A group of 19 state attorneys general and the District of Columbia attorney general have sent a letter to Senate Majority Leader Mitch McConnell and Senate Minority Leader Charles Schumer expressing the AGs’ “strong opposition” to S.J. Res. 47, the resolution introduced in the Senate to disapprove the CFPB’s final arbitration rule under the Congressional Review Act.
Last week, the House passed H. J. Res. 111 disapproving the arbitration rule under the CRA. Under the CRA, to override the arbitration rule, both the House and Senate must pass a resolution of disapproval by a simple majority vote within 60 legislative days of the rule’s receipt by Congress. A vote on the Senate resolution is not expected to occur until September.
In their letter, the AGs assert that they are “quite familiar with the many meritorious class actions filed every year across the country and have reviewed thousands of successful class settlements” because their offices review proposed federal court class action settlements pursuant to the federal Class Action Fairness Act. They claim that these cases “supplement and expand our enforcement authority and prevent abuses that we do not always have the resources to address” and that “[s]uccessful cases also return millions of hard-earned dollars to low- and middle-income consumers who would otherwise have no remedy for overcharge, fraud and abuse.”
Despite the billions of dollars the arbitration rule will cost providers who currently use arbitration agreements to defend against additional class actions, the AGs urge lawmakers to consider the CFPB’s “careful and well-researched work in support of the rule, including its thoughtful analysis of the limited cost of the rule to businesses when compared to the benefits to consumers.” (emphasis added)
Unfortunately, the AGs’ position suffers from the same faulty assumption as the final arbitration rule itself – i.e., that class actions are “meritorious” even when they settle without a final adjudication of liability and the defendant denies liability. As many courts have observed, many if not most class actions settle, not because they have merit, but because most companies cannot afford to lose them. See, e.g., Coopers & Lybrand v. Liveasay, 437 U.S. 463, 476 (1978) (“[c]ertification of a large class may so increase the defendant’s potential damages liability and litigation costs that he may find it economically prudent to settle and to abandon a meritorious defense”); Newton v. Merrill Lynch, Pierce, Fenner & Smith, 259 F.3d 154, 164 (3d Cir. 2001) (class certification “places inordinate or hydraulic pressure on defendants to settle”); In re Rhone-Poulenc Rorer, Inc., 51 F.3d 293, 299 (7th Cir. 1995) (class certification may require defendants to “stake their companies on the outcome of a single jury trial”). See also Senate Report No. 14, The Class Action Fairness Act of 2005, 109th Congress, 1st Sess., 2005 WL 627977, at *14, 20-21 (Feb. 28, 2005) (“Because class actions are such a powerful tool, they can give a class attorney unbounded leverage, particularly in jurisdictions that are considered plaintiff-friendly. Such leverage can essentially force corporate defendants to pay ransom to class attorneys by settling – rather than litigating – frivolous lawsuits.”).
The CFPB’s final rule will burden financial services providers with 6,042 additional class actions over the next five years, at a cost of between $2.6 billion and $5.3 billion, and there is no reason to believe that these additional class actions will be any more “meritorious” than the past ones. The CFPB acknowledges in the final rule that (a) none of the 562 class actions it studied was tried on the merits, (b) only 12.3% of the class actions had final settlements approved during the study period, (c) the average cash payment to settlement class members was $32 and (d) the attorneys for the plaintiffs were paid $424,495,451. By contrast, awards to prevailing consumers in individual arbitrations averaged close to $5,400.
Nor does the AGs’ alleged lack of “resources” justify opening the class action floodgates. The CFPB itself has virtually unlimited resources, and the AGs collaborate with the CFPB and one another. This is what the Senate should keep in mind as it considers the joint resolution of disapproval.