Arbitration Clauses and Consumer Rights: Class Actions, FAA, and CFPB

A 1925 Law Now Controls How 826 Million Contracts Resolve Disputes

The Federal Arbitration Act was passed in 1925 to resolve a narrow problem: federal courts were ignoring commercial arbitration agreements between sophisticated merchants. The FAA's drafters did not contemplate consumer contracts. No one anticipated that corporations would embed mandatory arbitration clauses — with class action waivers — in the fine print of cell phone plans, credit card agreements, nursing home admissions, and employment offers. Yet by 2019, a study by the Economic Policy Institute found that 56% of non-union private-sector workers were subject to mandatory arbitration, and the Supreme Court's interpretations of the FAA had created a near-impenetrable shield against class-based consumer litigation.

The Mechanism: How Class Action Waivers Work

When a consumer opens a bank account or activates a phone plan, they typically click through a terms-of-service agreement that includes an arbitration clause. Hidden inside is a class action waiver: the consumer agrees not only to arbitrate disputes but to arbitrate them individually. This combination is lethal to consumer claims involving small per-person losses. If a bank improperly charges customers $7 each in overdraft fees — affecting three million accounts — the total harm is $21 million. But no individual customer will hire a lawyer and pursue a $7 claim in arbitration. The class action waiver eliminates the one legal vehicle that makes such claims economically viable. The $21 million goes unchallenged. Corporations have calculated — accurately — that class action waivers are more valuable than the settlements they avoid.

AT&T Mobility v. Concepcion (2011)

Vincent and Liza Concepcion sued AT&T under California consumer protection law after being charged sales tax on a "free" phone. A class of similarly situated customers existed. AT&T's contract contained a class action waiver and mandatory arbitration clause. California courts had developed a rule — the Discover Bank doctrine — holding that class action waivers in consumer arbitration agreements were unconscionable under certain circumstances and therefore unenforceable under state law.

The Supreme Court, 5-4, reversed. Justice Scalia's majority opinion held that the FAA preempts state law rules that disfavor arbitration, even if framed as general unconscionability doctrines. The FAA requires courts to enforce arbitration agreements according to their terms. California's Discover Bank rule, by treating class action waivers as unconscionable, stood as an obstacle to the FAA's objectives. Preempted. Gone.

• The ruling swept away similar state-law consumer protection rules in several states
• Companies immediately updated contracts to include explicit class action waivers
• The Concepcions recovered $7,613 in AT&T's arbitration — the individually promised premium
• The class-wide implication of AT&T's advertising practices was never adjudicated

FAA Preemption and Its Limits

The FAA does not preempt everything. Courts have identified several narrow exceptions:

• Generally applicable contract defenses: Fraud in the inducement, duress, and mutual mistake can void an arbitration clause — but the defense must apply to the arbitration clause specifically, not just the overall contract
• Substantive rights: Congress can explicitly override the FAA for specific claims; the 2022 Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act did exactly this
• Transportation workers: Section 1 of the FAA exempts contracts of employment of seamen, railroad employees, and other workers engaged in interstate commerce — interpreted by the Supreme Court in Southwest Airlines v. Saxon (2022) to include airline cargo ramp supervisors

The CFPB's 2017 Rule and Its Reversal

After a multi-year study mandated by Dodd-Frank, the Consumer Financial Protection Bureau issued a rule in July 2017 that would have prohibited class action waivers in consumer financial product agreements — covering bank accounts, credit cards, payday loans, and student loans. The rule would not have banned arbitration; consumers could still be required to arbitrate individually. But stripping the class action waiver would have made such small-dollar claims economically viable again.

Congress used the Congressional Review Act to nullify the rule in October 2017. The Senate voted 51-50, with Vice President Pence casting the tie-breaking vote. The CFPB has not attempted to revive the rule under subsequent administrations.

California AB 51 and the Ongoing State Challenge

California passed AB 51 in 2019, prohibiting employers from conditioning employment on signing an arbitration agreement covering California Labor Code and Fair Employment and Housing Act claims. Crucially, the law made the employer's act of requiring the agreement illegal — without voiding the agreement itself, an attempted workaround to avoid FAA preemption.

Federal courts split on preemption. The Ninth Circuit initially upheld AB 51 as applying to the formation of agreements, not their enforcement — outside FAA scope. Then reversed. As of 2026, the law's status remains in litigation, with the Ninth Circuit's en banc decision the controlling authority pending further appellate review. The saga illustrates the near-impossibility of state-level legislative challenges to mandatory arbitration under the current FAA preemption doctrine.

This article is for informational purposes only and does not constitute legal advice.