Get ready to say goodbye to waiver of consumer class actions

A return to the dark ages; compliance is critical

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Dealers should get ready for the return of the days of consumer class actions seeking rescission of four years worth of deal files. A drastic change in the law may revive these killer class actions in mid-2017. Here, at the Scali Law Firm, we’ve been advocating corporate compliance and ethics programs due, in part, to this impending change, so that dealers can limit their liability before the change goes into effect.

By now, you’ve heard that the Consumer Financial Protection Bureau (CFPB) issued its proposal to ban class action waivers in pre-dispute arbitration clauses.

Currently, under the California Supreme Court’s holding of Sanchez v. Valencia Holding Company, dealers who use the LAW-553-CA-ARB form, available from CNCDA business partner, Reynolds & Reynolds, enjoy near unassailable protection from class actions concerning dealer F&I practices due to the class action waiver clause in its arbitration provision. That’s about to change.

The Dark Ages

It wasn’t too long ago that dealers all over California found themselves almost routinely subject to class action lawsuits over their F&I practices for innocuous technical violations of the law that caused little to no harm to any individual customer. The claims ranged from alleged improper advertising, or failure to properly document a tire fee or DMV fees to backdating a rewritten contract or violating the single document rule in the Automobile Sales Finance Act.

These cases often involved deals made over a four year period, had few defenses on the merits (though we have had significant success defeating these cases at the class certification stage) and often had questionable insurance coverage (i.e., many carriers refused to cover rescission and restitution—a buyback—which was the main remedy sought in these cases). This triple whammy proved to be troubling and very expensive for many dealers.

The Age of Enlightenment

But in 2011, in AT&T Mobility LLC v. Concepcion, the United States Supreme Court, in a 5-4 opinion, adopted the argument I unsuccessfully made in 2010 in Fisher v. DCH Temecula Imports, LLC before a California court that was hostile to class action waivers in consumer contracts. That is, the Supreme Court found that the Federal Arbitration Act preempts state law and public policy, such that it can no longer be applied in a manner that disfavors arbitration.

This monumental decision, written by Justice Antonin Scalia, marked a sea change in the enforceability of class action waivers in consumer contracts, like the retail installment sale contract used by auto dealers.

But it wasn’t the end of the fight. While numerous subsequent 5-4 U.S. Supreme Court opinions penned by Justice Scalia were handed down further emphasizing the High Court’s opinion that class action waivers in consumer contracts are enforceable, the California courts continued to rail against the High Court’s edict with anti-arbitration and anti-class action waiver opinions.

One such opinion was the Court of Appeal’s 2011 decision in Sanchez v. Valencia Holding Company, LLC, in which the Court of Appeal rejected the arbitration agreement, not due to its class action waiver, but due to what it perceived as its general unconscionable nature, citing to four specific provisions of that agreement. In early 2012, that decision was appealed to the California Supreme Court. In the meantime, dozens of pending class actions in California against auto dealers were stayed, pending the outcome of the Sanchez appeal.

Finally, last year, the California Supreme Court issued its long awaited decision in Sanchez v. Valencia Holding Company LLC, which validated the class action waiver used in the LAW553-CA-ARB form used by the majority of auto dealers in California.

Thus, since early in 2012, many of the class action cases against dealers have been stayed, and since last year’s dealer-favorable California Supreme Court opinion in Sanchez, most have been dismissed or favorably resolved. Thus, dealers have largely enjoyed four years free of consumer class actions.

A Return to the Dark Ages

But this year two events have signaled an end to the Age of Enlightenment for auto dealers; the death of Justice Scalia and the CFPB’s proposed rule banning class action waivers in arbitration agreements.

As mentioned above, many of the pro-business arbitration decisions of the U.S. Supreme Court in recent years were penned by Justice Scalia and many of them were 5-4 decisions. Justice Scalia’s absence makes it likely that the High Court’s anti-class action and pro-arbitration Justices will not be able to retain a majority in future class action and arbitration cases. As recently pointed out,

The Roberts court has steadily rolled back the excesses of the class-action bar, issuing rulings that enforce contract terms requiring individual arbitration and requiring plaintiff lawyers to state their claims with precision. This term has three big cases remaining that might now be resolved in favor of plaintiff lawyers. Microsoft v. Baker seeks to overturn a Ninth Circuit decision allowing lawyers to dismiss their cases to get a second shot at having a judge certify a class action. In Spokeo v. Robins, the court must decide whether plaintiff lawyers can sue on behalf of consumers who haven’t suffered any specific monetary loss but might be entitled to statutory damages if a company is found to have violated the law. And it is even more certain plaintiffs will win in Tyson Foods, Inc. v. Bouaphakeo, which challenged an employment class action covering hundreds of employees who arguably suffered little or no harm.

Justice Scalia’s absence certainly will increase the risk that defendants will find themselves on the losing end of pending, and possibly future, class action cases.

Second, on May 5, the CFPB announced its proposed rule banning class action waivers in consumer contracts with financial companies. Through the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress asked the CFPB to study the use of mandatory arbitration clauses in consumer financial markets. Congress also gave the CFPB the power to issue regulations that are “in the public interest, for the protection of consumers”; in addition, the findings underlying the rule “shall be consistent with” the arbitration study. Dodd-Frank Act Section 1028(B).

While NADA successfully lobbied for an auto dealer exclusion to the CFPB’s authority, when this rule banning class action waivers is adopted, it will affect financial institutions under the CFPB’s authority, which include captive finance companies and other banks with whom auto dealers do business. The adoption of the rule may mean that these companies will no longer be able to accept assignment of sale contracts that include an arbitration agreement containing a class action waiver. Thus, dealers would be unable to sell consumer contracts that include arbitration agreements containing class action waivers, effectively eliminating usage of retail installment sale contracts containing class action waivers.

While existing U.S. Supreme Court precedent has held that FAA preemption applies even to preempt other federal statutory schemes, it remains to be seen whether the new U.S. Supreme Court, bereft of Justice Scalia’s voice, would continue that precedent. The favorable resolution of this issue is further complicated by the fact that the CFPB’s class action waiver ban is a result of a Congressional mandate, potentially casting further doubt on the viability of an FAA preemption argument. Though questions about the constitutionality of the CFPB’s structure raised by the D.C. Circuit prior to oral argument in the PHH Corp. v. CFPB case, and the focus on that question at the oral argument, cast a shadow on the proposed arbitration rule. A holding in PHH that the CFPB’s structure confers too much unconstrained authority on a single individual—the Bureau’s Director—and therefore violates the Constitution could provide grounds for invalidating the arbitration rule. And if the issue is not addressed by the PHH Court, it is likely to be raised in any judicial challenge to the final arbitration rule.

When could we conceivably return to the Dark Ages?

The CFPB’s issuance of a proposed rule is just the beginning of the rulemaking process. The CFPB has established a ninety-day period for any interested party to file comments. The CFPB then is obligated to study the comments, decide whether to modify any provisions of the proposed rule—or terminate the rulemaking without issuing a rule—and, if a rule is issued, explain its provisions and respond to the public comments. That process typically requires at least several months following the close of the comment period.

The Dodd-Frank Act provides (in Section 1028(d)) that any arbitration regulation issued by the CFPB may apply only to arbitration agreements entered into 180 days after the effective date of the regulation. Recognizing this limitation, and the general rule that regulations do not take effect until 30 days after their promulgation, the proposed rule states that it would apply to contracts entered into 211 days after the date the final rule is published in the federal register (§ 1040.5(a)). Thus, if a final rule banning class action waivers in consumer arbitration agreements is promulgated, it will not likely be effective until sometime in the middle of 2017.

What can auto dealers do now to protect themselves for a new age of consumer class actions?

Compliance is key. Doubling down on F&I compliance will be required to avoid costly consumer class actions. Conducting audits of F&I practices every six months is insufficient to remove costly mistakes from your processes. An effective corporate compliance and ethics program, providing clear policies, constant vigilance and training is required. Sales and F&I personnel change with the wind. But these folks must be educated and trained on compliant practices with regularity and as soon as possible after they have been hired. Spot-checking of deal files, regular meetings and question and answer sessions to reinforce the dealership’s policies, procedures and practices should be a part of your corporate compliance and ethics program. Contact your knowledgeable auto dealer compliance attorney to learn how to protect yourself economically in preparation for this inevitable change in the law. The sooner you put an effective compliance program into place, the sooner your risk and exposure can be reduced. Remember, these class actions span four year periods. If you put an effective compliance program into place now—a year before the anticipated change in the law—you can reduce your exposure and liability by 25% before the law even goes into effect.