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Studies Underway Pointing to Tighter Limits on Contract Arbitration

Wednesday, May, 23, 2012

For the past decade or so, corporations and banks have maintained that mandatory contract arbitration clauses, which prevent class-action cases, are the preferred way to deal with customer complaints. The continued existence of mandatory arbitration clauses is now possibly facing the axe of regulators such as the Securities and Exchange Commission and the Consumer Financial Protection Bureau. These two groups are currently conducting studies to determine if consumers are being exploited by these clauses. They may ban or limit them accordingly.

Legal Arbitration Prevents Class Action


The core issue of mandatory arbitration is that consumers are usually obligated to pursue their complaints individually and waive their rights to class action. The tendency of the SEC and the CFPB is already to arbitrarily enforce limits or remove these waivers on a case-by-case basis. An example of this growing trend happened just this February, when the SEC compelled The Carlyle Group to pull mandatory arbitration clauses from its proposed public offerings.


The essential dispute over enforced arbitration is that companies insist that it simplifies the legal process of complaints and prevents frivolous and expensive class-action suits. On the other hand, consumer groups claim that it limits damage awards, especially when a particular complaint is a widespread, rather than isolated consumer issues. According to Elizabeth Warren, a former Obama administration advisor and continued critic of mandatory arbitration, “The data suggest, however, that it is Darth Vader’s Death Star -- the Empire always wins.”

Attorneys General Opposing Mandatory Financial Arbitration


Along with the CFPB and the SEC, many current and retired state attorneys general oppose mandatory contract arbitration. Richard Cordray, former attorney general for Ohio, openly opposes class action waivers. According to a representative of the advocacy group “Public Justice,” most attorneys general believe that the practice of enforced arbitration is contrary to the consumers' interest.