On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) released its much-anticipated and highly controversial proposed regulation on restricting the use of class action waivers and arbitration provisions in consumer contracts. The CFPB’s proposal, if effectuated, would essentially overturn years of U.S. Supreme Court precedent by prohibiting the use of class action waivers in the majority of consumer contracts. This article will summarize the Supreme Court’s jurisprudence, explain the CFPB’s proposal and its legal basis, and outline steps companies can take to address the regulation before and after it goes into effect.

Supreme Court’s Approval of Arbitration Provisions and Class Action Waivers

Over the last decade, the U.S. Supreme Court has issued a series of opinions embracing the use of arbitration provisions and class action waivers in consumer contracts. Perhaps the most well-known case is AT&T Mobility v. Concepcion (2011), where the court considered AT&T’s contract provision that included a class action waiver and required consumers to arbitrate all disputes. California state courts had rejected AT&T’s attempts to enforce individual arbitration, relying on a state law known as the “Discover Bank Rule” that allowed courts to strike “unconscionable” arbitration provisions. The Supreme Court overturned the state courts’ decisions and mooted the Discover Bank Rule. It held that the Federal Arbitration Act (FAA), which strongly favors the enforcement of arbitration provisions, preempted state law. Accordingly, the parties were bound by the single-arbitration contract provision, and the plaintiff was precluded from bringing or participating in a class action.

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