The Supreme Court’s latest arbitration decision is but the latest in a long line of decisions enforcing the strong federal policy enforcing arbitration clauses in consumer contracts. In DirecTV v. Imburgia, a 6-3 decision, Justice Breyer held that the Federal Arbitration Act preempts state laws, in this instance California’s, that invalidate arbitration clauses if they contain a prohibition on class-wide arbitration.

While the United States Supreme Court continues to enforce the strong federal policy favoring arbitration, another part of the federal government, the Consumer Financial Protection Bureau (CFPB) has been busily preparing to ban mandatory arbitration clauses in a broad swath of consumer contracts. The CFPB’s plans are based on a view of consumer arbitration that is wholly contrary to that expressed by the Supreme Court. The CFPB views arbitration clauses as an unreasonable restriction on consumer’s ability to file class action lawsuits, and has launched a rulemaking process designed to “prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts.” Prepared Remarks of CFPB Director Richard Cordray at the Meeting of the Consumer Advisory Board, Oct. 22, 2015, available here. The CFPB’s planned regulation would limit companies’ ability to include class arbitration waivers in their arbitration provisions, a provision the Supreme Court enforced in Imburgia pursuant to the Federal Arbitration act. The CFPB’s rulemaking proposal developed as a result to its report to Congress on pre-dispute arbitration provisions earlier this year. (Troutman Sanders’ commentary of CFPB’s report can be found here). The CFPB concluded a multi-year review of the use of arbitration agreements, and based on its own data concluded that “consumers’ relief for disputes with financial service providers” by way of class action lawsuit would be restricted as a result of these arbitration agreements. The CFPB’s study has been criticized as providing a misleading comparative analysis between class actions and arbitrations and making conclusions regarding the inefficacy of arbitration contradicted by the very data the CFPB accumulated.

While section 1028(b) of the Dodd-Frank Act gives the CFPB authority to promulgate regulations that prohibit or impose conditions on arbitration agreements for consumer financial services or products, that provision says nothing about overturning the established federal policy favoring arbitration. Nevertheless, the CFPB proposes to exercise its authority in direct contradiction to the strong federal policy favoring arbitration. Indeed, the CFPB’s regulation limiting the arbitration agreements will stand in total discord with the long-standing federal policy – as expressed by the Supreme Court in interpreting the FAA – enforcing them as written. We can be sure that such a contradiction of policies will foster a new round of litigation on class arbitration waivers in arbitration clauses that is not likely to come to a final resolution until the Supreme Court weighs in.

While foreshadowing that ultimate showdown, Imburgia’s specific holding is not without interest. California’s law barring enforcement of an arbitration provision that contained a class arbitration waiver was previously invalidated by the Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). The California Court of Appeal tried to sidestep that holding by interpreting a choice of law provision in the parties’ agreement as applying the law in California as it existed prior to Concepcion. The Supreme Court found that California should have applied its state law in its current form, not as it existed prior to the Concepcion ruling. While parties may contract the specific law to govern potential disputes, that governing law must still be a valid one. Because the California Court of Appeal sought to apply a law that had been preempted by the Federal Arbitration Act, arbitration contracts were not on equal footing with any other contract. The Supreme Court, therefore, used its power to grant certiorari to enforce the federal law favoring arbitration under the Supremacy Clause of the U.S. Constitution. In other words, the Supreme Court has backed up its view that arbitration is supported by a strong federal policy with efforts to crack down on continuing efforts by the states to negate that policy.

Troutman Sanders LLP has extensive experience in drafting and enforcing arbitration agreements in the financial services industry and will continue to monitor CFPB activity in this regard.