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Consumer Financial Protection Bureau Proposes Rule Banning Arbitration Clauses That Prevent Class Action Lawsuits
Posted in Arbitration

On May 5, 2016, the Consumer Financial Protection Bureau ("CFPB") issued a proposed rule that would prohibit the use of mandatory arbitration clauses in consumer financial services contracts that waive class action lawsuits. Although the proposed rule is aimed at regulating providers of consumer financial services, a number of commentators have highlighted the broad scope of the rule and its applicability to banks, credit unions, consumer lenders, payday lenders, certain auto lenders, loan servicers, debt settlement firms, installment lenders, money transfer services, certain payment processors, and others. Thus, while the proposed rule appears to be aimed at the relationship between individual consumers and core financial service providers, and not at the franchiseefranchisor relationship, franchisors who offer financing to their franchisees will want to monitor the proposed rule's progress. The rule would also require covered entities to submit certain information to the CFPB, including claims filed and awards issued in arbitration.

If the proposed rule were to go into effect, providers of consumer financial services could face significant exposure to class action suits, which are often particularly problematic for franchisors. The rule presents a significant legal shift because arbitration clauses containing class action waivers have generally been upheld since the Supreme Court's decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

Although the proposed rule will likely see implementation in 2017, the final form of the rule is subject to change after a public comment period, and even then, the contours of the rule are sure to be tested through litigation. The CFPB published the proposed rule in the Federal Register on May 24, 2016, which officially opened the 90-day comment period, with all comments due no later than August 22, 2016. The full text of the rule can be found here. Gray Plant Mooty will track the status of the proposed rule and continue to provide updates regarding any developments impacting franchisors.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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