The Supreme Court was busy last week issuing opinions of interest to consumer finance companies, CFPB-regulated entities, and anyone who finds themselves enforcing arbitration rights in court.

The Appropriations Clause Challenge to the CFPB’s Funding Structure

First, on May 16th, the Supreme Court rendered its long-awaited decision in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd. The Court affirmed the legality of the CFPB’s funding structure in a 7-2 decision written by Justice Thomas. This is the outcome we anticipated from oral argument held in October 2023. For some in the industry, this was a welcomed result. Unpopular as the Bureau’s current rulemaking and enforcement activities may be, a number of regulated entities believed that the instability and uncertainty that would come with defunding the CFPB would have been worse.

The gist of the majority opinion is that an “Appropriatio[n] made by Law” under the Constitution’s Appropriations Clause (Art. I, §9, cl. 7) requires only that Congress designate a particular source from which the CFPB’s funds will be drawn and to specify a purpose for those funds. Beyond this, Congress has discretion on how to structure appropriations. The majority reached this conclusion based upon a historic, original-meaning analysis of the constitutional language. Applying this interpretation to the Dodd-Frank Act (the source of the Bureau’s funding), the Court determined that the CFPB’s funding structure met these modest requirements. Congress designated a source for the Bureau’s funds (“the combined earnings of the Federal Reserve System,” up to an inflation-adjusted cap), and it specified the object of this funding (to “pay the expenses of the Bureau in carrying out its duties and responsibilities”).

Justice Alito, joined by Justice Gorsuch, penned a 25-page dissent.[1] Much of the dissent is dedicated to a dueling historic analysis of the Appropriations Clause, from which Justice Alito determines that the Clause imposes more requirements on congressional appropriations than those imposed by the majority. He would have concluded that the CFPB’s funding structure flunks these requirements for a variety of reasons — e.g., it applies in perpetuity, the Bureau selects the amount it receives, the funds come from a separate, self-funded corporation, etc.

In large measure, the decision means that the status quo remains with respect to the Bureau. The Bureau has been on a rulemaking binge as of late. Many of these rules have been challenged in court, and a number of those rules have been frozen due to concerns over the CFPB’s funding structure. We anticipate that the CFPB will move to lift those stays in light of the decision. But that doesn’t mean the stays will be lifted; the challengers can still argue for a stay on grounds that the rules are likely unlawful and regulated entities will suffer irreparable harm if they are allowed to go into effect. As for enforcement actions, the CFPB has been staffing up for many months, in preparation for a likely enforcement spree. With the clouds of this constitutional challenge now parted, we expect the CFPB will be emboldened to aggressively pursue enforcement.

SCOTUS Says District Courts Must Stay Cases During Arbitration, Rather Than Dismiss Them

Another interesting decision came out on the same day, albeit to substantially less fanfare. In Smith v. Spizziri, the Supreme Court resolved a longstanding circuit split by holding that federal cases compelled to arbitration should be stayed rather than dismissed. The Court primarily based its decision on the text of the Federal Arbitration Act, which provides that a court “shall on application of one of the parties stay the trial of the action until such arbitration has been had.” 9 USC § 3 (emphasis added). The Court also found that the entry of a stay, rather than dismissal, “comports with the supervisory role that the FAA envisions for the courts,” as it allows the district court to continue to stay involved should discovery or other issues come out of the arbitration.

The Court’s decision is important for several reasons. First, litigators now have 100% clarity on the relief they should request when moving to enforce arbitration rights. Many litigators up to now have hedged by asking courts to “dismiss or, alternatively, stay” cases referable to arbitration. Some (like the respondents in this case) would outright ask for dismissal. Now, the correct answer is clear – ask for a stay.

Second, requiring district courts to stay cases referred to arbitration will shut down the practice of non-movants appealing orders that refer cases to arbitration. If district courts were to dismiss lawsuits after compelling a case to arbitration, that dismissal would constitute a final order subject to immediate appeal. Parties generally do not have the same appellate avenue when a case is stayed. “When a court compels arbitration . . . absent certification of a controlling question of law by the district court under 28 U. S. C. §1292(b), the order compelling arbitration is not immediately appealable.” In such cases, parties must instead wait until the conclusion of arbitration to pursue appellate remedies.  

The decision notably benefits consumer finance companies that regularly include mandatory arbitration clauses in their consumer contracts. Now, when a district court compels those cases to arbitration, the court will be required to stay the case, cutting off grounds for an immediate appeal of the arbitration by the plaintiff. Further, the Supreme Court made clear that its decision would not affect the appealability of orders denying a request for arbitration under Section 16 of the FAA. This will allow companies to maintain an immediate right to appeal when their arbitration rights are disregarded.

[1] The appellate nerds on our team (i.e., Eric Werlinger) find this split interesting. The popular sentiment is that Justices Thomas and Alito are the conservative bookend of the Court and that they frequently vote the same way. To be sure, this appears to be the first time in OT 2023 the two have completely split from each other. All the same, this case is an important reminder that, while some justices are jurisprudentially similar, they are not jurisprudentially the same.