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Commentary By James R. Copland

The Senate Still Has Time To Stop Lawsuit Abuse

Economics, Economics Finance, Regulatory Policy

The clock is ticking on the Senate. Under the 1996 Congressional Review Act, Congress has 60 "session days" to rescind a litigation-enabling federal rule adopted this summer by Obama administration holdovers in the Consumer Financial Protection Bureau (CFPB).

The rule was entered into the federal register on July 19. The House acted quickly, voting to quash the rule on July 25. Time expires on the Senate shortly before Thanksgiving.

The ill-advised new rule is a sop to the plaintiffs' bar. It would forbid finance companies from offering to resolve consumer complaints through arbitration rather than class-action lawsuits.

“According to the CFPB's own study, the average plaintiff brought home a paltry $32 in class-action settlements involving consumer-finance claims.”

Elizabeth Warren has tried to scare Republican Senators from acting by pointing to the data breach at the credit-rating company Equifax, which has an arbitration clause in its contracts.

Equifax has agreed to waive the clause in this case, but the broader point is that no consumer injured in the Equifax data breach is likely to recover anything meaningful in a class-action lawsuit.

In a data-breach lawsuit settled this summer by the health company Anthem, the business paid an 80-million-member class $115 million—likely less than $1 for each customer, once lawyers take their cut.

That's not an exception: Data-breach class-action settlements with Target and Home Depot netted the average customer in each respective class the grand sums of 25 cents and 33 cents. Indeed, none of the largest data-breach class-action settlements have paid more than $1 per plaintiff, according to class-action lawyers in the know.

The skimpy payouts in data-breach class-action lawsuits are striking, but they follow the general trend in such litigation across the board.

According to the CFPB's own study, the average plaintiff brought home a paltry $32 in class-action settlements involving consumer-finance claims. In contrast, according to the study, the average successful claimant in consumer-finance arbitration received more than $5,000 in compensation.

Federal law's strong presumption in favor of arbitration — with built-in protections to ensure that arbitration processes are procedurally fair — is a good thing for consumers. Customers sometimes have real disputes with vendors, but even when a consumer is in the right, attorneys will not sign up to pursue a small-dollar claim because the expected recovery from the lawsuit does not cover legal costs.

Class-action attorneys of course are happy to add together thousands — or millions — of claims into a single cause of action. But such strategies leave truly wronged consumers getting pennies on the dollar, as the data-breach settlements and CFPB study show.

Even though arbitration helps consumers and cuts the still-hefty American tort tax, it also squeezes out the lawyers. So legislation curbing the use of arbitration in consumer contracts has been near the top of the plaintiffs' bar's wish list for the politicians it generously finances. When the Obama White House was unable to win Congressional support for this idea, it moved aggressively to adopt administrative rules instead.

“Even though arbitration helps consumers and cuts the still-hefty American tort tax, it also squeezes out the lawyers.”

Thankfully, the Trump administration has been working to undo much of the prior administration's pro-lawsuit agenda. But with the CFPB, it hit a roadblock. In crafting the Dodd-Frank financial reform bill in the wake of the 2008 financial crisis, Sen. Warren and other Democrats created a new federal regulatory body designed to be independent of future Congresses — insulating the agency from the normal appropriations process and installing a single director who cannot be replaced by the president.

Thus, the individual still overseeing the CFPB is Richard Cordray, an Ohio politician whose prior political campaigns have benefited from hundreds of thousands of dollars in trial lawyer cash.

This strange agency structure forms part of the rationale for a Sept. 29 lawsuit filed in federal court by various trade associations, challenging the new CFPB rule. But there is no telling how the case will ultimately turn out. Hopefully, the Senate will just do its job and rescind the CFPB's lawyer-friendly rule.

This piece originally appeared in Investor's Business Daily

Consumer Financial Protection Bureau


James R. Copland is a senior fellow and director of legal policy at the Manhattan Institute. 

This piece originally appeared in Investor's Business Daily