Arbitration Update: CFPB Rule Uncertain, Mixed Fates for Others

Bloomberg Law’s combination of innovative analytics, research tools and practical guidance provides you with everything you need to be a successful litigator.

By Perry Cooper

A half dozen Obama-era rules to limit mandatory arbitration have met a variety of fates in the four months since Donald Trump became president.

The Consumer Financial Protection Bureau rule, which covers financial products, hasn’t been finalized yet and is in a perilous position.

Some consumer advocates argue the bureau should go ahead with it. But others caution Congress could undo the rule as it did with one covering federal contractors, and permanently bar the bureau from regulating arbitration in the future.

Congress reversed the federal contractor rule under the Congressional Review Act in March.

Anti-arbitration rules covering nursing homes and communication contracts have been put on hold by their originating agencies, while two others appear to be in the clear, at least for now.

Those rules, which apply to for-profit colleges and financial advisers, could, however, still be challenged in the courts.

Meanwhile, on the litigation front, another hot-button arbitration topic—the use of class-action waivers in employment contracts—is up in the air until the U.S. Supreme Court takes it next term.

Below is the current status of the CFPB rule, and five others advanced under the Obama administration.

CFPB Arbitration Rule Perilous

The CFPB’s proposed rule—released May 5, 2016, after years of study by the bureau—would bar banks and other financial institutions from using mandatory arbitration clauses to prevent class actions.

The bureau received nearly 13,000 comments on the proposed rule by the Aug. 22, 2016, deadline. The final rule was expected by mid-2017. But nothing has happened yet.

Professor David Noll told Bloomberg BNA the bureau engaged in the “monumental task” of sorting through the comments and improving on the rule’s cost-benefit analysis to get it ready for publication.

The bureau is taking its time to get it right because it knows congressional and legal challenges lie ahead, he said. Noll specializes in civil procedure and regulation at Rutgers Law School in Newark, N.J.

But defense attorney Alan S. Kaplinsky told Bloomberg BNA that “it would be bordering on reckless” for CFPB Director Richard Cordray to finalize the rule because of the risk it will be overturned under the CRA. Kaplinsky leads the consumer financial services group at Ballard Spahr in Philadelphia.

The CRA allows Congress to reverse an agency rule within 60 legislative days of its publication in the Federal Register. Until Trump’s administration began, the law had only been invoked once since it was passed in 1996, Noll said.

But since the start of the 115th Congress in January, 59 disapproval resolutions have been introduced and 13 have passed.

Those odds aren’t good for the CFPB rule, Kaplinsky said. Congressional Republicans will be in lock step against it, he predicted. “The forces behind an override will be very very strong.”

But consumer advocate F. Paul Bland isn’t so sure Republicans have the political will to take down the rule, at a time when Americans—even Trump voters—aren’t too pleased with big banks. Bland is executive director of Public Justice in Washington.

Bland called fears about CRA reversal “a recipe for paralysis.” “You miss all the shots you don’t take,” he said.

He pointed to the Wells Fargo fake account scandal, which snowballed to affect two million customers because mandatory arbitration shut down two early suits. Negative attention on Wells Fargo makes reversing the CFPB a “very hard vote for a lot of Republicans” in Congress, he told Bloomberg BNA.

Noll said the CFPB could go either way on the rule. On the one hand, the risk of CRA reversal is very high, and the stakes are increased because CRA reversal bars the agency from ever issuing a “substantially similar” rule.

On the other hand, a recent CRA vote may show that Congress’s support for the administration is waning, Noll said.

Sens. John McCain (R-Ariz.), Susan Collins (R-Maine), and Lindsay Graham (R-S.C.) broke with their party May 10 to vote down a resolution to reverse an Environmental Protection Agency rule restricting methane emissions.

Noll suggested that Cordray is taking Congress’s temperature and might be waiting to release the rule until congressional support for the administration splinters further.

Kaplinsky countered that the CFPB’s best bet is to play the long game and hold off on the rule until a future administration.

Contractor, Nursing Home, FCC Rules Nixed

One rule has already fallen victim to the CRA.

President Barack Obama signed an executive order in July 2014 banning mandatory arbitration agreements in new federal procurement contracts over $1 million.

Under the order, federal contracting officers would have been required to ensure that covered contractors didn’t mandate pre-dispute arbitration agreements for claims of sexual assault, sexual harassment and violations of Title VII of the Civil Rights Act of 1964. The General Services Administration issued regulations implementing the EO in October 2016.

But those regulations were overturned under a CRA resolution March 27, according to the George Washington University Regulatory Studies Center’s CRA Tracker. The White House revoked the EO the same day.

Two other anti-arbitration rules that have been halted cover nursing homes and communication services.

The rule banning arbitration clauses in nursing home contracts was challenged in court before it even went into effect.

The Department of Health and Human Services Centers for Medicare & Medicaid Services issued the final rule in September 2016 that would have barred nursing homes from including pre-dispute binding arbitration provisions in admission documents.

The rule was supposed to affect new nursing home agreements signed after Nov. 28. But a Nov. 11 federal court decision stayed implementation of the rule while the court considered its legality.

The big question after the court decision was whether CMS would appeal, Noll said. But in April CMS announced it would reconsider the rule altogether.

Meanwhile, the Federal Communications Commission said in October 2016 that it planned to address mandatory arbitration clauses in contracts for communication services.

But soon after Trump took office, the commission announced it was putting off those plans.

“I would be shocked if Chairman Pai thinks this is an issue that requires commission action,” Noll said, referring to FCC Chairman Ajit V. Pai.

For-Profit College, Fiduciary Rules Proceed

Despite the setbacks to the three Obama-era rules covering federal contractors, nursing homes, and communication services, two other rules appear to be in the clear, at least for now. These two rules cover for-profit colleges and financial advisers.

The Department of Education cleared the CRA 60-legislative-day hurdle in mid-May, professor Adam Zimmerman told Bloomberg BNA in an email.

Zimmerman teaches complex litigation and administrative law at Loyola Law School in Los Angeles.

The agency issued a final rule in October 2016 that prohibits post secondary schools that participate in its federal direct loan program from requiring students to sign pre-dispute arbitration agreements.

The rule allows students to choose where to pursue claims against an institution and prohibits institutions from banning class actions by students.

“Interestingly, there wasn’t enough of a political appetite to reverse the DoE rule under the CRA, in part, because repeal under the CRA would have also eliminated other desirable parts of the DoE rule, like a provision that permitted the DoE to claw back funds from failed for-profit colleges and collectively respond to claims for student debt relief (particularly by veterans),” Zimmerman said.

An association that represents California technical schools filed a court challenge to the rule May 24. “It claims that the DoE decision was the result of a rushed process, arbitrary and capricious, and contravenes Supreme Court precedent and the [Federal Arbitration Act] policy favoring arbitration,” Zimmerman said.

Another rule proceeding relates to financial advisers.

The Department of Labor issued a final rule in April 2016 that bans financial advisers from forcing consumers of certain retirement products from signing forced arbitration clauses with class-action waivers.

The class action provision is part of the rule’s “best interest contract” exemption from the Employee Retirement Income Security Act’s prohibited transactions, which allows financial advisers to use certain compensation arrangements that might otherwise be forbidden as long as they put their clients’ best interests first.

The DOL delayed portions of the Obama administration’s regulatory package that aimed to reduce the allegedly conflicting investment advice given to retirement savers until June 9.

But Labor Secretary Alexander Acosta wrote a Wall Street Journal op-ed May 22 saying the measure will take effect June 9 with no further delay.

Acosta said the DOL would seek additional public input on the rule but didn’t find a legal basis to adjust the start date while doing so.

Other portions of the rule are delayed until at least Jan. 1, 2018, while the rule is under a presidentially mandated review by the agency.

“It would be a difficult rule to rescind or modify because Labor compiled a very extensive record in support of it,” professor Noll said. “Of all the arbitration rules I’ve read, it was probably the most carefully done.”

Plus financial firms are already moving to comply with it despite the fact that it’s being challenged in court. “Events on the ground are probably outpacing the litigation,” Noll said.

NLRB Arbitration Ban Before Supremes

Meanwhile, on the litigation front, the Supreme Court will consider later this year another controversial arbitration issue, this one related to labor and employment law.

In 2012, the National Labor Relations Board decided that the National Labor Relations Act bars enforcement of arbitration agreements that waive employees’ rights to pursue class or collective claims in court or arbitration.

A circuit split exists as to whether the NLRB correctly interpreted the law and, in January, the top court agreed to review the issue. But it put off oral arguments until the October term, meaning it isn’t likely to issue a ruling until 2018.

Enforcement actions involving the question are on hold in the NLRB’s field offices until the Supreme Court makes a decision, Noll said.

But an interesting, and possibly outcome-changing, wrinkle in the matter is that Trump will get to appoint new members to the NLRB, Zimmerman said. “It appears poised to change course.”

“Based on early motions in the case to reorder the briefing schedule, it appears the Trump administration will switch sides and will likely side with the businesses in that case,” he said.

Noll noted, however, that the solicitor general’s office—currently run by Acting SG Jeffrey B. Wall—may feel pressure from the court to stick with the arguments it made in the petitions for review, filed during the Obama administration.

“The last time there was a change of administration and the SG’s office changed sides on some issues, Chief Justice John Roberts was extremely critical of the SG’s office,” Noll said.

Pressure from Attorney General Jeff Sessions and the White House counsel’s office could override that, he said.

To contact the reporter on this story: Perry Cooper in Washington at

To contact the editor responsible for this story: Steven Patrick at

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Litigation on Bloomberg Law