The FAA Should Not Cover Consumer Claims

Abstract

Consumer protection laws face a fundamental enforcement issue: because consumer claims are typically for small amounts, and litigation is expensive, it rarely makes economic sense for consumers to litigate their claims individually. Partly to deal with this problem, lawmakers created class actions so the cost of litigation could be shared among many claims. But businesses have used the Federal Arbitration Act to prevent consumers from asserting class actions. Specifically, businesses have included in their agreements arbitration clauses that block consumers from asserting their claims in class actions. The U. S. Supreme Court has ruled that these arbitration clauses combined with class action waivers are valid. As a result, few consumers assert claims subject to these contracts unless a substantial amount of money is at issue.

This leads to two unfortunate outcomes. First, in many situations, merchants employing arbitration clauses need not fear that they will face private enforcement of consumer protection laws and so are insufficiently deterred from engaging in misconduct that might otherwise lead to liability. Second, consumers lack an effective means to secure compensation unless they suffer huge losses. The problem is worsened by the fact that consumers cannot understand arbitration clauses and so surrender their rights to litigate in court without realizing that they are doing so.

Congress should amend the FAA to exclude consumer claims from the FAA’s coverage until a dispute has arisen. Otherwise, the Consumer Financial Protection Bureau (“CFPB”) should use its rule-making power to limit the use of arbitration clauses in consumer financial contracts. This chapter explains why.

Keywords: consumer protection, class actions, arbitration clauses, claim suppression, CFPB, underenforcement, arbitration regulation, consumer financial contracts