An Executive Order issued by Washington Governor Jay Inslee on June 12, 2018 seeks to rebuff the U.S. Supreme Court’s ruling in Epic Systems LLC v. Lewis, 138 S. Ct. 1612 (May 21, 2018), by implementing new state procurement procedures that overtly discriminate against companies whose employment agreements contain arbitration provisions with class action waivers.  However, the Executive Order may be preempted by federal law.

Epic Systems held that class action waivers in employment arbitration agreements are valid and enforceable under the Federal Arbitration Act (FAA) and are not prohibited by the National Labor Relations Act.  Nevertheless, the Executive Order requires Washington State executive and cabinet agencies to “seek to contract with qualified entities and business owners that can demonstrate or will certify that their employees are not required to sign, as a condition of employment, mandatory individual arbitration clauses and class or collective action waivers.”

The preamble to the Executive Order makes clear that it is specifically targeted to avoid the application of Epic Systems.  It states that the “decision [Epic Systems] will inevitably result in an increased difficulty in holding employers accountable for widespread practices that harm workers,” that “collective power is a real force for change, as evidenced by the ‘Me Too’ movement” and, therefore, “it is incumbent on state agencies to make every effort to encourage and support employers who demonstrate that they value workers’ rights to collectively address workplace disputes.”  A statement by the Governor’s Office confirmed that the Executive Order is predicated on public policy considerations that are antithetical to Epic Systems:

In our state, we value companies that respect workers’ rights …. There is power in numbers.  There is power in transparency.  And there is power in our pocketbook to influence companies to do the right thing.  We can’t change the Supreme Court’s ruling but we can change how we do business.

The Executive Order states that it is effective “[t]o the extent permissible under state and federal law.”  Because the FAA preempts inconsistent state laws, the Executive Order may be preempted by federal law.  The FAA requires rigorous enforcement of arbitration agreements “‘according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.’”  Epic Systems, 138 S. Ct. at 1621, quoting American Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 233 (2013).  As the Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 344  (2011):

States [cannot take steps that] … conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms …. States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons ….

The Executive Order is arguably preempted by federal law because it harnesses the economic power of Washington State to discriminate against companies that desire to enter into employment contracts containing arbitration agreements with class action waivers that the Epic Systems Court expressly declared to be lawful and enforceable in an opinion that is the law of the land.  Under substantive federal policy embodied in the FAA, states are forbidden from discriminating against arbitration or singling out arbitration agreements for special treatment.   See, e.g., Doctors’ Assoc., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).  That could be the Achilles’ heel of the Executive Order, since it blatantly discriminates against certain companies based solely on the fact that their employment contracts contain arbitration agreements specifying “with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.”  In any event, we consider the Executive Order to be misguided since arbitration is more beneficial to individual employees than class action litigation.

The New York Education Department (NYED) has issued a ruling which states that the Bureau of Proprietary School Supervision (BPSS) will not permit an enrollment agreement, including an arbitration clause, to infringe on the Commissioner of Education’s or the NYED’s jurisdiction “to investigate schools and issue findings (whether or not a complaint is filed), to commence disciplinary action, or otherwise to issue any remedy, including with respect to the tuition reimbursement account, provided by the Education Law and the Commissioner’s regulations.”  BPSS regulates private career training schools.

The ruling further states that mandatory, pre-dispute arbitration will not be approved, regardless of whether a school receives financial aid under Title IV of the Higher Education Act because BPSS has determined that the use of arbitration clauses “would unreasonably undermine a student’s private right of action under New York’s Education Law §5003(8), which permits a ‘student injured by a violation of [Article 101 of the Education Law to] bring an action against the owner or operator of a licensed private career school for actual damages or one hundred dollars, whichever is greater.’”  The ruling includes conditions under which “permissive, post-dispute arbitration may be approved.”

In addition to covering enrollment agreements, the ruling would appear to apply to school financing arrangements offered by a career training school subject to BPSS’s jurisdiction.  Moreover, given the ruling, it also seems likely that BPSS would try to preclude a school from asserting rights under a mandatory, pre-dispute arbitration provision in a private loan note or credit agreement that finances a student’s education at the school.

In our view, NY’s effort is an exercise in futility since it is unlikely to survive a preemption challenge under the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable.”  See AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1747, (2011) (“[w]hen state law prohibits outright the arbitration of a particular type of claim, the … conflicting rule is displaced by the FAA”).

 

 

The Department of Education, in an issue paper submitted as part of negotiated rulemaking on its final “borrower defense” rule, is proposing to require schools that use pre-dispute arbitration agreements and class action waivers in agreements with students to provide disclosures to students regarding their use of such agreements and waivers.

The ED’s proposed approach represents a reversal of the ED’s position under the Obama Administration.  In its final “borrower defense” rule issued in November 2016, the ED banned the use of pre-dispute arbitration agreements by schools receiving Title IV assistance under the Higher Education Act.  The final rule also prohibited a school from relying on such an agreement to block the assertion of a borrower defense claim in a class action lawsuit.

In November 2017, the ED announced that it was postponing “until further notice” the July 1, 2017 effective date of various provisions of the final rule, including the rule’s provisions banning the use of arbitration agreements and reliance on such agreements to block class claims.  At that time, the ED also announced that it planned to establish two negotiated rulemaking committees, with one committee to develop proposed regulations to revise the “borrower defense” rule and the other to develop proposed revisions to the “gainful employment” rule that became effective in July 2015 and includes requirements for schools to make various disclosures such as graduation rates, earnings of graduates, and student debt amounts. [link to blog]

 

The CFPB is scheduled to publish a notice in tomorrow’s Federal Register removing the agency’s final arbitration rule from the Code of Federal Regulations (CFR).  The rule was originally published in the Federal Register on July 19, 2017.  However, Congress disapproved the rule under the Congressional Review Act on October 24, 2017, and President Trump signed the joint resolution into law on November 1, 2017.  Subsequently, the CFPB posted a notice on its website that the arbitration rule “has no force or effect” and that the materials relating to the rule on the CFPB’s website “are for informational purposes only.”  Tomorrow’s notice will state the CFPB “is hereby removing the final rule titled Arbitration Agreements from the CFR.”

On November 29, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Now that the CFPB’s Arbitration Rule is Dead, How Should the Industry React?”  For more information and a link to register, click here.

Two weeks after President Trump signed H.J. Res. 111, the joint resolution passed by the House and Senate disapproving the CFPB arbitration rule, the CFPB has formally acknowledged Congress’ override of the rule under the Congressional Review Act.  The following notice is now posted at the head of the section of the CFPB’s website dealing with the arbitration rule:

“On Nov. 1, 2017, the President signed a joint resolution passed by Congress disapproving the Arbitration Agreements
Rule under the Congressional Review Act (CRA).  Pursuant to the joint resolution, the Arbitration Agreements Rule has
no force or effect. The materials relating to the Arbitration Agreements Rule on the Bureau’s website are for informational
purposes only.”

This is a fitting epitaph for a rule that was misconceived from the outset.  We assume the CFPB will publish a similar notice removing the arbitration rule from the Code of Federal Regulations, although we have not seen such a notice yet.

On November 29, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Now that the CFPB’s Arbitration Rule is Dead, How Should the Industry React?”  For more information and a link to register, click here.

The CFPB has issued its fifth Financial Literacy Annual Report to Congress.  The report describes the CFPB’s ongoing financial literacy work, “with an emphasis on work during October 2016 through September 2017.”  It covers the CFPB’s financial literacy strategy, its financial education initiatives generally and those specifically targeted at students and young adults, servicemembers, economically vulnerable individuals, and older adults, and its research initiatives.

An Appendix to the report provides a list and brief descriptions of the CFPB’s currently available financial education resources, which include web-based resources and tools, CFPB brochures, CFPB reports and white papers, and consumer advisories.

We have previously commented that the CFPB has not devoted any resources to educating consumers about arbitration.  Congress’ override of the CFPB’s arbitration rule means that the rule cannot be reissued in substantially the same form, nor can a new rule that is substantially the same be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the resolution of disapproval.  Since many financial services companies can be expected to continue to use arbitration agreements, a strong need remains for consumers to be educated about arbitration.

In a blog post last week, we noted that there had been no official statement from the CFPB about Congress’ override of the CFPB’s arbitration rule, which President Trump signed on November 1.

Since publishing our blog post, we learned that Director Cordray had issued a statement on November 1 in which he criticized the override.  Director Cordray’s statement was not published on the CFPB’s website and it appears the statement was only sent to media members.  There continues to be no indication of the CRA override on the CFPB’s website.

As we previously commented, we assume the CFPB will be publishing a notice in the Federal Register that references the CRA override and removes the arbitration rule from the Code of Federal Regulations.  However, if the CFPB is planning to wait until it publishes such a notice before removing the rule from its website, we hope it will update its website in the meanwhile to note the CRA override.

On November 29, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Now that the CFPB’s Arbitration Rule is Dead, How Should the Industry React?”  For more information and to register, click here.

Today will mark one week since President Trump signed H.J. Res. 111, the joint resolution passed by the House and Senate disapproving the CFPB arbitration rule.

Since that time, there has been no official statement from the CFPB about the override of the arbitration rule.  The arbitration rule was not mentioned in Director Cordray’s remarks to the CFPB’s Consumer Advisory Board at its November 2 meeting.

The arbitration rule became effective on September 18, 2017, with a March 19, 2018, mandatory compliance date.  Under the, Congressional Review Act, enactment of a resolution of disapproval blocks a rule from taking effect or continuing.  Accordingly, the signing of the joint resolution by President Trump means the CFPB arbitration rule became ineffective as of November 1.

Other agencies whose rules were disapproved under the CRA earlier this year have published notices in the Federal Register that reference the CRA overrides and remove the disapproved rules from the Code of Federal Regulations.  We assume the CFPB will publish a similar notice removing the arbitration rule from the Code of Federal Regulations.

As of today, however, the final arbitration rule, with its effective and mandatory compliance dates, continues to be posted on the CFPB’s website with no indication of the CRA override.  If the CFPB is planning to wait until its notice is published before removing the rule from its website, it should at least update the website in the meanwhile to note the CRA override.

On November 29, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Now that the CFPB’s Arbitration Rule is Dead, How Should the Industry React?”   For more information and a link to register, click here.

 

The plaintiffs in the lawsuit filed by industry groups in a Texas federal district court against the CFPB to overturn the final arbitration rule have filed a Notice of Voluntary Dismissal.

Yesterday, President Trump signed H.J. Res. 111, the joint resolution passed by the House and Senate disapproving the CFPB arbitration rule.  In their notice, the plaintiffs cited to the language in the Congressional Review Act that provides that the enactment of a joint resolution of disapproval blocks a rule from taking effect or continuing in effect.  The arbitration rule became effective on September 18, 2017, with a March 19, 2018, mandatory compliance date.  The plaintiffs stated that “[b]ecause the [CFPB] rule has been invalidated pursuant to the Act, and therefore has no continuing effect, Plaintiffs hereby voluntarily dismiss this action without prejudice.”

The case docket indicates that the case has been terminated pursuant to the plaintiffs’ notice.

Today, President Trump signed H.J. Res. 111, the joint resolution passed by the House and Senate disapproving the CFPB arbitration rule.

The House and Senate actions were taken pursuant to the Congressional Review Act (CRA), which establishes a fast-track procedure under which Congress can override a federal agency’s final rule by passing a resolution of disapproval that cannot be filibustered in the Senate and only requires a simple majority vote.

The arbitration rule became effective on September 18, 2017, with a March 19, 2018, mandatory compliance date.  Under the CRA, enactment of a resolution of disapproval blocks a rule from taking effect or continuing.  Accordingly, the signing of the joint resolution by President Trump means the CFPB arbitration rule is no longer effective.

The CRA also provides that enactment of a resolution of disapproval prevents an agency from reissuing the disapproved rule in substantially the same form or from issuing a new rule that is substantially the same, unless the reissued or new rule is specifically authorized by a law enacted after the date of the resolution of disapproval.  Thus, without new authority from Congress, the CFPB cannot reissue the arbitration rule with substantially similar prohibitions and requirements for companies using arbitration agreements or issue a new rule containing substantially similar prohibitions and requirements.

Acting Comptroller of the Currency Keith Noreika issued a statement in which he applauded the President and Congress for vacating the CFPB rule.  He called the override “a victory for consumers and small and midsize banks across the country because it stops a rule that likely would have significantly increased the cost of credit for hardworking Americans and taken away a valuable tool for resolving differences among banks and their customers.”