Debate over forced arbitration finds its second wind, with help from events like Wells Fargo scandal

WASHINGTON – Nearly eight years after launching a legislative assault on binding arbitration clauses buried in service and employment contracts, U.S. Sen. Al Franken, D-Minn., sees unprecedented progress on a pet peeve.

The ubiquitous fine print clauses that allow company-appointed arbitrators rather than courts to determine the fate of aggrieved customers and employees have been a long-running target for Franken.

Now, a rare high-profile trifecta of current events has thrust the issue into the national spotlight.

First, the Consumer Finance Protection Bureau (CFPB) is poised to let consumers of financial services pursue complaints in class-action suits previously prohibited by arbitration clauses.

Second, the federal Centers for Medicare and Medicaid Services (CMS) just stopped long-term care facilities from forcing Medicare and Medicaid patients to sign residential agreements with arbitration clauses before they move in.

Third, news surfaced that Wells Fargo Bank applied arbitration clauses to customers hurt by unauthorized checking and credit card accounts created by bank employees, a move that will lead to a bill to ban Wells Fargo from using the practice when the Senate returns from its electoral recess in November. This month, the unauthorized account scandal cost Wells Fargo CEO and Minnesota native John Stumpf his job.

"There's real momentum on this [arbitration] issue," Franken said. "These kinds of examples have a real impact on people."

Franken knows the battle against fine print, "pre-dispute" arbitration clauses is far from over. He has succeeded in getting mandatory arbitration stripped from sexual assault and civil rights claims of government contractors. But the Arbitration Fairness Act he offered in 2011 and 2013, which would have generally invalidated mandatory arbitration agreements as a condition of being hired or offered a service, never made it out of committee.

The U.S. Chamber of Commerce and the financial services industry lobbied strongly against Franken's legislation. They continue to fight back against the CFPB and CMS initiatives that they claim will empower expensive class-action lawsuits and enrich trial lawyers while doing little or nothing to make complaining parties whole.

"Consumers do much better in arbitration than they do in class action, and the CFPB's own study showed that," said Matthew Webb, a senior vice president in the chamber's Institute for Legal Reform.

The CMS rule is "on pretty weak ground as far as the Federal Arbitration Act," Webb added.

A three-judge panel of the District of Columbia Court of Appeals issued an opinion Oct. 11 questioning the constitutionality of CFPB's power in a separate case.

The Wall Street reform passed by Congress instructed the watchdog agency to study arbitration clauses and apply limitations that it deemed in the public interest. CFPB said the 2015 study that led to its proposed ban on mandatory arbitration "found that class actions provide a more effective means for consumers to challenge problematic practices by companies."

CMS said it was "strengthening the rights of long-term care facility residents."

How thoroughly the new regulatory restrictions, combined with bipartisan outrage at corporate fraud, can change things is unclear.

"The latest developments are incredibly important," said Minneapolis attorney Vildan Teske, who specializes in consumer finance. "But it is a patchwork of protection. It doesn't cover every situation."

For instance, the new nursing home rule may not extend to other categories of senior care, such as assisted living facilities and "memory care" facilities that house people with dementia, according to Joel Smith, an attorney in Plymouth.

"I don't see this trickling down," he said.

Minnesota Attorney General Lori Swanson began looking at arbitration clauses when she sued an arbitration company in 2009 for not disclosing its ties to the banks and credit card companies involved in its supposedly neutral negotiations. Swanson has testified twice on Capitol Hill about the ways arbitration clauses unfairly limit consumers. Her office encouraged the Consumer Finance Protection Bureau and the Center for Medicare and Medicaid Services to move against what she considers "forced arbitration."

On Oct. 4, Swanson sent a letter to Stumpf asking him to stop using arbitration clauses in resolving complaints by customers who had unauthorized accounts created in their names.

"This stretches forced arbitration to a preposterous extreme," she wrote.

Swanson told the Star Tribune that arbitration clauses are "pretty eye-opening in terms of abuses."

"We've seen more and more companies put them into the fine print of contracts," she explained. "The problem with forced arbitration is you forfeit the right to have a day in court without knowing it."

Still, the limits of her authority to do anything about abuses hinge on two U.S. Supreme Court cases that upheld pre-dispute arbitration clauses under existing federal law and prohibited states from banning them.

"Congress is the only body with the power to ban this across all sectors," Swanson said.

U.S. Sen. Sherrod Brown, D-Ohio, has promised to introduce a bill in November that prohibits Wells Fargo from arbitrating unauthorized account cases.

Franken said he will support the bill and refile his Arbitration Fairness Act next year.

"You want to sue [Wells Fargo] for fraud for opening [an unauthorized] account, and they are taking the position successfully that the arbitration agreement on the bogus account is binding. That's absurd," Franken said.

Wells Fargo declined to comment on Swanson's letter, Brown's bill and Franken's observation. The company pointed to $2.6 million it set aside to pay for fees associated with unauthorized accounts in addition to its $185 million settlement with the government.

"In cases where customers have received a product that they did not want or authorize related to our recently announced settlements, we are providing free mediation through an impartial third-party," a spokeswoman said in a statement.

In Los Angeles, attorney Jonathan Delshad has sued in behalf of Wells Fargo employees he says were fired because they could not meet the sales quotas that drove other employees to create unauthorized accounts. Delshad, a Minnesota native, expects the company to try to force his clients into closed arbitration hearings.

In that way, Wells Fargo "will be able to fire good employees who said something is wrong, and grievances will be hushed," Delshad said. "That's why employees who were fired should be included in any legislation."

Teske believes the industries affected by the new regulatory rules will challenge them in court, possibly trying to head them off before they can be put into practice.

Webb said supporters of arbitration clauses are "looking at all of our options" as they study the CMS rule and await the final language from CFPB.

"Clearly litigation is always on the table," Webb said. "The chamber isn't afraid to file lawsuits against rules that we believe are inappropriate or unfair or against [the] law."

Meanwhile, advocates for reform say that the more politicians talk about arbitration clauses, the better consumers understand them, and the greater the chances for legislative relief.

"Public opinion matters," Teske said. "When people realize they are being cheated and can't take it to court, that is going to make a difference."

Franken agreed.

"The right to go to a jury is [mentioned] twice in the Bill of Rights," he said. "This is really just very basic justice."

Jim Spencer • 202-662-7432