration of a consumer group's putative CROA class action based on a clause in its standard contract, the consumers urged that CROA's "right to sue" provision exempted contracts with credit repair organizations from the reach of the FAA. In August 2010, the Ninth Circuit affirmed the Northern District of California's decision denying CompuCredit's motion and accepting the consumers' arguments. The United States Supreme Court reversed, citing the FAA and Concepcion. Justice Scalia wrote the opinion for the Court and held that any congressional exclusion of particular classes of contracts from arbitration must be clear. Statutory references to a "right to sue" and to "an action" in a statute are not sufficiently explicit.
This may not be the end of the story in the consumer context, however. As noted in the April 2011 Jones Day Commentary, "Does Dodd-Frank Provide the Seeds to Unravel Concepcion in Consumer Financing Transactions?," Sections 1028(a) and (b) of Dodd-Frank direct the CFPB to study mandatory arbitration clauses in contracts between consumers and any person or entity "offering or providing a consumer financial product or service." The CFPB is then to report its findings to Congress under Sections 1002(6) and 1028(a). Section 1028(b) also states that the CFPB may issue regulations prohibiting, conditioning, or limiting arbitration clauses in consumer contracts with a "covered entity" for "a consumer financial product or service" if it finds that such an action is "in the public interest and for the protection of consumers." Thus, even while Congress is considering an eventual report from the CFPB, the CFPB may be authorized to move forward with regulations of its own. Potential regulations may run the gamut from prohibiting predispute arbitration clauses in covered contracts altogether, to purporting to prohibit class treatment in contracts that have predispute arbitration provisions (in effect, making the "price" of an arbitration clause the lender's willingness to potentially face classwide arbitration), to making no substantive changes at all.
The recent appointment of Richard Cordray to head the CFPB, during what may or may not have been a congressional "recess," may increase the confusion further, particularly as the validity of any regulations may depend, in part, upon the validity of that appointment. In any event, prudent companies in the consumer arena should monitor CFPB releases regarding its study and report process, paying particular attention to opportunities to provide input and empirical information. Because the resulting regulatory or rulemaking efforts may well provide the equivalent of a congressional or regulatory reexamination of the holdings in Concepcion and CompuCredit, companies should continuously monitor events affecting their arbitration clauses.
Jones Day's Consumer Financial Products & Services team advises clients regarding the issues discussed in this Alert, including the ongoing development of arbitration clauses as a result of the Concepcion and CompuCredit decisions.
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