Proof of Contract-Formation for Arbitration vs. Credit Card Agreements: Inconsistent Case Law

FORMATION-PROOF DISPARITY: ARBITRATION AGREEMENTS AND CREDIT CARD AGREEMENTS TREATED DIFFERENTLY 
FOR NO READILY APPARENT LEGAL REASONS

In several recent cases, Texas courts have denied motions to compel arbitration in the employment context, and appellate courts have affirmed the denial, where the employer failed to establish the requisite contract-formation facts: that the employee was given notice of the arbitration agreement and continued to work, thereby accepting the agreement by conduct rather than with a wet-ink signature or formal acknowledgment.

See Stagg Restaurants, LLC v.. Serra, No. 04-18-00527-CV (Tex.App.- San Antonio, Feb. 13, 2019, no pet.) (trial court's denial of motion to compel arbitration affirmed in interlocutory appeal where employer failed to prove notice of arbitration provision in occupational injury plan document to employee who later brought work-related injury suit); Alorica, Inc. v. Tovar, No. 08-18-00008-CV (Tex.App.- El Paso, Nov. 26, 2018)(trial court's denial of former employer's motion to compel arbitration affirmed where trial court resolved conflicting evidence on whether terminated employee had notice of mandatory arb agreement); Kmart Stores of Tex., L.L.C. v. Ramirez, 510 S.W.3d 559, 565 (Tex.App.-El Paso 2016, pet. denied) (where employer provided evidence that employee had logged on to computer and received notice of arbitration agreement, employee bore burden of raising a fact issue contesting formation, which she met by filing a sworn denial of notice).  

"An employer may enforce an arbitration agreement entered into during an at-will employment relationship if the employee received notice of the employer's arbitration policy and accepted it." In re Dallas Peterbilt, Ltd., L.L.P., 196 S.W.3d 161, 162 (Tex. 2006) (per curiam) (orig. proceeding). "An at-will employee who receives notice of an employer's arbitration policy and continues working with knowledge of the policy accepts the terms as a matter of law." Id. at 163.

The holdings regarding the evidence needed to prove an agreement to arbitrate was formed in the employment context stand in marked contrast to Texas courts’ sloppy handling of contract-formation in consumer debt cases. In the latter category of civil suits, Texas courts routinely ignore the several elements of contract formation (or merely pay lip service to them when reciting the caselaw) and take an affiant’s averment that the attached form contract is the applicable contract as sufficient.

The elements necessary for formation of a valid contract are (1) an offer, (2) acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party's consent to the terms, and (5) execution and delivery of the contract with the intent that it be mutual and binding. Thornton v. AT& T Advert., L.P., 390 S.W.3d 702, 705 (Tex. App.-Dallas 2012, no pet.). For a contract to be enforceable, it must be supported by consideration. In re OSG Ship Mgmt., Inc., 514 S.W.3d 331, 338 (Tex. App.-Houston [14th Dist.] 2016, no pet.) (orig. proceeding). 

In credit card collection cases, evidence of card use (shown with billing statements) is deemed to constitute acceptance of whatever the contract terms were, rather than the creditor being required to show (in addition to card use) that the specific version of a boilerplate agreement attached as an exhibit to a motion for summary judgment (or a business records affidavit) was furnished to the cardholder prior to use of the account by that cardholder, so as to satisfy the elements of offer and acceptance, based on a meeting of the minds on the terms and conditions stated in the offer.
  

The same lax judicial treatment often extends to the issue of whether there is sufficient proof that the consumer agreed to the account-specific finance charge terms (interest rates and penalty charges such as late fees and overlimit fees), which are often not set forth in generic credit card agreements, but are in are shown on a separate Truth-in-Lending disclosure document, which may be denominated in various ways (Pricing Schedule, Terms & Conditions, Important Terms of Your Account, etc.), depending on the identity of the creditor. The additional document is often absent from creditor's or debt buyers' summary judgment proof and trial exhibits, depriving the interest-rate component of the plaintiff's claim of its contractual foundation.  

Incidentally, many boilerplate cardmember agreements also contain arbitration agreements, but those rarely become an issue in collection litigation because neither party moves to compel arbitration. In theory, however, and under general common-law principles of contract-formation, there is no distinction between formation of an agreement to arbitrate and other agreements because even under the Federal Arbitration Act, the formation question is one of ordinary state contract law, rather than one governed by the FAA itself.

For the same reason, the FAA’s public policy preference in favor of arbitration does not come into play unless and until the existence of valid agreement to arbitrate has been established either by virtue of signatures of the agreement or by other competent contract-formation proof, such as evidence supporting the theory of implied consent by conduct. See Huckaba v. Ref-Chem, L.P., 892 F.3d 686, 688-89 (5th Cir. 2018).

Also see, relatedly, Hi Tech Luxury Imports, LLC v. Morgan, No. 03-19-00021-CV (Tex.App.-Austin, Apr. 30, 2019), in which the Third Court of Appeals last month affirmed an order denying arbitration because the employer had not also signed the arbitration agreement at issue, which provided for both parties to sign it.)

Hi Tech Luxury Imports, LLC, Appellant,
v.
Townsend L. Morgan, Jr., Appellee.

No. 03-19-00021-CV.

Court of Appeals of Texas, Third District, Austin.

Filed: April 30, 2019.   

Appeal from the 345th District Court of Travis County, No. D-1-GN-18-002579, The Honorable Dustin M. Howell, Judge Presiding.

Affirmed.

Before Justices Goodwin, Baker, and Triana.

MEMORANDUM OPINION

GISELA D. TRIANA, Justice.

Appellant Hi Tech Luxury Imports, LLC (Hi Tech), appeals from the district court's order denying its motion to compel arbitration under the Federal Arbitration Act (FAA). We will affirm the district court's order.

BACKGROUND

Appellee Townsend L. Morgan, Jr., filed suit against Hi Tech, his former employer, alleging wrongful termination and age discrimination in violation of Chapter 21 of the Texas Labor Code. See Tex. Lab. Code § 21.051. After the case had been set for a jury trial, Hi Tech filed a motion to compel arbitration. In the motion, Hi Tech asserted that the parties had executed an agreement to arbitrate, and that Morgan's claims fell within the scope of that agreement. Morgan filed a response in opposition, arguing that the arbitration agreement was invalid because Hi Tech had failed to sign it. Following a hearing on the matter, the district court denied the motion to compel arbitration. This interlocutory appeal followed. See Tex. Civ. Prac. & Rem. Code § 51.016.

STANDARD OF REVIEW

"We review a trial court's order denying a motion to compel arbitration for abuse of discretion." Henry v. Cash Biz, LP, 551 S.W.3d 111, 115 (Tex. 2018) (citing In re Labatt Food Serv., L.P., 279 S.W.3d 640, 642-43 (Tex. 2009)). "We defer to the trial court's factual determinations if they are supported by evidence but review its legal determinations de novo." Id. A party seeking to compel arbitration under the FAA must establish that (1) there is a valid arbitration agreement, and (2) the claims in dispute fall within that agreement's scope. In re Rubiola, 334 S.W.3d 220, 223 (Tex. 2011). "Whether parties have agreed to arbitrate is a gateway matter ordinarily committed to the trial court and controlled by state law governing `the validity, revocability, and enforceability of contracts generally.'" Jody James Farms, JV v. Altman Grp., Inc., 547 S.W.3d 624, 631 (Tex. 2018) (quoting Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631 (2009)). No presumption of arbitration exists until "after the party seeking to compel arbitration proves that a valid arbitration agreement exists." J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003). "The burden of establishing the existence of an arbitration agreement is evidentiary and runs with the party seeking to compel arbitration." Fitness Entm't Ltd v. Hurst, 527 S.W.3d 699, 703 (Tex. App.—El Paso 2017, pet. denied).

DISCUSSION

"Under Texas law, a binding contract requires: `(1) an offer; (2) an acceptance in strict compliance with the terms of the offer; (3) a meeting of the minds; (4) each party's consent to the terms; and (5) execution and delivery of the contract with intent that it be mutual and binding.'" Huckaba v. Ref-Chem, L.P., 892 F.3d 686, 689 (5th Cir. 2018) (quoting In re Capco Energy, Inc., 669 F.3d 274, 279-80 (5th Cir. 2012)). The only question in this case is whether the parties intended that the arbitration agreement be mutual and binding, despite Hi Tech's failure to sign the agreement.

"Contracts require mutual assent to be enforceable." Baylor Univ. v. Sonnichsen,221 S.W.3d 632, 635 (Tex. 2007). "Evidence of mutual assent in written contracts generally consists of signatures of the parties and delivery with the intent to bind." Id.; New York Party Shuttle, LLC v. Bilello, 414 S.W.3d 206, 214 (Tex. App.-Houston [1st Dist.] 2013, pet. denied). However, "while signature and delivery are often evidence of the mutual assent required for a contract, they are not essential." Phillips v. Carlton Energy Grp., LLC, 475 S.W.3d 265, 277 (Tex. 2015); see also Perez v. Lemarroy, 592 F. Supp. 2d 924, 931 (S.D. Tex. 2008) ("The Federal Arbitration Act (`FAA') only requires that an arbitration clause be in writing, without any requirement that an arbitration clause must be signed, thus, no signatures are necessary to bind parties to an arbitration agreement."). "Signatures are not required `[a]s long as the parties give their consent to the terms of the contract, and there is no evidence of an intent to require both signatures as a condition precedent to it becoming effective as a contract.'" Huckaba, 892 F.3d at 689(quoting Perez, 592 F. Supp. 2d at 930-31).

"A court can decide intent as a matter of law." Id. (citing Tricon Energy Ltd. v. Vinmar Int'l, Ltd., 718 F.3d 448, 454 (5th Cir. 2013)). "In construing a contract, a court must ascertain the true intentions of the parties as expressed in the writing itself." Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex. 2011). "We begin this analysis with the contract's express language." Id.Unless that language is ambiguous, see id., "we end it there too," Huckaba, 892 F.3d at 689.

Here, the language of the contract provides unambiguous evidence of the parties' intent to require both signatures as a condition precedent to enforcement of the agreement. Although it is true, as Hi Tech observes, that the agreement is written primarily from the employee's perspective, the document repeatedly refers to bothparties agreeing to the terms of the contract. The agreement discusses the "mutual benefits" that arbitration can provide to "both the Company and [Morgan]," and the agreement requires that "[Morgan] and the Company both agree" that any disputes "between [Morgan] and the Company" shall be submitted to arbitration. The agreement further provides that "[b]oth the Company and [Morgan] agree that any arbitration proceeding must move forward under the Federal Arbitration Act" and that "[t]his is the entire agreement between the Company and the employee." 

The agreement also contains the following statement, "I UNDERSTAND BY AGREEING TO THIS BINDING ARBITRATION PROVISION, BOTH I AND THE COMPANY GIVE UP OUR RIGHTS TO TRIAL BY JURY." 

This language indicates that, by agreeing to arbitrate, both parties would be giving up their rights to a jury trial, which suggests that the signatures of both parties would be required for the agreement to be enforceable. Additionally, in the signature block at the bottom of the agreement, there are lines for two signatures, one for the "Employee" and one for the "Manager" of Hi Tech. 

There is also a line next to the Manager's signature for the Manager to print his name. Moreover, both signature lines appear below the following statement, "MY SIGNATURE BELOW ATTESTS TO THE FACT THAT I HAVE READ, UNDERSTAND, AND AGREE TO BE LEGALLY BOUND TO ALL OF THE ABOVE TERMS." Thus, both parties were to indicate their mutual assent to the terms of the arbitration agreement by signing the document.

Hi Tech did not sign the arbitration agreement, and the above language indicates that the signatures of both Hi Tech and Townsend were required for the agreement to be enforceable. The burden was on Hi Tech to prove the validity of the agreement, see Henry, 551 S.W.3d at 115; Fitness Entm't Ltd., 527 S.W.3d at 703-04, and it failed to satisfy that burden here. Accordingly, we cannot conclude that the district court abused its discretion in denying Hi Tech's motion to compel arbitration. See Huckaba, 892 F.3d at 691 (refusing to enforce arbitration agreement in wrongful-termination case when employer failed to sign agreement and concluding that enforcement would allow employer to "have it both ways—argue that it did not intend to be bound because it did not sign the agreement or it did because it kept the agreement and sought to compel arbitration"); see also Simmons & Simmons Constr. Co. v. Rea, 286 S.W.2d 415, 416-17 (Tex. 1955)(concluding that signature block on contract and other language in agreement was evidence that signatures of both parties were required); In re Bunzl USA, Inc., 155 S.W.3d 202, 210-11 (Tex. App.—El Paso 2004, orig. proceeding) (same).

CONCLUSION

We affirm the district court's order.

ALEXANDER CONSTANTINE, Plaintiff,
v.
AHMAD ADAS and SWIFT AUTO HAULING, LLC, Defendants.

Civil Action No. H-18-1273.

United States District Court, S.D. Texas, Houston Division.

July 24, 2018.

MEMORANDUM AND ORDER

NANCY F. ATLAS, District Judge. 

Plaintiff Alexander Constantine filed this lawsuit under the Fair Labor Standards Act ("FLSA"). Defendant Swift Auto Hauling, LLC ("Swift") filed a Motion to Dismiss and Compel Arbitration or Stay Case ("Motion") [Doc. # 5], asserting that Plaintiff's claims were subject to a written arbitration agreement. Plaintiff filed a Response [Doc. # 6], noting that Swift did not sign the arbitration agreement on which it bases its Motion. Swift neither filed a reply nor requested an extension of the reply deadline. Having reviewed the record and governing legal authorities, the Court denies the Motion.

I. BACKGROUND

Swift operates a tow truck business, and Plaintiff was employed by Swift from June 2016 to October 2017. Plaintiff alleges that Swift failed to pay him in full for his work, and failed to pay him overtime wages for hours he worked in excess of forty (40) per week.

Swift has presented a contract signed by Plaintiff that includes an arbitration provision. The contract on which Swift relies, however, was not signed by Swift.

II. ARBITRATION AGREEMENTS

Enforcement of an arbitration agreement requires proof that (1) there is a valid agreement to arbitrate; and (2) the dispute falls within the scope of that agreement. See Huckaba v. Ref-Chem, L.P., 892 F.3d 686, 688 (5th Cir. 2018). Determining whether there is a valid arbitration agreement is a question for the Court based on state contract law. See id. The party seeking to enforce an arbitration agreement must show that the agreement meets all of the requisite elements of a contract. See id. Additionally, "because the validity of the agreement is a matter of contract, at this stage, the strong federal policy favoring arbitration does not apply." Id. at 688-89.

Under Texas law, a binding contract requires: "(1) an offer; (2) an acceptance in strict compliance with the terms of the offer; (3) a meeting of the minds; (4) each party's consent to the terms; and (5) execution and delivery of the contract with intent that it be mutual and binding." Id. at 689 (citations omitted). As to the fifth element, whether a signature is required to bind a party is a question of the parties' intent. Id. (citing Tricon Energy Ltd. v. Vinmar Int'l, Ltd., 718 F.3d 448, 454 (5th Cir. 2013)). "Signatures are not required as long as the parties give their consent to the terms of the contract, and there is no evidence of an intent to require both signatures as a condition precedent to it becoming effective as a contract." Huckaba, 892 F.3d at 689. 

In determining the parties' intent, the Court "must examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless." Id.

In this case, the arbitration provision in the contract at issue refers to the "Signor's successors, assigns, executors, administrators, beneficiaries, and representatives." See Subcontractor Agreement, Exh. 1 to Motion, ¶ 18.6. This reference to a "Signor" indicates the parties' intent that the contract will become binding when signed. Additionally, the contract contains a signature line for "Swift Auto Hauling, LLC" that is unsigned. The language in the Subcontractor Agreement reflects the parties' intent that a signature was required for each party to be bound to the terms of the contract, including the arbitration provision. Because Swift did not sign the agreement, neither party is bound to its terms. See Huckaba, 892 F.3d at 691.

Plaintiff argued in opposition to Swift's Motion that there was no evidence that the arbitration agreement became a binding contract absent the signature of all parties. See Response, p. 3. Swift failed to file a reply presenting such evidence. As a result, the record demonstrates, and the Court concludes, that the parties did not enter into a valid arbitration agreement.

III. CONCLUSION AND ORDER

Swift did not sign the contract that contains the arbitration provision. Moreover, Swift has not presented evidence that the parties intended Swift to be bound by the arbitration provision in the contract notwithstanding its failure to sign. As a result, it is hereby

ORDERED that Swift's Motion to Dismiss and Compel Arbitration or Stay Case [Doc # 5] is DENIED.

Vine v. PLS Financial Services Inc. (5th Cir. 2017) Payday lender's submission of worthless check affidavits to DA entailed waiver of right to force borrowers to arbitrate malicious prosecution claims

On September 15, 2017, the Texas Supreme Court will sit in Houston, TX (University of Houston Law Center) to hear oral argument on whether a payday lender may divert a class action filed against it over its practice of pursuing the collection of defaulted civil debts through criminal prosecution with hot-check affidavits in violation of Texas law. 

The San Antonio Court of Appeals had ruled in the lenders' favor and remanded the case for arbitration, but one justice on the panel had dissented. See Cash Biz, LP v. Henry, No. 04-15-00469-CV, 2016 WL 4013794, at *6 (Tex. App.—San Antonio July 27, 2016, pet. granted under Cause No.16-0854. ("We conclude the Plaintiff borrowing parties' causes of action fall within the scope of the parties' arbitration agreement, and Cash Biz's filing of a criminal complaint was not an act that substantially invoked the judicial process to constitute waiver of this agreement. We conclude the Plaintiff borrowing parties waived the right to bring a class action. Accordingly, we reverse the trial court's order denying Cash Biz's motion to compel arbitration and denying Cash Biz's motion to enforce the class action waiver provision. We render an order granting Cash Biz's motion. We remand for arbitration.") 

Cash Biz, LP v. Henry, 04-15-00469-CV, 2016 WL 4013794 (Tex. App.—San Antonio July 27, 2016, pet. filed) (dissenting opinion by Justice Rebeca C. Martinez)("I believe the record here shows that Cash Biz substantially invoked the judicial process by deliberately engaging in a series of overt acts in court that evidence a desire to resolve the same arbitrable dispute through litigation rather than arbitration. See Tuscan Builders, LP v. 1437 SH6 L.L.C., 438 S.W.3d 717, 721 (Tex. App.-Houston [1st Dist.] 2014, pet. denied) (op. on reh'g) (quoting Haddock v. Quinn, 287 S.W.3d 158, 177 (Tex. App.-Fort Worth 2009, pet. denied)). Therefore, I would hold that, by filing the criminal "bad check" complaints against the Borrowing Parties, seeking repayment or some other form of satisfaction, Cash Biz waived its contractual right to arbitrate the malicious prosecution claims arising out of the criminal proceedings.")

Footnotes from the Dissenting opinion by Justice Martinez 

Earlier this year, the Fifth Circuit affirmed denial of a motion to compel arbitration of another payday lender under similar circumstances, endorsing the Martinez dissent in Cash Biz v Henry. One member of the three-judge 5th Circuit panel also dissented. 

LUCINDA VINE; KRISTY POND, Plaintiffs-Appellees,
v.
PLS FINANCIAL SERVICES, INCORPORATED; PLS LOAN STORE OF TEXAS, INCORPORATED, Defendants-Appellants.

No. 16-50847.

United States Court of Appeals, Fifth Circuit.

Filed May 19, 2017.   

Appeals from the United States District Court for the Western District of Texas, USDC No. 3:16-CV-31.

Before: BARKSDALE, GRAVES, and HIGGINSON, Circuit Judges.

PER CURIAM.^[*]

Appellants PLS Financial Services, Inc., and PLS Loan Store of Texas, Inc. (collectively "PLS"), appeal the district court's denial of its motion to dismiss and to compel arbitration. Because PLS substantially invoked the judicial process to the detriment or prejudice of Appellees Lucinda Vine and Kristy Pond when it submitted false worthless check affidavits, we AFFIRM the judgment of the district court.

BACKGROUND

PLS's business is to provide short-term loans to customers. To obtain loans, PLS customers must present blank or post-dated checks for the amount borrowed plus a finance charge and a credit-access-business fee. They must also sign PLS's Loan Disclosure, Promissory Note and Security Agreement and a Credit Services Agreement (the "Agreement"), which requires arbitration of all "disputes." The Agreement states:

For purposes of this Waiver of Jury Trial and Arbitration Provision . . . the words "dispute" and "disputes" are given the broadest possible meaning and include, without limitation (a) all claims, disputes, or controversies arising from or relating directly or indirectly to signing of this Arbitration Provision, the validity and scope of this Arbitration Provision, the validity and scope of this Arbitration Provision and any claim or attempt to set aside this Arbitration Provision . . . .

Vine and Pond allege that during the loan application process, PLS asked them for blank or post-dated checks, but assured them that the checks would not be cashed and would only be used to verify checking accounts. However, PLS cashed the checks as soon as Vine and Pond defaulted on their loans, and then submitted worthless check affidavits to local district attorneys' offices when the checks bounced. 

According to Vine and Pond, PLS's actions were part of a regular strategy whereby PLS submitted false worthless check affidavits to achieve repayment of the loans and to avoid arbitrating any collection actions. In addition, Vine and Pond allege that PLS knew that its submission of false worthless check affidavits violated Texas law. See Tex. Fin. Code §§ 393.201(c) and 292.301.

Soon after submission of the worthless check affidavits, Vine and Pond received letters from their local district attorneys' offices, notifying them that they would need to pay restitution to PLS and statutory fees or face criminal proceedings on theft by check charges.

On January 26, 2016, Vine and Pond initiated the present class action against PLS on behalf of themselves and all similarly-situated plaintiffs, alleging: (1) malicious prosecution; (2) Texas Deceptive Trade Practices Act violations; (3) fraud; and (4) Texas Finance Code § 392.301 violations. 

On March 23, 2016, PLS moved to dismiss the proceedings and compel Vine and Pond to arbitrate their claims pursuant to the Agreement. On June 6, 2016, the district court denied PLS's motion to dismiss, stating that, even if Plaintiffs had agreed to arbitration, PLS had waived its right to compel them to do so by submitting the worthless check affidavits. PLS appeals from the district court's denial of their motion to dismiss and to compel arbitration.

STANDARD OF REVIEW

"We review the issue of whether a party's conduct amounts to a waiver of arbitration de novo." Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir. 1999). A motion to compel arbitration is generally treated as a motion to dismiss. See Suburban Leisure Ctr., Inc. v. AMF Bowling Prods., Inc., 468 F.3d 523, 525 (8th Cir. 2006). Consequently, we accept Vine and Pond's well-pleaded facts as true and view them in the light most favorable to them. Id.

DISCUSSION

PLS makes three arguments on appeal. It contends that the district court erred by: (1) deciding whether PLS waived its right to compel arbitration by participating in litigation conduct; (2) ignoring the parties' express agreement to arbitrate all disputes, including any litigation-conduct waiver claims; and (3) concluding that PLS waived its right to arbitrate by submitting worthless check affidavits. None of these arguments are persuasive.

I.

First, the district court did not err by deciding the litigation-conduct waiver. In Tristar Fin. Ins. Agency v. Equicredit Corp. of Am., 97 F. App'x 465, 464 (5th Cir. 2004), we recognized that when "waiver . . . depends on the conduct of the parties before the district court," "the court, not the arbitrator, is in the best position to decide whether the conduct amounts to a waiver under applicable law." Here, the district court's waiver decision depended on the conduct of PLS—a party to the litigation. Consequently, the district court was "in the best position" to decide the litigation-conduct waiver. Id.

PLS contends that the Supreme Court's decision in BG Group, PLC v. Republic of Argentina, 134 S. Ct. 1198 (2014), abrogates any persuasive effect of our Tristardecision. In BG Group, the Supreme Court stated that courts should decide issues "such as whether the parties are bound by a given arbitration clause, or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy." BG Group, 134 S. Ct. at 1206 (quotations omitted). But arbitrators should decide questions "about the meaning and application of particular procedural preconditions for the use of arbitration." Id. at 1207. Because BG Group defines "claims `of waiver, delay, or a like defense to arbitrability'" as procedural, PLS argues that litigation-conduct waiver should be decided by an arbitrator, and not a court. See id. at 1202 (quoting Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 (1983)). PLS notes that in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (quoting Moses H. Cone Memorial Hospital, 460 U.S. at 25), the Supreme Court also stated that "claims `of waiver, delay, or a like defense to arbitrability'" are procedural and thus arbitrator-committed.

Despite the surface appeal of this argument, a careful reading of BG Group and Howsam demonstrates that it is misguided. When confronted with the identical language in Howsam, the Third Circuit stated:

Properly considered within the context of the entire opinion . . . we believe it becomes clear that the Court was referring only to waiver, delay, or like defenses arising from non-compliance with contractual conditions precedent to arbitration . . . and not to claims of waiver based on active litigation in court.

See Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 219 (3d Cir. 2007). Unlike other types of waiver, litigation-conduct waiver "implicates courts' authority to control judicialprocedures or to resolve issues . . . arising from judicial conduct." Id. (emphasis in the original). Consequently, because "parties would expect the court to decide [litigation-conduct waiver] itself," the Third Circuit was unconvinced that the Supreme Court had meant for arbitrators, and not courts, to presumptively decide litigation-conduct waiver. The majority of our sister circuits agree. See Marie v. Allied Home Mortg. Corp., 402 F.3d 1, 14 (1st Cir. 2005) ("We hold that the Supreme Court . . . did not intend to disturb the traditional rule that waiver by conduct, at least due to litigation-related activity, is presumptively an issue for the court."); Grigsby & Assocs., Inc. v. M. Sec. Inv., 664 F.3d 1350, 1353 (11th Cir. 2011) (same); JPD, Inc. v. Chronimed Holdings, Inc., 539 F.3d 388, 393 (6th Cir. 2008) (same); Martin v. Yasuda, 829 F.3d 1118, 1122-23 (9th Cir. 2016)(same). But see Nat'l Am. Ins. Co. v. Transamerica Occidental Life Ins. Co., 328 F.3d 462, 466 (8th Cir. 2003) (holding that all waiver challenges should be committed to an arbitrator). We note that a majority of the decisions addressing litigation-conduct waiver pre-date BG Group, but the logic of those decisions interpreting Howsam is equally applicable to BG Group. Consequently, the district court did not err.

II.

Second, the parties' express agreement does not address litigation-conduct waiver. As a preliminary matter, PLS waived this issue by raising it for the first time in its motion to reconsider. See LeClerc v. Webb, 419 F.3d 405, 412 n.13 (5th Cir. 2005) ("A motion for reconsideration may not be used to . . . introduce new arguments."). However, even if PLS had not waived the issue, we would reach the same conclusion.

While the language of an arbitration agreement can displace the presumption that a court should decide an issue, "[a]n issue that is presumptively for the court to decide will be referred to the arbitrator for determination only where the parties' arbitration agreement contains `clear and unmistakable evidence' of such an intent." See Ehleiter,482 F.3d at 221 (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).

Here, we do not find "clear and unmistakable evidence" that the parties intended to arbitrate litigation-conduct waiver. Id. Though the parties' agreement requires arbitration of "any claim or attempt to set aside this Arbitration Provision," it does not explicitly mention litigation-conduct waiver. See Principal Investments, Inc. v. Cassandra Harrison,366 P.3d 688, 696 (Nev. 2016) ("Had Rapid Cash intended to delegate litigation-conduct waiver to the arbitrator, rather than the court, the agreements could and should have been written to say that explicitly."). Furthermore, we "cannot interpret the Agreement's silence regarding who decides the waiver issue here `as giving the arbitrators that power for doing so . . . [would] force [an] unwilling part[y] to arbitrate a matter he reasonably would have thought a judge, not an arbitrator, would decide.'" Ehleiter, 482 F.3d at 222(quoting First Options, 514 U.S. at 945). Because the Agreement does not contain "clear and unmistakable evidence" of an intent to arbitrate the instant litigation-conduct waiver issue, the district court did not err. Id. at 221.

III.

Third, the district court correctly found that Vine and Pond plausibly alleged that PLS waived arbitration when it submitted false worthless check affidavits. "The question of what constitutes a waiver of the right of arbitration depends on the facts of each case." Tenneco Resins, Inc. v. Davy Int'l AG, 770 F.2d 416, 420 (5th Cir. 1985). "Waiver will be found when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party." Subway Equipment Leasing Corp., 169 F.3d at 326 (quoting Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986)).

A.

A party substantially invokes the judicial process when it "engage[s] in some overt act in court that evinces a desire to resolve the arbitration dispute through litigation." Id. "We use the term [invoke] to describe the act of implementing or enforcing the judicial process, not the act of calling upon for support or assistance, as say, one would invoke a spirit or the elements." Id.

As the district court noted, whether PLS sufficiently implemented the criminal justice system to its own benefit such that its conduct constitutes a substantial invocation of the judicial process is a matter of first impression before this Court. On this narrow issue, we find no guidance from any of our sister circuits.

Here, Vine and Pond allege that PLS systematically engaged in a strategy of submitting worthless check affidavits that falsely stated that borrowers had committed theft by check. In addition, Vine and Pond claim that PLS submitted these false affidavits solely to achieve repayment of loans and to avoid arbitrating any collection actions. According to Vine and Pond, PLS also knew that the affidavits violated Texas law. Texas law does not permit a lender to "threaten or pursue criminal charges against a consumer related to a check . . . in the absence of forgery, fraud, theft, or other criminal conduct." See Tex. Fin. Code § 393.201(c); see also Tex. Fin. Code § 392.301.

Documents incorporated by reference into Vine and Pond's complaint also show the mechanics of PLS's alleged course of conduct.^[1] One of the affidavits submitted by PLS and a letter received by a borrower from her local district attorney's office show that the district attorney's office sent out the letter the day after it stamped the corresponding PLS affidavit as "received." This comparison plausibly suggests that when the local district attorney's office sent out its letter requesting restitution, it relied solely on PLS's representations that the customer had committed theft by check. These documents also suggest that the district attorney's office may not have exercised robust discretion in reviewing PLS's affidavits before initiating criminal proceedings against PLS customers. As the district court noted,

If what Plaintiffs allege is true, Defendants conduct is merely a pretext to obtain a favorable ruling, which Defendants can then use in either defending or prosecuting a lawsuit brought by or against Plaintiffs in an arbitration proceeding.

Moreover, if true, PLS's conduct is inconsistent with a right to arbitrate.

In determining whether PLS's alleged actions are consistent with a right to arbitrate, three state-court decisions are instructive. In Principal Investments, 366 P.3d at 690-91,the Nevada Supreme Court found that Defendant Rapid Cash waived its right to arbitrate when it secured thousands of default judgments against the named plaintiffs and other borrowers by submitting false affidavits prepared by its process server. The court explained:

"By initiating a collection action in justice court, Rapid Cash waived its right to arbitrate to the extent of inviting its borrower to appear and defend on the merits of that claim." Id. at 697. It also stated:

If the judgment Rapid Cash obtained was the project of fraud or criminal misconduct and is unenforceable for that reason, it would be unfairly prejudicial to the judgment debtor to require arbitration of claims seeking to set that judgment aside, to enjoin its enforcement, and otherwise to remediate its improper entry.

Id. at 697-98.

The Texas Court of Appeals decision in In re Christus Spohn Heath Sys. Corp., 231 S.W.3d 475 (Tex. App.-Corpus Christi 2007, no pet.), is also instructive here. Christus Spohn was a premises liability case arising out of a murder in a hospital parking lot. When the murder victim's husband filed a civil lawsuit against the hospital, the hospital moved to compel arbitration. Id. at 481. However, the court denied the hospital's motion because the hospital had sought an order of contempt against the husband's counsel during the criminal proceedings. Id. The court explained that while "ordinarily [it] would not consider actions in a separate cause as indicative of waiver," the hospital's actions were "part of its strategic plan of defense in the underlying matter that would be inconsistent with a right to arbitrate." Id.

As in Christus Spohn, PLS allegedly submitted the false worthless check affidavits as "part of its strategic plan of defense in the underlying matter" to achieve loan repayment. See Christus Spohn, 231 S.W.3d at 481. As in Principal Investments, PLS allegedly derived benefit by engaging the criminal justice system through improper conduct. If it is true that PLS's submission of worthless check affidavits was fraudulent, "it would be unfairly prejudicial to [Vine, Pond, and similarly situated borrowers] to require arbitration of claims . . . to remediate [the] improper entry" of the affidavits. See Principal Investments, 366 P.3d at 690. Thus, Vine and Pond have plausibly alleged that PLS waived its right to arbitrate when it submitted false worthless check affidavits.

Nevertheless, PLS argues that we should follow the Texas Court of Appeals decision in Cash Biz, LP v. Henry et al., 2016 WL 4013794 (Tex. App.-San Antonio 2016, pet. filed). In Cash Biz, the court found that Defendant Cash Biz did not waive its right to arbitrate when it "contacted the applicable local district attorneys and submitted information necessary to make a criminal complaint." Cash Biz, 2016 WL 4013794, at *2. The court stated that "courts consistently evaluate a party's conduct after suit is filed to determine whether it waived its right to arbitration. Here, the parties focus on Cash Biz's conduct in a separate proceeding before the underlying litigation was filed by the Borrowing Parties." Id. at *8 (emphasis in the original). The court also reasoned that "[i]n Texas, the filing of criminal charges and initiation of criminal process is the discretion of the prosecuting attorney." Id. Consequently, the preliminary act of "filing of suit or initiation of litigation is not `substantial invocation of judicial process.'" Id. (quoting G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 512 (Tex. 2015)).

However, despite the obvious factual similarities between Cash Biz and this case, we decline to follow Cash Biz for the following reasons: As the dissent in Cash Biz aptly noted, here, "we are presented with the unique situation of a civil lawsuit and a criminal proceeding, both of which arise out of the same civil debt." Cash Biz, 2016 WL 4013794, at *10 (Martinez, J., dissenting). Moreover, it is alleged that the criminal proceedings were an integral component of PLS's litigation strategy to collect on outstanding debt. If PLS attempted to "game the system" by initiating theft by check proceedings in place of submitting collection actions to an arbitrator, PLS should not be allowed "a second bite at the apple through arbitration" to resolve related issues. See Cargill Ferrous Int'l v. SEA PHX. MV, 325 F.3d 695, 701 (5th Cir. 2003) ("Under the facts of this case, it is clear Serene is not gaming the system by seeking a win at trial, and in the case of loss, anticipating a second bite at the apple through arbitration.").

In addition, we also agree with the Cash Biz dissent that the majority in that case did not sufficiently consider the critical role that the Defendant played in the criminal proceedings as the complainant. See Cash Biz, 2016 WL 4013794, at *10 (Martinez, J., dissenting) ("[W]hile the formal parties in a criminal proceeding are the defendant and the State of Texas, the victim or complaintant [sic] has a personal interest in the prosecution and thus plays a unique role in criminal proceedings."). Here, Vine and Pond allege that PLS had a great "personal interest in the prosecution" as it constituted a means to achieve repayment of its loans while avoiding arbitration. Furthermore, documents incorporated by reference into Vine and Pond's complaint arguably show that PLS drove all theft by check criminal proceedings when it submitted the worthless check affidavits to local district attorneys' offices. In other words, had PLS not submitted the worthless check affidavits, "no criminal prosecution would have occurred." See id. at *9 (Martinez, J., dissenting).

Therefore, by allegedly submitting false worthless check affidavits, PLS "invoke[d] the judicial process to the extent it litigate[d] a specific claim it subsequently [sought] to arbitrate." See Subway Equip. Leasing Corp., 169 F.3d at 328. As the district court made clear, "Defendants have initiated a process that invites Texas district attorneys' offices to address issues that are at stake in the instant action." Most obviously, all claims involve whether PLS misled or threatened Vine, Pond, and the class of PLS customers they purport to represent in order to obtain outstanding debt owed to PLS.

B.

Vine and Pond have also demonstrated detriment or prejudice from PLS's submission of worthless check affidavits. "Prejudice in the context of arbitration waiver refers to delay, expense, and damage to a party's legal position." Nicholas v. KBR, Inc., 565 F.3d 904, 910 (5th Cir. 2009). Here, Vine and Pond would have borne the costs of defending against any theft by check prosecution. In addition, they would have suffered the preclusive effect of a conviction in any subsequent litigation. Consequently, they have sufficiently shown detriment or prejudice. See Subway Equip. Leasing Corp., 169 F.3d at 327.

CONCLUSION

For the reasons stated above, we AFFIRM the judgment of the district court.

STEPHEN A. HIGGINSON, Circuit Judge, dissenting.

Although I agree with the majority that the district court did not err by deciding litigation-conduct waiver, I would hold that PLS's conduct did not amount to waiver of arbitration. I believe the question is close, due largely to the unique procedural nature of theft-by-check cases—especially here, where there is evidence that PLS not only intended to force repayment of these loans by submitting worthless check affidavits, but in fact achieved that result. However, my read of our law in Subway Equipment is that more is required for a party to have "substantially invoke[d] the judicial process." Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir. 1999).

To the extent it applies, my read of Texas law is the same. See Cash Biz, LP v. Henry,No. 04-15-00469-CV, 2016 WL 4013794, at *6 (Tex. App.-San Antonio July 27, 2016, pet. filed) ("To waive arbitration, the party must engage in some overt act in court that evince[s] a desire to resolve the arbitrable dispute through litigation rather than arbitration." (internal quotation marks and citations omitted)). Furthermore, even accepting its legal framework, I view the Nevada Supreme Court's decision in Harrisonas distinguishable due to the particularly overt and affirmative steps taken by the lender in that case, namely, "fil[ing] . . . individual collection actions in justice court" and "secur[ing] thousands of default judgments against . . . borrowers who failed to appear and defend the collection lawsuits." Principal Invs., Inc. v. Harrison, 366 P.3d 688, 690-91 (Nev. 2016).

I share the majority's discomfort that PLS may be gaming the system through its submission of the worthless check affidavits, which is inconsistent with the company's current pro-arbitration stance. As Appellees note, attempting to secure repayment through the local district attorney's office not only provides PLS with two bites at the apple, but also allows it to avoid potential costs associated with arbitration, such as arbitrator and attorney's fees. Nevertheless, I believe our law requires something more than the actions alleged here.

Accordingly, I respectfully dissent.

[*] Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

[1] In ruling on motions to dismiss, courts may examine documents incorporated into the complaint by reference. See Lormand v. US Unwired, Inc., 565 F.3d 228, 251 (5th Cir. 2009).

Case info for Lucinda Vine v PLS Financial Services Inc. (GPO)

CFPB Proposes Banning Mandatory Arbitration Clauses That Deny Groups of Consumers Their Day in Court (May 5, 2016 press-release re-post)

FOR IMMEDIATE RELEASE: May 5, 2016

CONTACT: Office of Communications Tel: (202) 435-7170

CONSUMER FINANCIAL PROTECTION BUREAU PROPOSES PROHIBITING MANDATORY ARBITRATION CLAUSES THAT DENY GROUPS OF CONSUMERS THEIR DAY IN COURT 

Bureau Seeks Comment on Proposal to Ban a Contract Gotcha that Prevents Groups of Consumers from Suing Consumer Financial Companies 

WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) is seeking comments on proposed rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court. Many consumer financial products like credit cards and bank accounts have contract gotchas that generally prevent consumers from joining together to sue their bank or financial company for wrongdoing. These widely used clauses leave consumers with no choice but to seek relief on their own – usually over small amounts. With this contract gotcha, companies can sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers. The CFPB’s proposal is designed to protect consumers’ right to pursue justice and relief, and deter companies from violating the law.

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” said CFPB Director Richard Cordray. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

In recent years, many contracts for consumer financial products and services – from bank accounts to credit cards – have included mandatory arbitration clauses. They affect hundreds of millions of consumer contracts. These clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for cases brought in small claims court. Where these clauses exist, either side can generally block lawsuits from proceeding in court. These clauses also typically bar consumers from bringing group claims through the arbitration process. As a result, no matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company.

Through the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets. Congress also gave the Bureau the power to issue regulations that are in the public interest, for the protection of consumers, and consistent with the study.

Released in March 2015, the CFPB’s study showed that very few consumers ever bring – or think about bringing – individual actions against their financial service providers either in court or in arbitration. The study found that class actions provide a more effective means for consumers to challenge problematic practices by these companies. According to the study, class actions succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year and cause companies to alter their legally questionable conduct. The study showed that at least 160 million class members were eligible for relief over the five-year period studied. Those settlements totaled $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses. In addition, these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior. However, where mandatory arbitration clauses are in place, companies are able to use those clauses to block class actions.

The CFPB proposal is seeking comment on a proposal to prohibit companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it. Under the proposal, companies would still be able to include arbitration clauses in their contracts. However, for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposal would provide the specific language that companies must use.

The proposal would also require companies with arbitration clauses to submit to the CFPB claims, awards, and certain related materials that are filed in arbitration cases. This would allow the Bureau to monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers. The Bureau is also considering publishing information it would collect in some form so the public can monitor the arbitration process as well. 

The benefits to the CFPB proposal would include:

• A day in court for consumers: The proposed rules would allow groups of consumers to obtain relief when companies skirt the law. Most consumers do not even realize when their rights have been violated. Often the harm may be too small to make it practical for a single consumer to pursue an individual dispute, even when the cumulative harm to all affected consumers is significant. The CFPB study found that only around 2 percent of consumers with credit cards who were surveyed would consult an attorney or otherwise pursue legal action as a means of resolving a small-dollar dispute. With class action lawsuits, consumers have opportunities to obtain relief from the legal system that, in practice, they otherwise would not receive.
• Deterrent effect: The proposed rules would incentivize companies to comply with the law to avoid group lawsuits. Arbitration clauses enable companies to avoid being held accountable for their conduct. When companies know they can be called to account for their misconduct, they are less likely to engage in unlawful practices that can harm consumers. Further, public attention on the practices of one company can affect or influence their business practices and the business practices of other companies more broadly.
• Increased transparency: The proposed rules would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit any claims filed and awards issued in arbitration to the CFPB. The Bureau would also collect correspondence from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to adhere to the arbitration forum’s standards of conduct. The collection of these materials would enable the CFPB to better understand and monitor arbitration. It would also provide insight into whether companies are abusing arbitration or whether the process itself is fair.

The proposed rules which the CFPB is seeking comment on would apply to most consumer financial products and services that the CFPB oversees, including those related to the core consumer financial markets that involve lending money, storing money, and moving or exchanging money. Congress already prohibited arbitration agreements in the largest market that the Bureau oversees – the residential mortgage market.

In October 2015, the Bureau published an outline of the proposals under consideration and convened a Small Business Review Panel to gather feedback from small companies. In addition to consulting with small business representatives, the Bureau sought input from the public, consumer groups, industry, and other stakeholders before continuing with the rulemaking. That process concluded in December 2015 with a written report to the Bureau’s director, which is also being released today. 

The public is invited to comment on these proposed regulations when they are published in the Federal Register. Written comments will be carefully considered before final regulations are issued.

The proposal is available at:http://files.consumerfinance.gov/f/documents/CFPB_Arbitration_Agreements_Notice_of_Proposed_Rulemaking.pdf

The Small Business Review Panel report is available at:http://files.consumerfinance.gov/f/documents/CFPB_SBREFA_Panel_Report_on_Pre-Dispute_Arbitration_Agreements_FINAL.pdf

The March 2015 CFPB report on arbitration is available at: http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/

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Prepared Remarks of Richard CordrayDirector of the Consumer Financial Protection Bureau 

Field Hearing on Arbitration Clauses 

Albuquerque, N.M.May 5, 2016

Thank you to Albuquerque for the warm welcome you have given us.  This is our 34th field hearing since the Consumer Financial Protection Bureau first opened its doors and started traveling the country to listen to the everyday concerns of American consumers.  Each one of these field hearings has been valuable for us.  They give us insight and substance to inform our work, and they humanize the challenges posed in the financial marketplace.  So we thank you all for joining us today.  Hearing people’s stories, as told by them, sometimes in voices of steely determination, other times through tears as they recount their difficulties and frustrations, leaves an indelible mark on us as we turn back to analyze and address the issues they raise.  Let there be no doubt that these sessions motivate us to keep moving forward in our efforts to help make consumer finance markets work better for consumers.

Today we are proposing a new regulation for public comment and further consideration.  If finalized in its current form, the proposal would ban consumer financial companies from using mandatory pre-dispute arbitration clauses to deny their customers the right to band together to seek justice and meaningful relief from wrongdoing.  This practice has evolved to the point where it effectively functions as a kind of legal lockout.  Companies simply insert these clauses into their contracts for consumer financial products or services and literally “with the stroke of a pen” are able to block any group of consumers from filing joint lawsuits known as class actions.  That is so even though class actions are widely recognized to be valid avenues to secure legal relief under federal and state law.

We have investigated arbitration, and our research found that very few consumers know anything about these “gotcha” clauses.  Even fewer consumers know how they actually work.  Based on our research, we believe that any prospect of meaningful relief for groups of consumers is effectively extinguished by forcing them to fight their legal disputes as lone individuals.  These battles – frequently over small amounts of money – would often have to be fought against some of the largest financial companies in the world.  When faced with the daunting prospect of spending considerable time and effort to recoup a $35 fee or even a $100 overcharge, it is not hard to see why few people would even bother to try.

The fact is that certain corporate policies and practices can be lucrative to businesses but harm large numbers of individuals only on a minor basis.  There was a long time in the history of this country where the legal system struggled for a solution to this problem.  Courts and legislative bodies sought to develop a workable mechanism whereby people could band together and aggregate their claims into a single action that could provide accountability and justice within the legal system.  Some of these efforts go back hundreds of years, but about a half-century ago, the concept of the modern class action came to fruition in the American civil justice system.  As this procedure was refined to allow the courts to handle and process such cases efficiently and fairly, both Congress and the federal courts embraced and approved this approach.  So did legislatures and courts in nearly every state.  It has proved particularly meaningful in the arena of consumer finance, where companies that violate the law may do small amounts of harm to thousands or even millions of consumers.

It is important to recognize that the legislative and judicial branches of government not only have recognized and validated this mechanism for group lawsuits, but they also tightly control its use in particular cases.  Congress and state legislatures have the authority to determine whether any violation of law can give rise to a private lawsuit in the first place, under what conditions, and for what types of relief.  If a class action lawsuit is filed, the courts have specific processes for determining whether the claims can proceed in that format or not.

This is notable because for some provisions of the consumer financial laws, Congress has in fact authorized private lawsuits.  Thus, over many years of enacting federal consumer financial laws (all of which post-date the adoption of the modern class action procedures in the federal courts), Congress has explicitly determined that such actions further the purposes of those particular statutes.  And in so doing, Congress has permitted consumers to bring lawsuits (including class actions) to seek meaningful relief for the harm done them by such violations of law.

These provisions of the consumer financial laws thus provide a right to sue for relief, with one consumer representing the interests of a group who have all been harmed in the same way.  If the lawsuit is successful, the company can be made to rectify the problem for all affected customers.  It also can be required to clean up its practices moving forward.  Yet a mandatory arbitration clause can negate all of this, leaving consumers with few practical avenues to secure adequate relief when they are harmed by violations of the law.

***

The justification for this approach is found in the Federal Arbitration Act, a statute that dates from 1925 and whose application has evolved over time.  At the outset, its primary and virtually sole focus was on business-to-business disputes, in cases where the parties negotiated and agreed that it was in their mutual interest to have their disputes resolved by an arbitrator rather than by the courts.  Over the years, arbitration came to be used in other types of disputes as well, such as those between unions and employers.  It is generally recognized as one of several methods of “alternative dispute resolution.”

More recently, many businesses have sought to use arbitration clauses not simply as an alternative means of resolving disputes, but effectively to insulate themselves from accountability by blocking group claims.  For many years, courts wrestled with the question of whether to allow arbitration clauses to be used in this way.  Several years ago the Supreme Court concluded that arbitration clauses could in fact block class actions even though the state courts in that case had deemed that result to be unconscionable under state law.

In the past decade, however, Congress has expressed growing concern about whether mandatory arbitration is appropriate in the realm of consumer finance.  First in the Military Lending Act, passed in 2007, Congress barred arbitration clauses in connection with certain loans made to servicemembers.  In 2010, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress went further by barring arbitration clauses in mortgages, which make up the largest consumer finance market.  In so doing, Congress expanded on a ban that Fannie Mae and Freddie Mac had imposed several years earlier on mortgage contracts they purchased.

Similarly, in the Dodd-Frank Act Congress authorized the Securities and Exchange Commission (SEC) to regulate the use of arbitration clauses in contracts between investors and brokers and dealers.  Here Congress was building on work by the Financial Industry Regulatory Authority (FINRA), which has long required that arbitration clauses adopted by its broker-dealer members cannot be used to block class actions by customers.  Each of these measures reflects concern about how mandatory arbitration clauses may undermine the welfare of individual consumers (or, in the case of the SEC, investors) in the financial marketplace.

Congress also spoke to our subject today by directing the Consumer Bureau to conduct a study and provide a report to Congress on the use of mandatory arbitration clauses in other consumer financial contracts.  Once this work was completed, Congress stated that “[t]he Bureau, by regulation, may prohibit or impose conditions or limitations on the use of” such arbitration clauses in consumer financial contracts if the Bureau finds that such measure “is in the public interest and for the protection of consumers,” and such findings are “consistent with the study” we performed.  We finished that work a year ago and heard from stakeholders about our findings and analysis.  We then put forward an initial framework, subject to further review through our small business review panel process and with others as well.  All of this leads up to our proposal today for a potential new rule that would address this issue.

***

To explain what we are proposing, it is useful to recap the results of our extensive study and report to Congress, which spans 728 pages of findings and analysis.  Perhaps the most striking finding from our study is that consumers rarely file individual disputes involving financial products or services in any forum.  We believe in part this is because consumers often do not recognize when their rights have been violated.  It can be difficult for consumers to know, for example, when they have received inadequate or even misleading information or when they have been subject to discrimination.  Even when consumers do feel aggrieved by something their financial service provider has done – for example, by charging an unwanted back-end fee – consumers rarely know whether the company’s conduct is unlawful.  And for the overwhelming majority of consumers, we believe it simply does not make sense to try to find a lawyer to take issue with a small fee or other such practices.

Our study further found that when individual consumers choose to step forward and bring a class action on behalf of all similarly-situated consumers, such group lawsuits can be an effective way to provide relief when they are allowed to proceed.  This includes those who may not realize that their rights have been violated or those who may have felt they simply had to resign themselves to the way they were treated.  Indeed, by examining five years of data on several distinct markets, the study found that group lawsuits delivered, on average, about $220 million in payments to 6.8 million consumers per year in consumer financial services cases.  Customers were also able to obtain substantial prospective relief by forcing companies to improve compliance and adopt more consumer-friendly practices.  Of course, the class action lawsuit is by no means a perfect mechanism for addressing such issues.  But class actions do happen to be the most practical solution that has been worked out to date.  And the precise parameters of class action procedures have remained constantly subject to further critique, reform, and improvement over time.

The study showed that many companies use mandatory arbitration clauses to block consumers from ever securing any meaningful relief from violations of the law.  Tens of millions of consumers use financial products or services that are subject to arbitration clauses.  Those clauses deter class action lawsuits from being filed and often prevent those that are filed from moving forward.  Yet without group lawsuits, those consumers who feel they may have been wronged are often left with very limited options.  They can pursue their dispute with the company individually in arbitration, in small claims court, or sometimes in state or federal court, yet our study showed they rarely do so.  They can simply accept the unlawful terms and absorb the harmful treatment, as is too often the case for many consumers.  They can pursue some type of informal dispute resolution with the company through complaint lines, which will lead to relief in some instances as a matter of good customer service, but falls far short of any systematic resolution that eradicates unlawful practices.  Or they can “vote with their feet” by moving on to another provider, though this is not always possible.  Even when it is, there may be less incentive to do so if other companies have also inserted arbitration clauses in their own contracts.

So our study indicated that simply by inserting the magic words of an arbitration clause, financial companies can avoid being held directly accountable for their actions affecting their customers.  Of course, the laws may empower certain government officials, such as those of us at the Consumer Bureau, to bring actions to enforce their terms.  Yet public resources devoted to this purpose are limited, to the point where we cannot hope to cover the waterfront of consumer financial harm by such means.  Indeed, the study found that class actions supplement government enforcement actions and seldom overlap with them.  And several state attorneys general have told us they favor limitations on arbitration clauses because their enforcement resources are also limited.

Under the proposed regulation we are releasing today for public comment, companies could still include arbitration clauses in their contracts.  For new contracts, however, these clauses would have to say explicitly that they cannot be used to stop consumers from grouping together in a class action.  As noted previously, this is the same approach FINRA has taken in regulating similar provisions in certain investor contracts and it does not go as far as Congress did for mortgage contracts or certain credit contracts for servicemembers.  In our study, we found that individual arbitrations are not commonly filed in consumer finance matters, and we do not believe we have enough data to justify restricting them further at this time.

If arbitration truly offers the benefits that its proponents claim, such as providing a less costly and more efficient means of dispute resolution, then it stands to reason that companies will continue to make it available.  If they do, then companies which retain these more limited arbitration clauses would have to submit claims, awards, and other information to the Bureau.  This would enable better monitoring of consumer finance arbitrations to ensure that the process is fair for individual consumers.  It would also enable further review of the substantive allegations raised in these arbitration processes to see if they warrant action by the Bureau.  Finally, we are considering publishing these materials on our website to promote transparency and enable the public to learn more about the arbitration process.

***

So the essence of the proposal issued today is that it would prevent mandatory arbitration clauses from imposing legal lockouts to deny groups of customers the right to pursue justice and secure meaningful relief from wrongdoing.  From the results of our study, we believe that doing so would produce three general benefits, about which we seek further comment.

First, consumers would have a more effective means to pursue meaningful relief after they have been hurt by violations of consumer financial laws.  At the same time, it would stop the same prohibited practices from harming consumers in the future.  Many of these laws confer the right to an effective remedy to redress harms consumers suffer from violations of the law.  This reflects an important element of personal liberty, that people should have the ability to protect themselves by acting to pursue their rights.  But as we have already noted, it may not be practical or worthwhile for consumers to undertake the burden and cost of bringing an individual case just to challenge small fees and charges.  Without the opportunity to pursue group claims, they may be effectively cut off from having their grievances addressed.

Second, another important benefit that would potentially flow from our proposal is that it would deter wrongdoing on a broader scale.  Although many consumer financial violations impose only small costs on each individual consumer, taken as a whole these unlawful practices can yield millions or even billions of dollars in aggregate harm.  Mandatory arbitration clauses that bar group actions protect companies from being held accountable for their misdeeds.  Thus, companies have less reason to ensure that their conduct complies with the law.  We plainly recognize that this may cause financial companies to incur higher compliance costs and forgo some revenue from engaging in risky behaviors.  But we believe that is exactly how accountability should change company behavior.

Put differently, it matters if companies are aware that group lawsuits can lead to relief to thousands or even millions of victims of unlawful practices.  The likely result is to create a safer market for current and future customers of that company.  That is because the potential for a substantial monetary award often leads a company to rethink its practices by reassessing its bottom line.  And the public spotlight on these cases can influence business practices at other companies as well.

Third, by requiring companies to provide the Bureau with arbitration filings and written awards, which we might end up making public in some form, the proposal would enable the Bureau to monitor and assess the pros and cons of how arbitration clauses affect resolutions for individuals who do not pursue group claims.  We believe this would improve our understanding and enable policymaking that is better informed.  The Bureau would also collect correspondence from administrators about a company’s non-payment of arbitration fees and its failure to adhere to the arbitration forum’s fairness principles.  The purpose here would be to provide insight into whether companies are abusing arbitration or whether the process itself is unfair.

In short, we believe our proposal would promote consumers’ ability to pursue claims, bring greater accountability, and enhance the transparency and fairness of arbitrations.

***

Our democracy allows, encourages, and indeed depends on citizens who band together to demand political or legislative change.  Many consumer financial laws likewise presuppose that groups of customers can join together in our legal system to demand changes in unlawful practices that affect them all in common.  But our study shows that an important avenue for reform can be cut off by mandatory arbitration clauses that affect millions of consumers.  Our proposal would reopen that avenue by ensuring that consumers can take action together if they have been hurt together.

Under our proposed rule, companies would not be able to deny consumers their day in court.  Companies would not be able to evade responsibility by blocking groups of consumers from the legal system and reaping the favorable consequences.  Everyone benefits from a marketplace where companies are held accountable for treating their customers fairly and in accordance with the law.

Our proposal will be open for public comment for the next three months.  We will carefully consider the comments we receive before issuing a final rule.  We have found this process is always instructive and enables us to reach sounder conclusions in the end.  We look forward to the public comments as well as the initial feedback we will hear today.  Thank you.

###

The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.