Does the Consumer Financial Protection Bureau have the power to trump theU.S. Supreme Court?
That's the intriguing question raised by a seemingly routine announcement last week that the watchdog agency is seeking public comments on "how consumers and financial services companies are affected by arbitration and arbitration clauses."
"Arbitration clauses are found in many contracts for consumer financial products," the bureau's director, Richard Cordray, said in a statement. "We want to learn how arbitration clauses affect consumers, and how effective arbitration is in resolving consumers' issues."
He added: "This inquiry will help the bureau assess whether rules are needed to protect consumers."
At first glance, it would appear that the Consumer Financial Protection Bureau could do little regarding arbitration clauses, which forbid people from suing businesses or joining class-action lawsuits.
The Supreme Court ruled in a 5-4 decision last year that businesses — phone companies, credit card issuers, cable operators — can include arbitration clauses in their service contracts. The ruling specifically involved AT&T but applies to all companies in all industries.
Generally speaking, businesses prefer arbitration because settlements are limited and because professional arbitrators, whose fees are typically paid by the company in a dispute, tend to favor businesses. It's a classic example of not biting the hand that feeds.
A 2007 report by Public Citizen found that, over a four-year period, arbitrators sided with credit card companies 94% of the time in disputes with California consumers.
Consumer advocates have long argued that it's unfair to deny people the right to sue or to band together in class actions, which are often the only effective way of addressing relatively small claims.
So if the Consumer Financial Protection Bureau comes to the same conclusion, does it have the power to do anything about it?
The answer, it seems, is yes.
Section 1028 of the Dodd-Frank Act, the financial-reform bill signed into law by President Obama in 2010, gives the bureau explicit authority to study use of arbitration clauses related to financial products and services.
The bureau "may prohibit or impose conditions or limitations on the use" of arbitration clauses if it determines that restricting such provisions "is in the public interest and for the protection of consumers," the law says.
A spokeswoman for the bureau declined to comment.
But lawyers who follow arbitration matters say it looks like the language of Dodd-Frank does indeed empower the bureau to ban arbitration clauses for certain contracts, regardless of past Supreme Court rulings.
"It's a whole new ballgame, at least for consumer financial services," said Christine Hines, consumer and civil justice counsel for Public Citizen.
In other words, the bureau could forbid banks, credit card companies and issuers of prepaid gift cards from including arbitration clauses in their contracts. Phone and cable companies would still be able to block customers from filing lawsuits because they don't offer financial services.
"It would affect what the Supreme Court has said in the past, for sure," Hines said. "It would eliminate a huge segment of arbitration clauses from consumer contracts."
Jeffrey Keller, a San Francisco attorney who specializes in consumer-protection cases, said last year's high court ruling focused on the Federal Arbitration Act of 1925, which the justices said preempts state courts from striking down class-action bans.
The Consumer Financial Protection Bureau's authority over arbitration clauses comes from a more recent statute, he said, and that allows the agency to supersede the Supreme Court.
Deepak Gupta, an appellate lawyer in Washington who previously worked at the bureau, agreed with this assessment.
"At the end of the day, Congress gets to overrule the Supreme Court with a new statute," he said.
All this isn't to say that a ban on arbitration clauses for credit cards, checking accounts and mortgages is a done deal. Gupta said bureau officials are approaching the matter with an open mind.
But considering that various state and federal courts have found that arbitration clauses are unfair to consumers, it's not much of a stretch to think that once all the facts are in, bureau officials will recognize a need to act.
And that could represent a turning point for consumers who have long had to stomach take-it-or-leave-it contracts from financial firms.
No one's saying arbitration is a bad thing. It's an option that should certainly be on the table for dispute resolution.
But it shouldn't be the only option. And it shouldn't be solely up to businesses to make that call.
Nor the Supreme Court, for that matter.
David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to firstname.lastname@example.org.