The so-called Consumer Financial Protection Bureau, ghastly love child of Elizabeth Warren and Barack Obama, is attempting to overturn longstanding federal law by illegal regulatory fiat. That’s no surprise — this is mainly what Democrats created the CFPB to do, i.e., provide the Left with an all-purpose cudgel to use against financial institutions, because the Treasury Department, the Fed, the Justice Department, the FDIC, the SEC, the Office of Thrift Supervision, the Financial Crimes Enforcement Network, and the Office of the Comptroller of the Currency just weren’t enough.
At issue is the practice of financial firms’ writing arbitration agreements into contracts. When customers enter into these contracts, they agree to take certain kinds of disputes to arbitration rather than litigating those matters in court. There are limitations on this, of course: Arbitration agreements can be thrown out if, for example, the arbitration authority is found to be biased against one side of a dispute.
These agreements annoy the hell out of the left-wing lawyers who so generously fund Democratic political campaigns, because they prevent a few class-action lawsuits from getting off the ground.
The Supreme Court ruled in 2011 that such arbitration agreements must be honored. The legal reasoning there was not very difficult to follow: There is a law, the Federal Arbitration Act, that specifically requires federal courts to enforce contracts to arbitrate. That’s pretty straightforward. Because lawmakers still wrote in something resembling English when the law was drafted in 1926, its language is reasonably clear, requiring courts to enforce “any issue referable to arbitration under an agreement in writing for such arbitration.” The usual exemptions for corruption and the like apply.
The CFPB and the usual Democratic shakedown artists are making familiar arguments: The proposed CFPB regulation doesn’t violate the Federal Arbitration Act because it is narrowly tailored to cover only financial firms; such agreements are generally found in the “fine print” of contracts; and (though they generally don’t put it quite this way) financial companies are wicked and make lots of money. The first objection is irrelevant in that the Federal Arbitration Act does not contain a carve-out for financial firms; the second objection could be made about practically any contract; the third objection really does not merit a rebuttal, though it will be the most persuasive.
The law says what the law says, and such rule-making authority as the CFPB has does not entitle it to overturn an act of Congress. If the Democrats want to get rid of arbitration agreements for financial companies, then let them repeal the Federal Arbitration Act.
#share#Arbitration is a good and useful process in many contexts. For example, arbitration in high-tech intellectual-property cases allows for disputes to be considered by parties with more technical expertise than federal judges generally bring to bear. (Court watchers over 40 may remember the unseemly spectacle of the antitrust suit against Microsoft, during which Judge Thomas Penfield Jackson dozed off during the more abstruse technological disquisition and had to have the basics of how a computer works explained to him, like any other 1990s granddad.) Arbitration often is preferred over traditional litigation in the case of genuine good-faith disputes.
There are some options for consumers who do not wish to be bound by arbitration agreements, the most important of which is refusing to sign contracts that contain binding arbitration agreements. In cases in which those agreements are imposed through fraud or used abusively, legal remedies already exist.
There is room for disagreement about how useful and desirable binding arbitration clauses are. There isn’t much room for agreement about what federal law says on the matter. But Democrats prefer rolling the dice on these matters, because these fights are a win-win for them: If the case goes to court and takes years to litigate, that’s a full-employment program for the left-wing lawyers and activists employed by the CFPB. If they win, great. If they lose, they’ve still have inflicted enormous expense on U.S. financial institutions, which they regard as their enemy, indeed as the great villain of American public life.
That’s one reason the CFPB never should have been created in the first place, and another reason (there are many) to repeal the Dodd-Frank Act, which created it.