In the fine print of credit card agreements and bank deposit agreements, banks and credit card companies frequently require consumers to agree to give up their right to sue the bank in court-even for serious violations of consumer rights-and submit any claims to arbitration. In July, the Consumer Financial Protection Bureau adopted a rule placing a rather mild restriction on such agreements-they could not prevent consumers from filing or joining class action lawsuits. However, a joint resolution has been proposed in Congress to block the rule under the Congressional Review Act, a law that provides an expedited process for Congress to overrule regulations issued by agencies of the executive branch. The resolution has already passed in the House of Representatives and is pending in the Senate.
By requiring consumers to arbitrate any claim and to give up their right to file or join class action lawsuits, a bank can make it unfeasible for consumers to hold them to account when the bank rips off numerous customers by a small amount each. For example, when Wells Fargo was caught opening fraudulent bank accounts, about 85,000 customers were charged $2 million in bogus fees-but because each of the customers was subject to an arbitration agreement and could not join together to file a class action, each would have been forced to resort to expensive, separate arbitration to recover their few hundred dollars in fees.
Cases like these are exactly why the law allows for class action lawsuits, and arbitration agreements with class action waivers subvert that purpose. While Congressional critics of the CFPB rule complained of “overregulation,” an undue interference in the free market. However, a free economy cannot function unless its participants can trust that disputes will be fairly decided. It is hard to make a bargain when you have to wonder whether your bargain will be enforced, or whether the other guy can defraud you without consequence. This requirement is not met by an arbitrator who is paid by one of the parties, whose decisions are made in secret, and whose decisions are not subject to review by a higher court.
This is why adjudication of private disputes is an essential role of government, and why it is protected in both the federal constitution and in state constitutions. State constitutions have always protected it in the strongest terms, requiring that it be “held sacred” or “remain inviolate.” Alexander Hamilton recognized in Federalist No. 83 that the lack of a guarantee of trial by jury in civil cases-“the very palladium of free government,” as he put it-was the most prominent objection to the adoption of the Constitution. This led to the right ultimately being protected under federal law by the 7th Amendment.
Sadly, this right has been eroded by the adoption of the Federal Arbitration Act in 1925 and the Supreme Court’s expansive interpretation of that statute in the 1984 case Southland Corp. v. Keating. Critics in Congress have argued that the CFPB lacks the authority to make this rule because it violates the constitutional principal of separation of powers. They may be right, but Congress could also serve the Constitution and its guarantee of the civil jury trial by amending or repealing the Federal Arbitration Act. An attempt to do so-the Arbitration Fairness Act-is before both houses of Congress and would prohibit enforcement of predispute arbitration agreements in employment, consumer, antitrust, or civil rights cases. This law has not been given a vote, however, and the infringement of millions of American citizens’ constitutional rights to a civil jury trial continues.