Sen. Reed’s Harmful and Foolish Opposition to Arbitration in Consumer Finance Disputes

Ronald Reagan once observed that “the nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’” If Senator Jack Reed (D-RI) has anything to do with it, that will continue to be true. The senator held an event last week to back the Consumer Financial Protection Bureau’s (CFPB) ban on mandatory arbitration clauses in consumer contracts, which is facing disapproval under the Congressional Review Act. Appearing alongside public attorney Paul Bland, Sen. Reed argued that most Americans are not knowledgeable enough of contracts to know what these arbitration clauses really mean. The solution? The government must step in to ban them to promote consumer welfare.

At the hearing, Mr. Bland concentrated on the Wells Fargo scandal that began last year; he believes that if the bank had not made use of mandatory arbitration clauses, consumers would have heard about it earlier, and the bad behavior would not have gone on for so long. The event also featured a woman who was defrauded by Wells Fargo, and explained that she has since joined a class action lawsuit against the company as the only way for her and others to get justice.

This argument has no merit; as my colleague Ted Frank points out, Wells Fargo is already answering publicly for the scandal by being forced by existing regulators to pay fines in the hundreds of millions of dollars, imposing layoffs, and suffering reputational damage. The scandal escaped attention for so long partly because the Office of the Comptroller of the Currency “did not take timely and effective supervisory actions after the bank and the OCC together identified significant issues with complaint management and sales practices,” not because of the use of arbitration.

When asked why the CFPB could not simply have companies include opt-out clauses for arbitrations instead of outright banning the language, Bland said studies showed that American consumers don’t read the fine print of contracts enough to make these opt-out clauses viable, and even when they do, Americans are not smart enough to understand them. Yet even when the fine print is drawn to people’s attention, they are unwilling to give up the benefits of arbitration. A campaign by Public Citizen in 2012 encouraged customers of eBay to use the opt-out clause for mandatory arbitration, yet few customers ended up doing so, because it was not in their best interests.

Even if it were true that a typical American consumer does not know enough about contract law to make the optimal decision, it does not follow that the government has to step in to make the decision for him. Perhaps the reason many Americans don’t opt out of these clauses is because arbitration truly produces better results than class-action lawsuits do, as CEI argued in 2016.

If class-action suits were truly better for consumers, they would refuse to sign contracts with mandatory arbitration clauses, and use of the clause would die out on its own. In fact, consumers see benefits from mandatory arbitration that outweigh whatever benefits they get from reserving a right to join a class action that will often provide no meaningful redress while awarding their lawyers millions of dollars.

America was founded on the principle of freedom, including freedom of contract. The greatest founding father, George Washington, included an arbitration clause in his own will. Whether intentionally or not, Sen. Reed and his allies are using hard cases to put the interests of trial lawyers above the interests of a free people.