How Wells Fargo Illustrates the Failure of the CFPB Class Action Waiver Rule

By | November 23, 2016

Courtesy of Barret Jackson Nye and Lee Reiners

The scandal at Wells Fargo has placed big banks’ use of forced arbitration clauses under the microscope. When then Wells Fargo CEO John Stumpf testified in front of the Senate Banking Committee shortly after the scandal broke, he was asked by Senator Sherrod Brown (D-Ohio) whether his bank would continue to require customers to take all disputes with the bank to arbitration. Stumpf replied that he was “not an expert in that” and would therefore have to consult with his legal team. Brown made his views on the practice known during his opening remarks at the hearing, stating: “rather than letting fraud victims have their day in court, Wells Fargo forced customers to abide by the mandatory arbitration clauses in their real accounts. You heard that right – the bank invoked the fine print on a real account to block redress on a fake one which it had created.” The use of forced arbitration clauses even made its way to the presidential campaign trail, with Hillary Clinton pledging to “reign in that abuse.”

After an initial bungled response to the scandal, Well Fargo launched their “Commitment Campaign,” replete with a fancy television commercial. The campaign vows to: (1) fully refund impacted customers, (2) proactively confirm new account openings and (3) eliminate product sales goals for retail bankers. Noticeably absent from the campaign is a commitment to eliminate the use of forced arbitration clauses, despite the fact that a number of Democratic Senators issued a letter to Wells Fargo demanding the firm end its use of such agreements.  Consumer groups have now turned their attention to a new Consumer Financial Protection Bureau (CFPB) proposal that would generally prohibit financial institutions from including arbitration clauses that block class-action lawsuits in their consumer contracts.


The Dodd-Frank Act required the CFPB to conduct a study on the use of pre-dispute arbitration agreements “in connection with the offering or providing of consumer financial products or services.” In March of 2015, the CFPB released the results of their comprehensive three-year study to Congress. Unsurprisingly, the study found that “tens of millions of consumers use consumer financial products or services that are subject to pre-dispute arbitration clauses,” with large financial institutions more likely to include arbitration clauses than smaller institutions. The study also found that consumers were generally unaware whether their financial product contracts include arbitration clauses, and that the presence of such clauses play little role in their decision-making process.

Proposed Rule

This past May, the CFPB followed up their study with proposed rules “that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court.” However, the proposal does not prohibit all mandatory arbitration agreements in consumer contracts, instead banning only agreements that include a class action waiver. The Wells Fargo scandal is evidence that the CFPB’s proposed rule does not go far enough, and we recommend the agency strengthen the final rule by prohibiting the use of any and all arbitration agreements in consumer contracts.

Purpose of Class Action

In theory, both parties stand to benefit from class action lawsuits; plaintiffs gain the ability to bring relatively small claims that would otherwise be too expensive to bring, and defendants gain a single ruling which prevents inconsistent judicial decisions arising from the same set of facts. However, empirical evidence suggests that companies implement class action waivers in arbitration provisions to avoid class action procedures.[1] A class waiver clause in a mandatory arbitration clause has the effect of requiring the individual to submit their dispute to the arbitral forum on an individual basis. However, eliminating the class waiver clause and still having a mandatory arbitration provision leaves individuals in the precarious position that Wells Fargo customers find themselves in. They are still unable to proceed in a class action, and Wells Fargo remains insulated from the courts.

Issues with Mandatory Arbitration Clauses

Allowing for mandatory arbitration clauses in agreements is based on the principle of freedom of contract. Traditionally, when deciding whether to include an arbitration clause in an agreement, parties would weigh the procedures and formalities of the court against the simplicity, informality, and expedition of arbitration. However, the rise of contracts of adhesion has altered the traditional notion of contract bargaining from parties bargaining on equal footing and mutually agreeing to arbitrate their disputes, to parties with superior bargaining power dictating the terms to the weaker party on a take-it-or-leave-it basis. This approach has led to a debate around the fairness of mandatory arbitration clauses in contracts of adhesion.

Proponents of arbitration clauses argue that adhesion contracts are essential to the functioning of today’s economy,[2] and that it is beneficial for consumers to settle their disputes in a forum that offers speed, accessibility, and justice.[3] Some proponents even contend that arbitration clauses provide a forum of relief that would otherwise be unavailable due to the “systematic injustice in judicial outcomes because the law and the legal process are tilted in favor of the wealthy and the powerful.”[4]

Opponents of arbitration agreements in adhesion contracts argue that their characterization as cheaper, faster, and more accessible is exaggerated,[5] and that the informal setting of arbitration disempowers individuals in resolving disputes. Some studies describe arbitration as a secret process that is skewed in favor of corporations, highlighting that consumers might not pursue low-value claims because attorneys are unwilling to take their case.

Wells Fargo’s Use of Forced Arbitration

The Wells Fargo customer agreement signed by those affected had boilerplate language that covered all disputes, including “claims based on broken promises or contracts, torts, or other wrongful actions.” When customers sought to proceed as a class against Wells Fargo, it was this language that San Francisco Federal Judge Vince Chhabria relied upon in requiring the customers to proceed in arbitration.

This result illustrates that even without a class waiver in an arbitration agreement, a mandatory arbitration clause still effectively prohibits consumers from proceeding in class actions because these clauses are written so broadly that they cover virtually all disputes. In the Wells Fargo scenario, the arbitration clause signed by customers went beyond the scope of the specific product they were signing up for, and included all accounts the customer had with Wells Fargo, even if an account was opened without the customer’s knowledge or intent.

Change is Unlikely

The CFPB hasn’t provided a timeline for when they will release a final rule, and now that a Republican administration is set to take over, it may never see the light of day.  Even if it does, it will face significant legal challenges, with the Chamber of Commerce signaling they would likely sue the agency.  Regardless, the agency should release a final rule that prohibits the use of all arbitration agreements in consumer financial contracts.  It is the right policy and would signal to consumers that at least someone is looking out for them.  And if business groups sue the agency, they will have their day in court – unlike consumers.


This post comes to us from Duke Law graduate Barret Jackson Nye and Duke Law lecturing fellow Lee Reiners. Barret Jackson Nye is an MBA candidate at Duke University’s Fuqua School of Business. Prior to attending business school, Jackson received his JD and LLM from Duke Law School in 2016.

[1] Theodore Eisenberg, Arbitration’s Sumer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts, 41 U. Mich. J.L. Reform 871, 887-88 (2008).

[2]Estrin Constr. Co. v. Aetna Cas. & Sur. Co., 612 S.W.2d 413, 422-23 (Mo. App. 1981).

[3] 14 Penn Plaza LLC v. Pyett, 129 S. Ct. 1456, 1463-65 (2009) (“Parties generally favor arbitration precisely because of the economics of dispute resolution.”).

[4] Katerine Van Wezel Stone, Rustic Justice: Community and Coercion Under the Federal Arbitration Act, 77 N.C. L Rev. 931, 958 (1999).

[5] Stroh Container Co. v. Delphi Indus., Inc., 783 F.2d 743, 751, n 12 (8th Cir. 1986) (discussing how arbitration is complex, expensive, and time consuming).

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