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New bills introduced to prohibit use of mandatory arbitration provisions

Democratic lawmakers have introduced several new bills to prohibit the use of mandatory arbitration provisions, ranging from bills that broadly target consumer transactions to bills that target schools that receive Title IV assistance under the Higher Education Act (HEA).

A bill introduced by Senator Sherrod Brown, the Senate Banking Committee’s ranking member, would amend the Consumer Financial Protection Act to provide that “no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a consumer dispute between a covered person and a consumer that relates to a consumer financial product or service.”  The bill is obviously an attempt to resurrect through legislation the CFPB’s failed attempt to ban predispute arbitration agreements in its final arbitration rule that was overturned by Congress pursuant to the Congressional Review Act.

The bill defines a consumer dispute as a dispute between a seller or provider of real or personal property, services (including services related to digital technology), securities or other investments, money, or credit where the transaction is for personal, family, or household purposes.  A “predispute joint-action waiver” is an agreement, whether or not part of a predispute arbitration agreement, “that would prohibit, or waive the right of one of the parties to the agreement to participate in a judicial, arbitral, administrative or other forum, concerning a dispute that has not yet arisen at the time of the making of the agreement.”  The bill would require a court, rather than an arbitrator, to decide any issue as to whether the prohibition applies to an arbitration agreement.

According to a press release issued by House Judiciary Committee Chairman Jerrold Nadler, two companion bills entitled “The Forced Arbitration Injustice Repeal (FAIR) Act” have been introduced in the House and Senate by Democratic lawmakers.  The text of the bills is not yet available.  The press release states that the bills “would end the use of forced arbitration in consumer, worker, civil rights, and antitrust disputes.”

The other two bills are previously introduced bills seeking to enact the “Court Legal Access & Student Support (CLASS) Act.”  They have been reintroduced by Congresswoman Maxine Waters (who chairs the House Financial Services Committee) and Senator Dick Durbin.  The bills would prohibit the use of mandatory pre-dispute arbitration agreements and class action waivers in enrollment agreements by schools receiving Title IV assistance under the HEA.  They appear to be an attempt to circumvent efforts by the Department of Education to remove the arbitration agreement and class action waiver ban that is part of the “borrower defense” final rule (Final Rule) issued by the ED in November 2016 and initially scheduled to take effect on July 1, 2017.

In July 2018, the ED issued a proposal that would rescind the Final Rule and replace it with “Institutional Accountability regulations” that would not ban the use of arbitration agreements and class action waivers.  Instead, the ED is proposing to require schools that use pre-dispute arbitration agreements and class action waivers in student agreements *99+ to students regarding such use.

Shortly before the Final Rule’s initial July 1, 2017 effective date, the California Association of Private Postsecondary Schools (CAPPS) filed a motion for a preliminary injunction in a D.C. federal district court to which the ED responded by issuing a stay of the Final Rule under Section 705 of the Administrative Procedure Act (APA).  The Section 705 stay was followed by the ED’s issuance of an interim final rule delaying the effective date until July 1, 2018 and the promulgation of a final rule further delaying the effective date until July 1, 2019.  Despite the ED’s efforts to stay the Final Rule’s effective date, the Final Rule’s ban on arbitration agreements and class action waivers became effective in October 2018 when the court refused to grant the preliminary injunction sought by CAPPS.  The ED has indicated that it will issue guidance on the ban.

Copyright © by Ballard Spahr LLP

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About this Author

Kaplinksy, partner, New York, finance
Partner

Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

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