Sternlight on the Equifax Fiasco

I recently posted about the Equifax Fiasco, and am still having problems getting everything straightened out with them.  I’m resigned to thinking that when 143 million people try to do something at once, there will always be bottlenecks.

FOI Jean Sternlight (UNLV) had a recent op-ed in Law360 discussing how the Equifax Fiasco relates to the political issues surrounding consumer arbitration.  The piece is published below in its entirety.

Sept. 25 is the anniversary of Congress’ passage of the Seventh Amendment to the U.S. Constitution, which provides a right to jury trial in civil cases. That right is increasingly in jeopardy, as the fine print of contracts from many banks, nursing homes, for-profits schools, credit monitoring services and other companies strip away our day in court. Forced arbitration clauses, typically coupled with class action bans, prevent Americans from accessing courts or banding together in group litigation when companies violate the law. Instead, no matter how many people have been harmed, such clauses usually require people to go it alone before a private arbitrator, typically chosen by the company, in a secretive proceeding with virtually no right of review.

A new rule by the federal Consumer Financial Protection Bureau, the independent watchdog created after the financial crisis, helps restore our constitutional rights. Specifically, this rule, adopted after years of study, prevents banks, credit reporting companies and other financial companies from using fine-print forced arbitration clauses to prevent their customers from participating in class action lawsuits brought against the company. The rule restores transparency and accountability to our justice system and allows people to exercise their Seventh Amendment rights.

But the rule is in jeopardy. The House of Representatives has voted to block the rule and the Senate may soon follow suit.

That’s why I have joined with over 400 other law professors and academics from all 50 states to support the CFPB. We urge our Senators to allow the rule to take effect.

When Equifax misplaces our trust and exposes sensitive financial information of 143 million Americans; when Wells Fargo opens 3.5 million fake accounts without customer permission; and when for-profit schools use deception to get students deep in debt for a worthless degree, people need group access to the courts. They can’t go it alone against a big company, especially when consumers may not know they have been harmed, and when the amount that a company steals from each person is often too small to justify hiring an attorney or taking the time to fight, whether in court or in arbitration.

For many years, the U.S. Chamber of Commerce and various business interests have campaigned to convince the world that arbitration is necessarily quicker and cheaper than litigation, and that class actions only benefit lawyers, and not class members. Yet, many advocates for consumers say that forced arbitration is unfair and that class actions help consumers by providing compensation and deterring future unlawful conduct.

Faced with these debates, the CFPB spent three years collecting and analyzing massive amounts of data and produced a comprehensive report, hundreds of pages long. The report found that forced arbitration typically deters consumers from bringing claims in any forum, and that class actions are far more helpful to consumers than individual arbitration. In particular, just a few hundred financial consumers even filed arbitration claims in a typical year. However, the data show that, over five years, 160 million consumer class members who were not forced into arbitration were awarded $2.2 billion in relief — after deducting attorneys’ fees.

Taking a detailed look at cases involving banks’ deceptive overdraft fee practices, the CFPB found that class actions brought on this issue alone allowed millions of Americans to recover nearly $1 billion of damages as well as important nonmonetary relief, all of which deters future legal violations. By contrast, the consumer watchdog learned that when people who were covered by forced arbitration clauses were defrauded by unfair overdraft fees or other similar financial misconduct they were not likely to know that they had been harmed, even less likely to realize that the harm was illegal, and certainly not likely to try to bring an individual arbitration claim over quite a small amount of money. This, together with the fact that federal and state investigative agencies are typically underfunded, is why class actions remain a critically important means of enforcing our laws.

The CFPB’s well-grounded data and analysis provide solid support for the arbitration rule. Yet lobbyists opposing the arbitration rule have mischaracterized the CFPB’s data. They have claimed that arbitration is better for consumers because people supposedly earn $5,389 on average in arbitration but only $32 on average in class actions.

That argument is completely deceptive. The $5,389 figure is based on the average cash award in the CFPB study for the only 16 people per year in the entire country who the study found won cash awards in arbitration. These are extreme outlier results. For the most part, when a company steals a small amount from a lot of people, those people won’t get over $5,000 if a class action ban requires them to pursue individual arbitration; they will get nothing, because only people with a lot of money at stake typically take the time and expense to pursue a case in arbitration. Compare the 16 people a year who won in consumer financial arbitrations to the 32 million who recovered billions in class actions. Companies are afraid of the deterrent power of class actions and are trying to use arbitration to avoid having to follow the law.

We cannot let dishonest lobbyist pitches doom a rule that restores accountability when companies like Wells Fargo and Equifax harm millions of people. It is time for Americans who value their Seventh Amendment rights to speak out and insist that their senators vote to preserve access to our justice system.

One thought on “Sternlight on the Equifax Fiasco”

  1. I find Sternlight’s argument, on its face, to be a rational and logical mindset when dealing with companies who have engaged in wrongful conduct. However, I do not believe that the implementation of the CFPB’s rule will actually deter future wrongful conduct by companies.

    Time and time again, we watch companies violate the law with no regard for those their illegal actions affect. Whether protected by an arbitration clauses or class action bans, they will continue to act outside the confines of the law. For example, my experience in a plaintiff-side labor and employment firm where all of the litigation is handled through the federal or state court system has shown me that companies have no remorse after violating the law. There only focus is their bottom line. Companies would rather egregiously discriminate against an employee, suffer reputational damage, and incur extensive litigation costs if said costs are less expensive than keeping an employee on board. Astonishingly, in employment actions, these companies are rarely, if ever protected by any arbitration clause or class action ban! They are willing to endure the wrath of the federal and state court system and commit the same legal violations over and over again!

    The same mindset applies to Equifax. Yes, the company has been fortunate to protect itself from litigation for a long time, but if their lobbying efforts fail, Equifax will simply adapt to the new rule to ensure its bottom line does not drop. As long as the litigation costs remain below what it costs to continue to violate the law, Equifax and other companies will not change how they act, and a rule by the CFPB will not stop them either. Equifax will not be the last company that negligently allows a hack to occur. Wells Fargo will not be the last company to open up millions of false accounts. Companies will be innovative in improving their bottom line as long as the cost/benefit analysis weighs in their favor. Removal of arbitration clauses and class action bans, and granting consumers better access to the courts will not deter the conduct of companies until their bottom line or stock price decreases.

    Therefore, the CFPB will likely have a nominal effect on how companies operate. If we want to see real change in the system, a consumer will need to be entitled to greater financial damages, companies should be ordered to dissolve; drastic measures must be taken to alter the mindsets of companies. Arbitration clauses and class action bans will not change this mindset.

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