Sponsored by Kaufman & Canoles
On Dec. 14, 2015, the Supreme Court of the United States decided yet another case by making a ringing endorsement of the use of arbitration in pre-printed, consumer-oriented, form agreements. The Supreme Court overturned a California state court ruling against a class-action waiver provision, saying once again that the lower courts were not giving due regard to the strong “federal policy favoring arbitration.”
To hear the federal Consumer Financial Protection Bureau tell it, consumer arbitration provisions are devious, confusing and maybe even may clog your arteries. The CFPB is considering a new blanket rule that may prohibit arbitration clauses between many financial institutions, service providers and their customers or members. The CFPB has not given any indication that it does not intend to impose this new rule on credit unions, despite the fact that very few credit unions currently include arbitration provisions in account agreements.
Whatever the merits of an anti-arbitration rule, the CFBP should keep its hands off credit union agreements and their members. In fact, credit unions might reasonably think about entering into more arbitration agreements with their members than they do now. It is a fact of life that members and credit unions have disagreements. Some of those disagreements are easily fixed. Others, not so much. And for many of the disagreements that arise between a credit union and a member, arbitration often proves a better method to resolve the dispute than running to court. There are a number of reasons this is so.
First, arbitration is a confidential process. Every paper filed in every court case in the country is a public document (with very few exceptions). The Internet means that court documents can be pulled up in seconds – every court document filed in every federal court can be accessed by the Internet, and most state courts have followed, or soon will follow, suit. But the very essence of the mission of a financial institution such as a credit union is safeguarding the privacy of their members, the confidential financial information that most folks would be reluctant to see spread on the public record –much less see linked via a hyperlink to their Facebook page.
Credit unions go through great expense to establish secure computer systems, and to hire and train responsible employees. Putting a member’s dispute on public display is simply not who we are. And this is true even if account balances and credit card use does not make its way into the public document; a dispute about credit score reporting or paying for overdraft protection can be just as hurtful to a member if made public, even if the details are not. And those cases are not at all uncommon.
Second, arbitration can be easier and cheaper for all involved. Now, let’s be frank: A significant commercial arbitration (about, say, the dissolution of a large professional business) often takes longer and cost more than going to court. But the arbitration of a single dispute with a member can be done cheaply and easily. Most of these disputes are in the five-figure dollar range, or less, and the American Arbitration Association has special “consumer arbitration rules” to level the playing field for members. And again, if the interpretation of some complex federal regulation is at issue, arbitration can get complex – but many times, in the case of a simple dispute, a member can navigate the arbitration process without the expense of a lawyer. One of the basic advantages of arbitration is that the arbitrator is free to work around the formal rules of evidence and pleading, and get to the heart of the matter: substantial justice. Courts just don’t have that flexibility.
Third, arbitration allows a member to resolve her own concerns, without being dragged into a class action in which she will have no control over her fate. Arbitration provisions can require the member and the credit union to resolve the dispute one-on-one; in a relatively modest case, the hearing could take an hour or so. Class actions in court take many years and usually benefit only the lawyers: We have all heard horror stories of five-year class action law suits settled where the lawyers get millions, and the persons who were injured get a coupon for a free soft drink. Arbitration can avoid this.
And finally, remember: as a credit union, we do not have “customers” – we have “members.” No one works at a credit union to build a financial empire, and in almost every case, members are treated like family. We are community based, fairly small organizations – and millions of dollars in attorney’s fees come out of the pockets of our members, not out of the gazillion-dollar profits of a hedge fund. Going to court is public, divisive and unpleasant. Disputes are inevitable in any organization, but arbitration remains a valuable tool for credit unions in the United States. Let us hope that the CFPB takes note of the strong “federal policy favoring arbitration,” and does not consign our members to years of courtroom purgatory!
John M. Bredehoft is a member of Kaufman & Canoles’ Credit Union Team and Labor and Employment Team. His practice emphasizes litigation and litigation-avoidance strategies and he regularly counsels credit unions on discrimination and harassment matters, executive contracts, trade secret and computer crime cases, and advice and litigation on covenants restricting post-employment competition. John can be reached at firstname.lastname@example.org or 757.624.3225.
Dustin H. DeVore is co-chair of Kaufman & Canoles’ Credit Union Team and works closely with a number of credit unions on regulatory and lending issues. He can be reached at email@example.com or 757.259.3808.
The K&C Credit Union Team serves as general counsel to credit unions, large and small, regularly advising clients on consumer compliance issues, NCUA requirements, and the rules governing credit union service organizations. For more information about our team visit www.kaufcan.com.