Will the Industry Attack the Constitutionality of the CFPB's Power to Regulate Arbitration Clauses?

by Jeff Sovern

Marc James Ayers of Bradley Arant Boult Cummings LLP has posted an item, Can the CFPB really prohibit pre-dispute arbitration agreements? in which he wrote:

[S]hould the CFPB independently decide to adopt regulations limiting or prohibiting the use of pre-dispute arbitration agreements relating to consumer finance, that regulation could be seen as an amendment or partial repeal of the FAA. Those defending such a regulation would argue that by enacting Section 1028 [the statute authorizing the CFPB to regulate or ban arbitration clauses in consumer financial contracts], Congress delegated the power to amend or repeal the [Federal Arbitration Act] in this way.

However, a serious challenge could be raised to such a regulation: While Congress can delegate authority to an administrative agency to adopt rules fleshing out the details of some existing statute (in a manner consistent with that statute), Congress does not have the constitutional authority to empower an agency to repeal existing law at that agency’s discretion. A challenger could argue that authority to repeal existing law is constitutionally vested solely in Congress and cannot be delegated in this manner. The answer to this question may determine whether those in the financial services industry may continue to utilize arbitration provisions in their consumer products.

I'm not a constitutional law person and so have only a limited ability to evaluate this argument. Ayers didn't cite any authority, leaving unclear the extent to which courts have adopted this limit to Congress's power. But I have a few quick thoughts: first, the CFPB would not be repealing the FAA if it banned arbitration clauses. The FAA would remain in effect as to commercial contracts and consumer contracts, like cell phones, that did not involve consumer financial contracts. Second, if the CFPB were to ban arbitration waivers, while otherwise allowing companies to use arbitration clauses in consumer contracts, it would be much harder to sustain the argument that the Bureau has repealed arbitration clauses. It could be argued that the Bureau would simply be interpreting the FAA as not applying to class action waivers (I recognize that Justice Scalia took a different view in Concepcion). Finally, instead of inserting the provision giving the CFPB the power to regulate arbitration clauses in the US Code where it did, suppose Congress had amended the FAA to provide that the CFPB has the power to exclude certain contracts from the FAA or alternatively regulate what those contracts may say. Doesn't Congress have the power to do that? Wouldn't that be what Ayers approvingly calls giving "authority to an administrative agency to adopt rules fleshing out the details of some existing statute"? And how is that different from what Congress did?