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By Perry Cooper
Nov. 10 — Consumer and worker advocates had been optimistic in recent months that their movement against mandatory arbitration was gaining traction.
Several federal agencies, including the Consumer Financial Protection Bureau and the Department of Education, had proposed or finalized rules to limit arbitration clauses and class action bans that had been placed in contracts after a series of favorable decisions from the U.S. Supreme Court.
But the election of Donald Trump to the presidency is likely to set the agencies, and anti-arbitration advocates, back.
“Trump and his businesses seem to have been big proponents of arbitration, using it as a way of getting disputes out of courts and therefore out of the public eye,” defense attorney Liz Kramer told Bloomberg BNA. Kramer, of Stinson Leonard Street LLP in Minneapolis, writes for her firm's blog Arbitration Nation.
“Given his overall ‘change' message, and repeated criticism of all things Obama, my gut tells me his administration will roll back these regulations,” she said.
Defense attorney Alan S. Kaplinsky, who leads the consumer financial services group at Ballard Spahr in Philadelphia, agreed. The election could, in particular, “spell very bad news for the CFPB” and its regulatory efforts, including those aimed at limiting class action waivers in credit card agreements and other financial service products, he said.
“Proposed rules pertaining to arbitration and small dollar lending are in jeopardy,” he said.
But a large-scale rollback of the anti-arbitration rules isn't necessarily inevitable.
Kramer pointed out that “part of Trump's campaign message was one of populism and empowering the ‘little guy.'”
It's possible that could “translate into supporting regulations that allow more consumers and employees to keep their disputes in court,” she said.
Plaintiffs' attorney Deepak Gupta, a prominent opponent of arbitration, agreed that Trump's “mandate reflects a deep distrust of Wall Street and the financial system” and that might work in favor of consumers and workers.
“Nobody really thinks he was elected because his supporters think Wall Street should get a free pass,” said Gupta, the founding principal of Gupta Wessler PLLC, a Washington public interest law firm.
It's unclear whether Trump even knows what the CFPB does, he said.
The short answer, Gupta said, is we don't know what Trump will do on arbitration.
“We knew that Hillary Clinton had strongly endorsed limits on mandatory arbitration by administrative agencies, but we don't know what Donald Trump's position and he probably doesn't know either,” he said.
If Trump does decide to dismantle the individual federal agencies' anti-arbitration rules, his success depends on how far along each rule progressed, Adam Zimmerman told Bloomberg BNA. Zimmerman teaches complex litigation and administrative law at Loyola Law School in Los Angeles.
The rules are either final, proposed or already being litigated.
Final rules would take another rulemaking to undo them, and that would take at least a year, Zimmerman said. He gave as examples the Department of Education rule limiting arbitration in for-profit college agreements and the Department of Health and Human Services Centers for Medicare & Medicaid Services (CMS) rule for nursing homes.
There could also be a court challenge to the process of undoing the regulations because the agencies would have to justify the change, he said. Notice and comment “is supposed to be a meaningful process that doesn't just hinge on a change in the administration.”
However, a significant loophole for Trump exists if he wants to undo final rules that haven't gone into effect yet.
“When regulations don’t go into effect until a new presidential administration takes control, that administration has some discretion to hold off on implementing the rule,” Zimmerman said. “It could have its own review and possibly reverse it.”
That would apply to the Department of Education rule. It isn't slated to go into effect until July 2017.
And, of all the regulations, Trump might be most interested in reversing the DOE rule, Zimmerman said, alluding to the pending fraud suits against Trump University.
The CMS rule for nursing homes, which also has been finalized, is in a different posture. It is slated to take effect Nov. 28, before the Trump administration takes over.
But that rule faces other obstacles, as court challenges have already met with some success.
On Nov. 11, a federal judge in Mississippi stayed the CMS rule in a suit brought by a nursing home in that state. The judge faulted the agency for not conducting a thorough review of why it was needed.
Technically an injunction only binds the agency with respect to the individuals involved in the case before the court, Zimmerman said. But usually the agency will acquiesce and won't try to enforce the rule against others while an appeal is being heard.
Rules that are in the preliminary stages before final approval—such as the CFPB anti-arbitration rule and expected action by the Federal Communications Commission—are the most vulnerable. They could be reversed quickly without notice and comment procedures.
President Barack Obama's 2014 executive order limiting arbitration in government contracts is also in this camp. “Trump could just reverse it with another executive order,” he said.
The CFPB has finished accepting public comments on its proposal to ban mandatory arbitration provisions and class waivers in financial services contracts. Before Trump won the election, it was expected to be finalized in 2017.
But that's unlikely now, according to Kaplinsky. Beyond reversing the arbitration rule, the new administration could find it easier to undermine the bureau's power more generally thanks to an Oct. 11 decision from a federal appeals judge in the District of Columbia.
The court said the CFPB is an executive agency and the president can essentially remove its head at will, Zimmerman said. “You can imagine that if that ruling stands, it further supports the idea that a new administration could come in and reverse that rule before it’s implemented.”
Defense attorney Kaplinsky said “there is a substantial risk” that the new administration will substitute a five-member commission for the CFPB's sole director.
That would subject the bureau to the congressional appropriations process and restrict its regulatory and enforcement initiatives such as issuing more rules that it perceives to be pro-consumer, he said.
“I would think that the likelihood of further rulemaking will decline since a Republican-controlled commission is likely to be more industry-friendly,” said Kaplinsky, who played a central role in promoting the use of arbitration clauses in consumer contracts.
The Federal Communications Commission is in a stronger structural position and might continue with its plan, announced Oct. 27, to look into an arbitration ban in February. The agency is independent, and Trump can't change the make up of three Democratic appointees and two Republican appointees without cause, Zimmerman said.
The new administration will have less control over the rules that are already being litigated as the ongoing litigation puts those rules, at least in the short term, in the courts' hands.
This would include the CMS rule and actions by the National Labor Relations Board.
The NLRB has issued decisions finding that arbitration agreements that prohibit employees from pursing class or collective actions unlawfully interfere with employees' rights to engage in concerted activity.
Federal appeals courts are split on the board's power to interpret its statute as it has, and the decisions are up for review at the U.S. Supreme Court.
The board has already filed amicus briefs at the court supporting its interpretation, Zimmerman said.
But Trump could still find ways to curb its activities, including those limiting arbitration.
Trump could appoint another member to the board, which could reverse its position and file new briefs.
But, in the meantime, the courts might say that the board was relying on express statutory authority and properly interpreted the statute.
To contact the reporter on this story: Perry Cooper in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Steven Patrick at email@example.com
|Consumer Financial Protection Bureau||Proposed rule—released May 5 after years of study by the bureau—would bar banks and other financial institutions from using mandatory arbitration clauses to prevent class actions.||Bureau received nearly 13,000 comments on proposed rule by Aug. 22 deadline. Final rule had been expected by mid-2017.|
|Department of Defense||Issued final rule in July 2015 (80 FR 43559) extending protections of Military Lending Act to ban mandatory arbitration in broad range of credit products sold to service members.||Changes went into effect Oct. 3, and include credit cards and other forms of open-ended credit in arbitration ban.|
|Department of Education||Issued final rule Oct. 28 that prohibits postsecondary schools that participate in its federal direct loan program from requiring students to sign pre-dispute arbitration agreements.||Rule allows students to choose where to pursue claims against an institution and prohibits institutions from banning class actions by students.|
|Department of Health and Human Services Centers for Medicare & Medicaid Services||Issued final rule Sept. 28 banning nursing homes from including pre-dispute binding arbitration provisions in admission documents.||Rule was supposed to affect new nursing home agreements signed after Nov. 28. But Nov. 11 federal court decision stayed implementation of rule while court considers its legality.|
|Department of Labor||Issued final rule in April (81 FR 21002) that bans financial advisers from forcing consumers of certain retirement products from signing forced arbitration clauses with class-action waivers.||Class action provision is part of rule's “best interest contract” exemption from 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 interest first.|
|Fannie Mae & Freddie Mac||In 2003 and 2004, government-chartered private mortgage investment companies stopped buying all mortgages with forced arbitration clauses.||Mortgages subject to mandatory arbitration are ineligible for sale to, or securitization by, Fannie and Freddie unless clause becomes null and void upon sale.|
|Federal Communications Commission||New privacy rules for broadband internet providers approved Oct. 27 didn't include ban on mandatory arbitration clauses as expected.||Commission said Oct. 27 it planned to proceed with rulemaking in February 2017 to address mandatory arbitration clauses in contracts for communication services.|
|Financial Industry Regulatory Authority||Board of Governors disciplinary decision (2014 BL 493894) in April 2014 found that Charles Schwab & Co. violated FINRA rules by barring class actions in its customer agreement.||Board held Federal Arbitration Act doesn't preempt FINRA rules banning mandatory arbitration.|
|National Labor Relations Board||Board decided in 2012 National Labor Relations Act bars enforcement of arbitration agreements that waive employees' rights to pursue class or collective claims in court or arbitration.||Second, Fifth, Eighth and Eleventh circuits rejected NRLB's decision, but Seventh and Ninth upheld it. Four petitions for review are currently pending at U.S. Supreme Court to resolve circuit split.|
|Securities and Exchange Commission||Commission told Carlyle Group that it wouldn't clear its initial public offering because it included mandatory arbitration provision. Carlyle dropped provision in February 2012.||Commission also has power under Dodd-Frank Wall Street Reform and Consumer Protection Act to regulate mandatory arbitration and class action waivers between customers and broker-dealers and investment advisers, 15 U.S.C. § 78o(o).|
|Executive Order||President Barack Obama signed Executive Order 13,673 in July 2014 banning mandatory arbitration agreements in new federal procurement contracts over $1 million.||Under order, federal contracting officers must ensure that covered contractors don't require pre-dispute arbitration agreements for claims of sexual assault, sexual harassment and violations of Title VII of Civil Rights Act of 1964.|
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