Examining Mandatory Arbitration in Financial Service Products (U.S. Senate Committee on Banking, Housing, and Urban Affairs)

Hearing	Examining Mandatory Arbitration in Financial Service Products
Committee	U.S. Senate Committee on Banking, Housing, and Urban Affairs
Date	March 8, 2022

 

Hearing Takeaways:

• Mandatory Arbitration Agreements: The hearing focused on the use of mandatory arbitration agreements in financial service product contracts. These agreements bind financial institutions and consumers to make use of arbitration (instead of litigation) to resolve disputes.
• Views of Opponents of Mandatory Arbitration Agreements in Financial Service Products: Committee Democrats, Mr. Bland, Mr. Gregg, and Prof. Gilles contneded that mandatory arbitration agreements undermined the ability of consumers to pursue claims against companies and financial institutions for wrongdoing. They stated that these agreements were often hidden in consumer contracts in order disadvantage consumers. They argued that consumers ought to be able to decide whether they would bring their claims against a financial institution or company via arbitration or via litigation (including via class action litigation). Of note, Full Committee Chairman Sherrod Brown (D-OH) mentioned how he had introduced the Arbitration Fairness for Consumers Act, which would ban the use of mandatory arbitration clauses in consumer contracts.
  • Prevalence of Mandatory Arbitration Agreements in Consumer Contracts: The opponents of mandatory arbitration agreements raised concerns with how these agreements were present in numerous consumer contracts. Mr. Gregg noted how the Center for Progressive Reform had found that mandatory arbitration clauses were present in 44 percent of checking account contracts, 53 percent of credit card contracts, 83 percent of prepaid credit card contracts, 98 percent of tuition agreements at for-profit colleges, and 99 percent of payday loan agreements. The opponents of these agreements questioned whether it was feasible for consumers to choose to avoid contracts containing mandatory arbitration agreements, especially given the market dominance of certain companies that made use of the agreements.
  • Unfairness of Arbitration Proceedings: The opponents of mandatory arbitration agreements raised concerns regarding the fairness of arbitration proceedings and asserted that these proceedings favored corporations and financial institutions. They noted how mandatory arbitration clauses often permitted the corporation to select the arbitrator that would hear a dispute and how these arbitrators tended to have backgrounds as industry defense attorneys. They stated that the aforementioned factors led consumers to have low success rates in arbitration proceedings. They further argued that it was often impractical for consumers to bring claims through the arbitration process given the low dollar amounts at stake. They contended that enabling consumers to engage in class action litigation would provide consumers with an avenue for restitution for low dollar claims.
  • Inability to Hold Companies Accountable: The opponents of mandatory arbitration agreements stated that these clauses prevented Americans from holding corporations accountable for overcharges and fraudulent activities. They raised concerns that the closed nature of arbitration cases (and decisions by extension) enabled corporations to hide their bad behaviors from the general public. Prof. Gilles also contended that corporations relied upon the unwillingness of consumers to pursue arbitration in order to evade legal responsibility for their actions. Chairman Brown suggested that Wells Fargo’s use of mandatory arbitration clauses likely delayed regulators and law enforcement bodies from discovering the bank’s illegal account opening practices.
  • Criticism of U.S. Supreme Court Jurisprudence on Mandatory Arbitration Agreements: Mr. Bland and Mr. Gregg criticized the U.S. Supreme Court’s jurisprudence on mandatory arbitration agreements and asserted that this jurisprudence was inconsistent with Congressional intent. They specifically criticized the U.S. Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion and stated that this decision had made it easy for corporations to enforce mandatory arbitration clauses, regardless of how fair they were. They highlighted how the decision enabled the federal preemption of state laws that guaranteed consumers access to class action lawsuits. Mr. Bland noted how courts had previously sought to determine the fairness of mandatory arbitration clauses prior to this decision. Mr. Gregg also stated that the Federal Arbitration Act (FAA) was meant to be limited in scope to arbitration agreements between parties of “roughly” equal bargaining power and to be procedural in nature. He asserted that the rejection of the more limited interpretation of the FAA had provided corporations with “near free reign” to make use of mandatory arbitration agreements.
• Views of Supporters of Mandatory Arbitration Agreements in Financial Service Products: Full Committee Ranking Member Patrick Toomey (R-PA), Prof. Zywicki, and Mr. Lehotsky expressed support for mandatory arbitration agreements. They asserted that arbitration was a fair and cost-effective process for resolving disputes outside of courts and stated that arbitration generally led to better outcomes for consumers than litigation. They remarked that the banning of arbitration agreements in consumer financial product contracts would harm consumers and undermine the freedom of contract. They contended that trail lawyers and certain liberal advocacy groups were advocating for the elimination of mandatory arbitration agreements for their own financial gain.
  • Lack of Concern Among Consumers Regarding Mandatory Arbitration Agreements: The supporters of mandatory arbitration agreements argued that the existence of such agreements was of low concern for consumers and stated that consumers could easily seek out financial service products that did not contain mandatory arbitration clauses. Ranking Member Toomey cited a 2015 U.S. Consumer Financial Protection Bureau (CFPB) study that found that 84 percent of credit card issuers and 92 percent of banks offering checking accounts do not use mandatory arbitration agreements in their contracts for those products.
  • Impact on the Availability of Financial Services Products for Consumers: The supporters of mandatory arbitration agreements stated that these agreements enabled companies and financial service providers to offer cheaper products with more benefits to consumers because the agreements limited litigation liabilities. 
  • Fairness of the Arbitration Process: Prof. Zywicki and Mr. Lehotsky highlighted that the arbitration process was subject to strict rules and case law that ensured fairness. Mr. Lehotsky noted how the American Arbitration Association rules required that arbitrators must be neutral, limit the fees that consumers must pay to $200 (which was less than the filing fee in federal court), empower the arbitrator to order any necessary discovery, and require that damages (including punitive damages and attorney’s fees) be available to the same extent as in court. He further stated that courts provide an additional layer of oversight with respect to the arbitration process and indicated that courts can and do intervene when arbitration provisions were unfair or unconscionable. He noted that this intervention could involve the invalidation of arbitration agreements.
  • Consumer Success Rates in Arbitration: The supporters of mandatory arbitration agreements asserted that multiple studies had demonstrated that consumers fared better in the arbitration process than in the litigation process in terms of success rates and award amounts. Prof. Zywicki also highlighted how companies and financial institutions had strong financial and reputational incentives to provide refunds to customers that brought claims against them. He stated that this dynamic meant that most claims made against companies tended to be resolved before arbitration was needed. He further commented that this dynamic suggested that consumers that pursued arbitration often had weaker claims, which led to lower success rates.
  • Impact of Proposals to Ban Mandatory Arbitration Clauses on Access to Arbitration: Ranking Member Toomey argued that restricting mandatory arbitration agreements would likely lead consumers to lose access to arbitration. He elaborated that the Independent Community Bankers Association had claimed that it would no longer be economical for community banks to subsidize arbitration if they were forced to carry the high costs from increased class action lawsuits.

Hearing Witnesses:

1. Mr. Paul Bland, Executive Director, Public Justice
2. Mr. Remington A. Gregg, Counsel for Civil Justice and Consumer Rights, Public Citizen
3. Prof. Todd J. Zywicki, George Mason University Foundation Professor of Law, George Mason University Antonin Scalia School of Law
4. Mr. Steven Lehotsky, Lehotsky Keller LLP, on behalf of the U.S. Chamber of Commerce
5. Prof. Myriam Gilles, Paul R. Verkuil Research Chair and Professor of Law, Benjamin N. Cardozo School of Law

Member Opening Statements:

Full Committee Chairman Sherrod Brown (D-OH):

• He remarked that mandatory arbitration (also known as forced arbitration) was a “powerful tool” that large corporations used to take away people’s choices and to take advantage of customers and workers.
• He discussed how corporations often hid mandatory arbitration clauses in their financial service product contracts and noted how the vast majority of consumers agreed to these clauses without reading them.
  • He commented that most consumers could not refuse contracts with mandatory arbitration clauses if they want to obtain traditional financial service products, such as loans and bank accounts.
• He stated that mandatory arbitration clauses prevented Americans from holding corporations accountable for overcharges and fraudulent activities.
• He mentioned how studies have demonstrated that consumers do not understand the consequences of agreeing to mandatory arbitration clauses.
  • He attributed this lack of understanding to the legally dense natures of the clauses and the contracts that they reside within.
• He further noted how mandatory arbitration clauses often permitted the corporation to select the arbitrator that will hear a dispute, which he commented unfairly advantaged corporations over consumers in arbitration disputes.
• He referenced an Economic Policy Institute report that had found that corporations that took consumers to arbitration won 93 percent of the time.
  • He noted however that the same report had found that consumers that took corporations to arbitration for restitution only won 9 percent of the time.
• He remarked that the fact that corporations won the vast majority of arbitrations against consumers was unsurprising because of the aforementioned advantages that corporations possessed.
• He raised concerns that the closed nature of arbitration cases enabled corporations to hide their bad behaviors from the public.
  • He suggested that Wells Fargo’s use of mandatory arbitration clauses likely prevented regulators and law enforcement bodies from discovering the bank’s illegal account opening practices earlier.
• He mentioned how he had introduced the Arbitration Fairness for Consumers Act, which would ban the use of mandatory arbitration clauses in consumer contracts.

Full Committee Ranking Member Patrick Toomey (R-PA):

• He explained that mandatory arbitration agreements were contracts in which parties agreed to use arbitration (instead of litigation) to resolve disputes.
  • He noted how mandatory arbitration agreements were common for checking accounts and credit cards.
• He called arbitration a fair and cost-effective process for resolving disputes outside of courts and stated that arbitration generally led to better outcomes for consumers than litigation.
• He discussed how arbitration agreements within the consumer financial products space had “come under attack” in recent years and mentioned how the CFPB had issued a 2017 rule that would have banned the use of such agreements in consumer financial product contracts.
  • He indicated however that Congress had overturned this rule through a Congressional Review Act (CRA) resolution.
  • He further noted that Congressional Democrats had subsequently introduced legislation to reinstate the ban on such agreements in consumer financial product contracts.
• He remarked that the banning of arbitration agreements in consumer financial product contracts would harm consumers, undermine the freedom of contract, and financially benefit trial lawyers.
  • He asserted that such a ban would lead aggrieved consumers involved in disputes to receive less money and to receive that money less quickly.
• He called the proposed bans of arbitration agreements in consumer financial product contracts paternalistic and stated that consumers that did not want to sign such agreements did possess other options.
  • He mentioned how the CFPB had found in 2015 that 84 percent of credit card issuers and 92 percent of banks offering checking accounts do not use mandatory arbitration agreements in their contracts for those products.
• He also stated that multiple studies had demonstrated that consumers fared better in the arbitration process than in the litigation process in terms of outcomes.
• He remarked that arbitration was more efficient and cost-effective at resolving disputes than litigation and highlighted how consumers did not need to pay lawyers to represent them in arbitration proceedings.
  • He noted how consumers that represented themselves in arbitration proceedings tended to fare better than consumers that hired lawyers to represent them in arbitration proceedings.
• He contended that restricting arbitration agreements would likely drive up the prices of financial services and deprive consumers of the ability to access arbitration.
  • He elaborated that the Independent Community Bankers Association had claimed that it would no longer be economical for community banks to subsidize arbitration if they were forced to carry the high costs of increased class action lawsuits.
• He noted that while trail lawyers contended that class action lawsuits were necessary to punish or deter wrongdoing, he stated that financial institutions already possessed strong economic incentives to not harm their customers.
  • He elaborated that these economic incentives to not harm customers included market competition and the prospect of legal penalties.
• He remarked that the ultimate beneficiaries of efforts to ban arbitration agreements would be trial lawyers rather than consumers.
• He further stated that increasing the prevalence of class action lawsuits would benefit liberal advocacy groups and noted how some class action lawsuit settlements required payments to non-profit organizations, despite the fact that the non-profit organizations were not aggrieved parties. 
  • He indicated that two of the witnesses at the hearing were from non-profit organizations that frequently sought out such payments and questioned whether these witnesses were truly disinterested parties on the question of banning mandatory arbitration agreements.

Witness Opening Statements:

Mr. Paul Bland (Public Justice):

• He noted how Congress had previously banned forced arbitration clauses for certain types of financial products and asserted that these bans suggested that such clauses did not actually benefit consumers.
  • He recounted how Congress had previously banned mandatory arbitration clauses in military payday loans as part of the Military Lending Act and in mortgage agreements as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
  • He also mentioned how Congress had recently passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, which further suggested that Congress understood that arbitration was an inferior means of obtaining justice as compared to litigation.
• He remarked that the Arbitration Fairness for Consumers Act would benefit consumers through extending bans on mandatory arbitration clauses to more financial services.
• He discussed how many lenders were using mandatory arbitration clauses to evade responsibility for their failures to fix damaging information on the credit reports of identity theft victims.
• He then mentioned how New Mexico had recently enacted a cap on payday loan interest rates and noted that the state could not address forced arbitration clauses in payday loan agreements because U.S. Supreme Court decisions have allowed for federal laws to preempt state laws.
  • He commented that this situation would likely render New Mexico’s cap on payday loan interest rates toothless.
• He discussed how the U.S. Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion had made it easy for corporations to enforce mandatory arbitration clauses, regardless of how fair they were.
  • He noted how courts had previously evaluated the fairness of mandatory arbitration clauses prior to this decision.
• He disputed the assertion that arbitration provided consumers with better outcomes relative to litigation and testified that this assertion did not align with his first-hand experience as an attorney.
• He attributed the lower success rate of consumers in the arbitration process to the fact that most arbitrators were industry defense lawyers.
  • He commented that these arbitrators were thus less likely to rule in favor of consumers than juries.

Mr. Remington A. Gregg (Public Citizen):

• He remarked that mandatory arbitration clauses undermined the rights of consumers and prevented them from seeking remedies for widespread and/or egregious misconduct.
  • He commented that these clauses deprived consumers of the choice regarding how they wish to hold wrongdoers accountable for such misconduct.
• He mentioned how a 2015 study had found that most consumers were unaware that they were subject to mandatory arbitration clauses and that consumers falsely assumed that these clauses still provided them with the safeguards of the judicial system.
• He noted how the U.S. Supreme Court’s AT&T Mobility LLC v. Concepcion decision had held that corporations could use mandatory arbitration provisions in consumer and employment contracts to ban class action lawsuits and that state contract laws would be preempted to the extent that the state laws deem class action lawsuit bans unconscionable.
  • He commented that this decision had enabled corporations to include mandatory arbitration clauses into their contracts “with impunity.”
• He remarked that the U.S. Supreme Court’s AT&T Mobility LLC v. Concepcion decision and other modern day mandatory arbitration jurisprudence did not reflect Congressional intent.
  • He stated that the FAA was meant to be limited in scope to arbitration agreements between parties of “roughly” equal bargaining power and to be procedural in nature.
• He asserted that the rejection of the more limited interpretation of the FAA had provided corporations with “near free reign” to make use of mandatory arbitration clauses.
• He noted how arbitrators were neither required to publicize their decisions nor explain their reasoning for their decisions.
  • He commented that this dynamic left consumers, workers, and small businesses vulnerable in cases involving workplace discrimination, unfair and deceptive business practices, and antitrust violations.
• He also highlighted how consumers, workers, and small businesses had low success rates in arbitration cases and how these parties tended to have limited appeal rights when they lost their cases.
• He then discussed how mandatory arbitration clauses were now included in all contracts.
  • He referenced Center for Progressive Reform findings that mandatory arbitration clauses were present in 44 percent of checking account contracts, 53 percent of credit card contracts, 83 percent of prepaid credit card contracts, 98 percent of tuition agreements at for-profit colleges, and 99 percent of payday loan agreements.
• He contended that consumers (rather than wrongdoers) ought to be able to choose how to hold bad actors accountable.
• He highlighted how many consumers had low dollar claims and called it impractical for these consumers to bring these claims in arbitration.
  • He referenced a CFPB study that had found that 422 consumer class action settlements between 2008 and 2012 had garnered more than $2 billion in relief for consumers and $644 million in in-kind relief.
• He partially attributed the “outrageous” loss rate that consumers faced in arbitration cases to the fact that companies tended to repeatedly use the same arbitrators in their disputes.
  • He also raised concerns over the lack of gender, racial, and socioeconomic diversity amongst arbitrators.
• He expressed the support of his organization, Public Citizen, for the Arbitration Fairness for Consumers Act and stated that the legislation would restore the ability of consumers to decide how to hold parties accountable for systemic wrongdoing with regard to financial services and products.
  • He commented that this legislation would increase accountability and transparency throughout the consumer financial industry.
• He also noted how 84 percent of the American public supports federal legislation to end the practice of arbitration agreements and added that surveyed Republicans had opposed this practice more than surveyed Democrats.

Prof. Todd J. Zywicki (George Mason University Antonin Scalia School of Law):

• He remarked that consumers tended to make well-informed decisions when shopping for products and asserted that the U.S. should only second guess these decisions in select circumstances.
  • He elaborated that these circumstances might involve situations where competition does not exist or where consumers do not understand what they are shopping for (which could cause them to harm themselves).
• He stated that most consumers did not care significantly about the ability to bring lawsuits to resolve disputes and suggested that it was not necessary that consumers care about this ability.
  • He highlighted how the U.S. financial service products market was very competitive and commented that it was very easy for consumers to find products that would enable them to bring lawsuits if they desired.
• He remarked that many consumers choose financial service products containing mandatory arbitration clauses because these clauses enable the products to be priced lower and provide more benefits.
• He stated that most consumers felt that they possessed sufficient redress for wrongdoings committed by financial services providers and could easily complain or switch financial services products if they did not obtain their desired outcomes.
  • He mentioned how his research of records from a Texas regional bank had found that consumers had received full refunds in over two-thirds of their complaints.
• He remarked that banks tended to be responsive to consumer complaints out of a desire to maintain the good will of existing customers.
• He then discussed how arbitration had clear rules and procedures and stated that there existed a “substantial” body of case law surrounding arbitration that ensured that it was a fair and effective process.
  • He highlighted how the arbitration process often included provisions that provided for minimum recovery for prevailing consumers in disputes.
• He stated that consumers were less able to pursue litigation on an individual basis and noted how most attorneys did not find it economical to accept individual complaints.
• He indicated that consumers did not need to obtain attorneys to pursue the arbitration process, which made arbitration more economical to pursue.
• He lastly contended that class action lawsuits provided limited or no relief to consumers and primarily benefited class action attorneys.

Mr. Steven Lehotsky (Lehotsky Keller LLP, On Behalf of the U.S. Chamber of Commerce):

• He remarked that the U.S. Chamber of Commerce strongly supported arbitration because it was a fairer, less complicated, and lower cost alternative to the U.S.’s “overburdened” court system.
• He discussed how the arbitration process used impartial decision makers and was subject to strict fairness rules.
  • He noted how the American Arbitration Association rules required that arbitrators must be neutral, limit the fees that consumers must pay to $200 (which was less than the filing fee in federal court), empower the arbitrator to order any necessary discovery, and require that damages (including punitive damages and attorney’s fees) be available to the same extent as in court.
• He further stated that courts provided an additional layer of oversight with respect to the arbitration process and indicated that courts can and do intervene when arbitration provisions were unfair or unconscionable.
  • He noted that this intervention could involve the invalidation of arbitration agreements.
• He mentioned how empirical studies had found that consumers did as well or better in arbitration as compared to litigation in terms of success rates and award amounts.
• He stated that arbitration was much simpler and less costly than court litigation in terms of money, time, and effort.
  • He asserted that all parties benefit from the reduced expense and complexity of arbitration, which enabled consumers to resolve their claims more quickly and seek redress of claims that could not be practically brought in court.
• He mentioned how the CFPB had issued a July 2017 rule that would have effectively limited the use of all arbitration agreements in disputes between consumers and providers of financial products and services.
  • He commented that this rule would have left consumers entirely dependent on the willingness of class action lawyers to take on and effectively litigate their disputes, even though most consumer complaints were individualized and could not be litigated as class action lawsuits.
• He asserted that the July 2017 CFPB rule would have harmed consumers and businesses and only benefited class action lawyers.
  • He noted that while the July 2017 CFPB rule had purported to permit some continued use of arbitration through targeting only arbitration agreements that specified individualized dispute resolution and prohibited class actions, he contended that this rule would have led businesses to no longer offer arbitration options for dispute resolution over cost concerns.
• He concluded that efforts to eliminate bilateral pre-dispute arbitration agreements would impose “significant” costs on providers of consumer financial service products.

Prof. Myriam Gilles (Benjamin N. Cardozo School of Law):

• She remarked that every American was likely subject to a mandatory arbitration clause in some aspect of their life as a consumer and stated that these clauses prevented Americans from seeking redress for instances of privacy violations, product liability, data breaches, and fraud.
  • She noted how mandatory arbitration clauses were often “buried in the fine print” of “take it or leave it” contracts.
• She disputed the contention that arbitration was better, faster, and cheaper for consumers and stated that “every reputable study” from neutral parties on the topic of arbitration had concluded that a very tiny percent of consumers decided to arbitrate their claims.
  • She attributed the low number of consumers bringing arbitration claims to the fact that most consumers did not know that they had signed away their rights to pursue jury trials and join class action lawsuits.
• She also asserted that consumers lacked the ability to opt-out of mandatory arbitration agreements in many instances given the market dominance of certain companies and products.
• She remarked that consumers understood that they were at a disadvantage in the arbitration process, which made them less likely to pursue arbitration.
  • She contended that corporations relied upon the unwillingness of consumers to pursue arbitration in order to evade legal responsibility for their actions.
• She asserted that mandatory arbitration agreements were undermining U.S. laws by making it more difficult to detect violations of the law.
• She contended that the Arbitration Fairness for Consumers Act was necessary in order to preserve the rights of U.S. consumers and to restore their faith in the law and the economy.

Congressional Question Period:

Full Committee Chairman Sherrod Brown (D-OH):

• Chairman Brown stated that companies tended to hide mandatory arbitration clauses “deep in the fine print” of their customer contracts. He mentioned how a 2015 study had found that consumers did not understand arbitration agreements and how such agreements limited their ability to access the court system. He asked Mr. Bland to provide his opinion on whether consumers understood mandatory arbitration clauses.
  • Mr. Bland asserted that the survey that Chairman Brown had referenced was “clearly correct.” He mentioned how he had represented “hundreds” of consumers as an attorney and testified that he had never had a client that knew about the mandatory arbitration clauses when they had initially brought their lawsuit. He also stated that mandatory arbitration clauses were written in ways that were “unreadable” to consumers while other communications from companies were written in ways that were more straightforward. He further mentioned how the CFPB had found that 95 percent of consumers that read mandatory arbitration clauses could not understand the contents of the clauses.
• Chairman Brown then discussed how arbitration was a confidential proceeding that occurred outside of the public’s view, which meant that third parties could not see what claims were being brought through arbitration and the decisions being made in arbitration cases. He asked Prof. Gilles to discuss the drawbacks and benefits of using non-public arbitration to resolve claims. He also asked Prof. Gilles to address whether non-public arbitration cases tended to favor large corporations through ensuring that patterns of bad practices were never made public.
  • Prof. Gilles highlighted how arbitration cases were non-transparent and noted how arbitrators did not need to issue written decisions or even follow the law in making their decisions. She further mentioned how arbitrators faced low possibilities of having their decisions appealed. She stated that the aforementioned dynamics raised concerns over the fairness and neutrality of the arbitration system. She then recounted how Wells Fargo had opened fake accounts on behalf of their customers and noted how customers had been aware of the problem four years before it received national attention. She attributed this delay in awareness to Wells Fargo’s use of mandatory arbitration clauses to shield itself from bad publicity.
• Chairman Brown remarked that mandatory arbitration clauses advantaged large corporations over working families and consumers. He asked Mr. Gregg to indicate whether corporations were forcing consumers into arbitration in order to look out for the best interests of consumers or to look out for their own best interests.
  • Mr. Gregg remarked that corporations should not be able to decide how consumers could lodge complaints against them. He questioned the wisdom of permitting potential wrongdoers to determine how claims filed against them would be decided. He stated that consumers ought to be able to choose how they wish to bring their claims against a corporation for wrongdoing. He also disputed the assertion that consumers could simply choose to not deal with companies with mandatory arbitration clauses in their contracts. He noted how nearly all payday loan contracts contained mandatory arbitration clauses and added that Black consumers used payday loans significantly more than other groups of consumers. He commented that this situation enabled payday lenders to avoid accountability for their actions.

Full Committee Ranking Member Patrick Toomey (R-PA):

• Ranking Member Toomey asked Prof. Zywicki to respond to the assertion that consumers lacked access to contracts without mandatory arbitration clauses.
  • Prof. Zywicki remarked that consumers could easily access financial products whose contracts did not contain mandatory arbitration clauses. He noted how the U.S. had thousands of banks and credit card issuers and indicated that only a small percent of these financial service product providers required arbitration as part of their terms and conditions.
• Ranking Member Toomey also noted how consumers only pursued arbitration in a tiny fraction of cases. He asked Prof. Zywicki to indicate whether this low level of pursuit of arbitration claims was attributable to the tendency of companies and financial institutions to remedy consumer complaints on their own.
  • Prof. Zywicki stated that Ranking Member Toomey was correct that most companies and financial institutions would remedy complaints against them before consumers would need to pursue arbitration. He asserted that a dearth of consumer arbitration claims did not mean that the U.S. arbitration system was failing consumers. He mentioned how his research had found that consumers that complained to companies tended to receive full refunds. He added that this finding suggested that consumers who did not receive full refunds following complaints might have weaker claims, which could result in them being more prone to lose in arbitration proceedings.
• Ranking Member Toomey then noted how Prof. Zywicki’s testimony had asserted that a complete prohibition of mandatory arbitration clauses would have significant second order effects, including increased costs for financial products and services. He asked Prof. Zywicki to elaborate on this assertion.
  • Prof. Zywicki remarked that limiting the ability of consumers to just use class action lawsuits for pursuing their claims against companies would not benefit consumers. He also mentioned how class action lawyers often brought “no-harm” class action lawsuits under federal laws that allowed for statutory minimum damages, even if consumers have not suffered real harm. He stated that increasing class action litigation without providing consumers with any benefits would ultimately harm consumers as they would face higher prices for products and services. He further asserted that the CFPB’s analysis of the prohibition of mandatory arbitration causes was “completely flawed” and expressed doubts regarding the CFPB’s view that a short-term suspension of mandatory arbitration clauses would have no price effect.
• Ranking Member Toomey then asked Mr. Lehotsky to address whether consumers were capable of assessing which financial service products were in their best interest.
  • Mr. Lehotsky remarked that consumers were capable of assessing which financial service products were in their best interest.

Sen. Elizabeth Warren (D-MA):

• Sen. Warren noted that large corporations and banks inserted mandatory arbitration clauses into the fine print of their contracts. She indicated that these clauses prevented people that experienced wrongdoing from the companies from pursuing their claims in court. She stated that these people instead had to pursue their claims in a “secret tribunal” where their claims would have low success rates. She questioned the impartiality of arbitrators given how they were paid by companies. She also alleged that arbitrators would not be selected to hear future cases if they ruled in favor of consumers too often. She then posited a hypothetical scenario in which a consumer opened a checking account with a bank that involved a contract without a mandatory arbitration clause. She posited the bank in this scenario cheated the consumer out of $30 and refused to rectify the tort. She asked Prof. Gilles to indicate whether the consumer in this scenario was likely to find an attorney, pay a filing fee, and go to court in order to recover their $30.
  • Prof. Gilles answered no.
• Sen. Warren then posited that the consumer in her hypothetical scenario did have a mandatory arbitration clause in their checking account contract. She asked Prof. Gilles to indicate whether the consumer in this new scenario would likely do the necessary paperwork and attend an arbitration hearing in order to recover their $30.
  • Prof. Gilles answered no.
• Sen. Warren commented that most people would not pursue low dollar claims against a company or bank, regardless of whether they were subject to a mandatory arbitration clause. She then posited that the bank in her hypothetical scenario had cheated about 35 million customers. She asked Prof. Gilles to indicate whether these millions of customers would be able to band together to sue the bank in a cheap and efficient fashion if the bank did not include mandatory arbitration clauses in its contracts.
  • Prof. Gilles stated that the customers in this new scenario could bring a class action lawsuit against the bank. She explained how class action lawsuits aggregated claims that were too small on their own to bring individually whether in court or arbitration settings. She stated that class action lawsuits allowed for a pooling of resources of consumers so that they could more efficiently litigate against a common and more well-resourced adversary.
• Sen. Warren noted that class action lawsuits provided aggrieved consumers with some redress for their damages. She asked Prof. Gilles to discuss how the class action lawsuit in her hypothetical scenario would impact the bank.
  • Prof. Gilles remarked that the class action lawsuit should deter the bank from engaging in future misconduct.
• Sen. Warren then posited that the bank in her hypothetical scenario did include mandatory arbitration clauses in their contracts with customers. She asked Prof. Gilles to indicate whether these millions of customers would now be able to ban together to sue the bank for damages in a cheap and efficient manner.
  • Prof. Gilles answered no.
• Sen. Warren asked Prof. Gilles to discuss how the inability of aggrieved consumers to bring a class action lawsuit in her hypothetical scenario would impact the bank.
  • Prof. Gilles remarked that the inability of aggrieved consumers to bring a class action lawsuit against the bank would enable the bank to act with impunity. She noted that while these banks could be subject to government enforcement actions, she highlighted how government enforcement agencies had limited resources to monitor all market actions. She commented that this dynamic would result in banks not being deterred from engaging in future misconduct.
• Sen. Warren remarked that mandatory arbitration clauses could enable a bank to cheat their customers without significant pushback. She disputed the assertion from corporations, banks, and their trade associations that mandatory arbitration clauses were fair and efficient. She stated that mandatory arbitration clauses enable corporations and banks to escape responsibility from customers for wrongdoing. She criticized Congress for enabling the continued use of mandatory arbitration clauses in consumer contracts and called for outlawing the practice.

Sen. Tina Smith (R-MN):

• Sen. Smith expressed concerns with the secret nature of arbitration proceeding outcomes. She stated that this secret nature reduced the likelihood that companies will actually change their bad behavior in the event that a consumer won an arbitration proceeding against the company. She further commented that this secret nature hindered other companies engaging in similar bad behaviors in evaluating their practices. She asked Prof. Gilles to discuss how the secretive nature of arbitration proceedings could help to perpetuate unfair corporate practices.
  • Prof. Gilles remarked that the secret nature of the outcomes of arbitration proceedings were problematic for all of the reasons stated by Sen. Smith. She further stated that lawyers had cleverly drafted mandatory arbitration clauses to prevent arbitrators from entering awards that would change policy. She noted how most mandatory arbitration clauses stated that arbitrators could only resolve the claims of the individual. She stated that arbitration claims were single filed, siloed, and secret, which meant that they were fundamentally different from claims filed in the court system.
• Sen. Smith expressed concerns over how arbitration findings had no implications beyond the case under consideration and were not made public. She commented that these features undermined the goal of justice.
  • Prof. Gilles contended that the arbitration system was inefficient.
• Sen. Smith then noted how the Pew Charitable Trusts had found that African Americans in her state of Minnesota were twice as likely to have a payday lender near their home as compared to the rest of the population. She stated that payday loans often trapped borrowers in a “cycle of debt” and called these loans predatory. She noted how the CFPB had found that 98.5 percent of payday lenders imposed arbitration on borrowers. She expressed concerns that payday loan borrowers would not have the requisite money or time to challenge wrongdoing from payday lenders through the arbitration process. She asked Mr. Bland to discuss the impact that mandatory arbitration clauses had on lower income borrowers.
  • Mr. Bland remarked that the consequences of mandatory arbitration clauses in payday loan contracts were “devastating” to low-income borrowers. He noted how the vast majority of payday loans were later rolled over and asserted that these loans pushed people towards destitution. He stated that payday lenders relied upon mandatory arbitration clauses in order to circumvent state consumer protection laws.
• Sen. Smith remarked that mandatory arbitration clauses were designed to take advantage of vulnerable populations.

Sen. Chris Van Hollen (D-MD):

• Sen. Van Hollen recounted the story of an 87-year-old woman that had a false check made out in her name and noted that this false check had caused the woman financial ruin. He indicated that the banks that were involved in this false check transaction have failed to provide relief to the woman. He noted that this woman could not pursue her claim against the banks in court because her checking account contract contained a mandatory arbitration clause. He asked Mr. Bland to discuss how this situation demonstrated the unfairness of mandatory arbitration clauses.
  • Mr. Bland discussed how arbitrators tended to be corporate or bank defense lawyers and commented that these arbitrators would be less inclined to rule in favor of consumers than trial juries. He also noted that arbitration proceedings had more limited discovery processes than jury trials. He further highlighted how many mandatory arbitration clauses included loser-pays provisions, which were not permitted under normal consumer protection laws. He concluded that the woman that Sen. Van Hollen had mentioned would be facing a “rigged” system.
• Sen. Van Hollen remarked that loser-pays provisions in mandatory arbitration clauses create disincentives to bring claims, especially for people representing themselves. He then asked Prof. Gilles to discuss how a court case could better incentivize companies to change their conduct.
  • Prof. Gilles remarked that the prospects of litigation would lead banks to more proactively protect against fraudulent activity and misconduct. She stated that the U.S.’s legal system was public by design in order to deter similarly situated entities from engaging in misconduct. She added that the legal system’s public nature enabled the general public to be made aware of misconduct so that it could better protect itself. She asserted that the deterrence function of litigation was just as important as the compensatory function of litigation.
• Sen. Van Hollen’s expressed agreements with Prof. Gilles. He expressed support for permitting corporations to enter into mandatory arbitration agreements with one another because these corporations tended to have relatively equal power. He stated however that consumers were less able to comprehend mandatory arbitration clauses and were limited in their ability to reject these clauses. He expressed support for banning mandatory arbitration clauses in consumer contracts.

Sen. Catherine Cortez Masto (D-NV):

• Sen. Cortez Masto asked Prof. Gilles to explain adhesion contracts.
  • Prof. Gilles described adhesion contracts as “take it or leave it” contracts with no opportunities for negotiation.
• Sen. Cortez Masto asked Prof. Gilles to indicate how many contracts from banks containing mandatory arbitration clauses constituted adhesion contracts.
  • Prof. Gilles estimated that nearly all contracts from banks containing mandatory arbitration clauses constituted adhesion contracts. She commented that adhesion contracts constituted the most efficient way for banks or other financial services institutions to transmit mandatory arbitration clauses.
• Sen. Cortez Masto discussed how banks tended to have significant leverage in their interactions with customers, which tended to result in consumers being unable to negotiate their contracts with banks. She asked Prof. Gilles to indicate whether consumers could choose another provider of financial services if they did not want to be subject to mandatory arbitration clauses.
  • Prof. Gilles noted how the vast majority of credit card issuers and banks employed mandatory arbitration clauses in their contracts. She commented that the widespread use of mandatory arbitration clauses among credit card issuers and banks was very rational because it enabled these financial services providers to limit their liabilities. She remarked that the widespread inclusion of mandatory arbitration clauses in consumer contracts undermined the assertion that consumers could seek out products that were not subject to mandatory arbitration clauses. She highlighted how every major cellular phone provider in the U.S. included mandatory arbitration clauses in their contracts.
• Sen. Cortez Masto asked Prof. Gilles to confirm that most consumers tended to prioritize paying less for products, which could make them more prone to agree to mandatory arbitration clauses.
  • Prof. Gilles stated that most consumers did not have significant choices with regard to cellular phones, credit cards, and bank accounts. She remarked that low-income groups were likely more vulnerable to using products where mandatory arbitration clauses were ubiquitous.
• Sen. Cortez Masto commented that providing consumers with free choice would involve giving consumers the option to choose either arbitration or courts to resolve their disputes with companies and banks.
  • Prof. Gilles remarked that no one at the hearing was advocating for the elimination of arbitration as a means of resolving consumer disputes with companies and banks. She stated that she simply wanted consumers to be able to choose the manner in which they would resolve their disputes with companies and banks.
• Sen. Cortez Masto expressed agreement with Prof. Gilles’s contention that consumers should be able to choose how they wanted to resolve their disputes with companies and banks. She questioned the previous assertions that arbitration was always in the best interest of consumers. She then remarked that it was more effective to hold financial institutions accountable for their wrongdoing through collective action rather than on a case-by-case basis.
  • Mr. Gregg remarked that the inability of consumers to band together to take collective action against financial institutions engaged in wrongdoing often rendered consumers incapable of vindicating their rights. He noted that while the government will sometimes take enforcement actions against financial institutions for wrongdoing, he asserted that the U.S. could not rely upon the federal government to police all bad actors within the financial services market. He stated that consumers could play a key role in policing the financial services market.

Full Committee Chairman Sherrod Brown (D-OH):

• Chairman Brown called it important for the Committee to continue its work to ban mandatory arbitration agreements for consumer financial products. He stated that banning mandatory arbitration agreements was also important in the securities context.