When Wells Fargo employees met sales goals by creating 3.5 million fake bank and credit card accounts using real customer information, the affected customers were prevented from suing because some fine print in their customer agreements specified that disputes must be settled in arbitration. And when Equifax experienced a massive breach of consumer data, it offered consumers a year of free credit protection -- if they agreed to a contract that included a similar arbitration clause.
Big businesses, including banks and financial institutions, regularly put forced-arbitration clauses in their standard consumer contracts. These are contracts we all have to sign to take part in virtually any transaction, from opening a bank account to getting a cell phone.
Arbitration clauses not only bar consumers from going to court with grievances, but generally prevent class-action lawsuits as well -- which is a big problem, because the limitations of arbitration may leave consumers with no remedies.
The Consumer Financial Protection Bureau (CFPB) passed a rule to stop financial institutions from including arbitration clauses in contracts, but Congress voted in October to undo this rule, so it will once again be difficult or impossible to sue bad banks.
Why arbitration clauses make it hard to get legal remedies
Arbitration clauses require consumers who have grievances -- say, being charged unfair fees or having fake accounts created in their name -- to resolve their disputes before an arbitrator instead of filing a lawsuit. If you've signed an arbitration clause, even one hidden in fine print, the court will dismiss your case if you try to sue.
Arbitration clauses typically prevent groups of plaintiffs from forming class actions. Class actions make it possible for many people with individual claims to join together in one big case against a person or company that has wronged them all. Class actions are filed for a wide variety of grievances, from defective drugs to phone batteries that fail too early.
Often, class actions are formed when the damages done to each individual are too small to merit a separate lawsuit or arbitration. If you're unfairly charged $10, you aren't going to find a lawyer, file a lawsuit or make a claim in arbitration, gather evidence, and go to court or before an arbitrator to try to get your $10 back. Not only would this be a waste of time, but no lawyer would take your case.
But if 50,000 people all lose $10, then lawyers want the case. When class actions are formed, most plaintiffs never go to court. They opt into the class action by mail or by filling out a form to become part of the class. The company may settle and agree to provide a remedy to all class members, and if it doesn't, the court may award damages to members of the class.
Companies want to avoid this accountability, so they include arbitration clauses that prevent class actions from being filed -- which often means no claims are filed at all.
How much do consumers lose out?
Class-action clauses are incredibly common. Around 86% of private student loan contracts, 92% of prepaid credit card agreements, and 88% of mobile phone contracts contain arbitration clauses, according to the CFPB. Banks with arbitration clauses in consumer contracts hold 44% of all FDIC-insured deposits, and credit card issuers covering 53% of the credit market have these clauses in their contracts.
Consumers bound by these classes lose millions of dollars in remedies for potential wrongs.
An average of 32 million consumers are eligible for relief through class actions annually, and over a five-year period, 160 million class members received an estimated $2.7 billion in financial compensation or in-kind remedies. By comparison, just 1,847 arbitration disputes were filed from 2010 to 2012 across six consumer finance markets, and no class actions went to trial. In the few cases that did make it to court, typically less than $1 million in damages was awarded.
How did Congress make it harder to sue bad banks?
In July 2017, the Consumer Financial Protection Bureau announced a final rule: the Arbitration Rule. The rule prohibited consumer financial companies from blocking group lawsuits with arbitration clauses in future contracts. While arbitration clauses weren't prohibited, there were new limitations, and the rule made it clear that financial institutions couldn't stop consumers from pursuing group relief.
Then, in October, Vice President Pence cast a tiebreaking vote in the U.S. Senate to repeal the Arbitration Rule. The repeal measure passed 51-50, with only two Republicans voting against it.
With the repeal of the rule, banks and other financial companies are once again free to deny consumers the right to form class actions, which are often their only practical way to seek recompense for wrongdoing.
How can you protect yourself?
You should read and understand the fine print of any contract you sign, but unfortunately, companies with these arbitration clauses dominate markets in which the average consumer must do business.
Banks and other institutions won't negotiate with you or remove these clauses. Only Congress can fully restore your right to class-action lawsuits, so for now we can only advocate for change on Capitol Hill -- and live with fewer rights in the meantime.