FAQ ABOUT MANDATORY ARBITRATION

A CORPORATE END RUN AROUND THE CIVIL JUSTICE SYSTEM

For 35 years, the tobacco, insurance, pharmaceutical, chemical, oil and auto companies have been before Congress and state legislatures trying to take power and authority away from juries. With “mandatory” or “forced” arbitration, they are accomplishing exactly the same objective—abolishing jury trials and eliminating the American public’s right to sue and hold accountable corporations that cause injuries.

Mandatory binding arbitration clauses have become standard in credit card and real estate contracts, applications for bank loans and leasing cars, employment contracts and even some HMO policies. In some states, they may apply broadly to insurance contracts. If you’ve bought a car, had a credit card, purchased a computer, used a cell phone, invested in stocks, had insurance, saw a doctor or worked for a large corporation during the last decade, chances are you unwittingly forfeited your constitutional right to access the courts by “agreeing to” mandatory binding arbitration, even though you may not have even realized it.

WHAT IS MANDATORY BINDING ARBITRATION?

Mandatory binding arbitration is a process by which parties “agree” to have a third party arbitrator (single arbitrator or a panel), instead of a jury or judge, resolve a dispute.

Arbitrators are not required to have any legal training and they need not follow the law. Court rules of evidence and procedure, which tend to neutralize imbalances between the parties in court, do not apply. There is limited discovery making it is much more difficult for individuals to have access to important documents that may help their claim. Arbitration proceedings are secretive. There is no right to public access. Arbitrators do not write or publish detailed written opinions, so no legal precedent or rules for future conduct can be established. Their decisions are still enforceable with the full weight of the law even though they may be legally incorrect. This is especially disturbing since these decisions are binding, so victims have virtually no right to appeal an arbitrator’s ruling.

While arbitration clauses are said to be justified on the grounds that they are “voluntary,” this is hardly true. Arbitration clauses are usually outlined in tiny print, buried in documents and paragraphs and written in legalese that is incomprehensible to most people. Moreover, these clauses are mandatory, meaning that people are compelled to agree to arbitration even before a dispute arises (i.e., “pre-dispute.”). Because entire industries are inserting these arbitration terms into contracts, there is usually little choice but to agree to them. In other words, “consent” is not voluntary, at all.

Arbitration agreements also may preclude some from bringing a class action, a practice recently upheld by the U.S. Supreme Court (AT&T vs. Concepcion), getting injunctive relief (to stop misconduct), or from collecting punitive damages or attorney fees.

IS MANDATORY BINDING ARBITRATION A BIASED PROCESS?

Yes. Arbitration has many built-in advantages that favor businesses. Bias is an obvious problem. Arbitrators may be on contract with the businesses against which the claim is brought. Often the company, not the victim, is allowed to choose the arbitrator. This creates inherent bias and self-interest on the part of the arbitrator—the arbitrator is motivated to rule in a way that will attract future company business. Businesses that are frequently before an arbitrator also know from experience which arbitrators are likely to rule favorably for them.

At the same time, arbitration companies have a financial incentive to side with corporate repeat players who generate most of the cases they handle. In March 2008, the city of San Francisco filed a lawsuit alleging that one of the nation’s major arbitration providers operated an “arbitration mill” that favored debt collectors. According to the complaint, National Arbitration Forum (NAF) arbitrators ruled in favor of California consumers in less than 0.2% of all cases (30 out of 18,075) heard from January 1, 2003 through March 31, 2007. These 30 victories only occurred in hearings where a consumer brought claims against a business; when companies brought claims against consumers, they were successful in hearings 100% of the time.

Harvard Law Professor and former NAF arbitrator Elizabeth Bartholet confirmed NAF’s anti-consumer bias in testimony before Congress. On July 23, 2008, Bartholet told the U.S. Senate Judiciary Committee how a credit card company had been allowed to remove her from cases once she ruled in favor of a consumer. “I concluded from this experience that the NAF process was systematically biased in favor of credit card companies and against debtors, since the process gave the companies a peremptory challenge right which they could use to systematically remove any arbitrator who ruled against a credit card company in a single case, since the companies were apparently using it in this way, since the alleged debtors were not in a position to know what was going on, and since NAF was fully aware of the practice and was either facilitating it or at a minimum tolerating it rather than doing anything to address it.”

DOESN’T ARBITRATION SAVE TIME AND MONEY FOR THE CONSUMER OR EMPLOYEE?

No. Arbitration cases can take years. Arbitration clauses also often require that hearings be held in a location inconvenient to the claimant. And whereas victims who go to court pay nothing up front, arbitration costs must generally be split between the injured victim and the insurance company, including the arbitrator’s fees, which can range between $200 and thousands of dollars per hour. This can be prohibitively expensive for an injured victim who has suffered financial loss, particularly in personal injury cases. Victims who are in need of medical care, who are disabled or perhaps in pain, who cannot work, whose families are disrupted and who may have major expenses, are in a substantially weaker position than their opposing party, the perpetrator of their harm or their insurers.

DO BUSINESSES PUT MANDATORY BINDING ARBITRATION CLAUSES IN THEIR OWN BUSINESS-TO-BUSINESS CONTRACTS?

Not much. When it comes to contracts with each other, corporations are far less likely to use arbitration clauses than they are in contracts with consumers. This was the finding of a December 2007 study by Cornell Law Professors Theodore Eisenberg and Emily Sherwin and Professor Geoffrey P. Miller of NYU Law School, who examined contracts from 21 financial and telecommunications companies. The data showed mandatory arbitration clauses in over 75 percent of consumer agreements but in less than 10 percent of their negotiated non-consumer, non-employment contracts.

“The absence of arbitration provisions in the great majority of negotiated business contracts suggests that companies value, even prefer, litigation as the means for resolving disputes with peers,” explained the authors. “Systematic eschewing of arbitration clauses also casts doubt on the corporations’ asserted beliefs in the superior fairness and efficiency of arbitration clauses.” Based on the data, the researchers concluded that “[l]arge corporations’ assertions that mandatory consumer arbitration is justified because it provides consumers with a superior form of dispute resolution thus appear to be disingenuous.”

In fact, most arbitration clauses force the consumer, employee or franchisee to arbitrate its claims while allowing the corporation the option of having its claims heard in court.

IS THERE HOPE FOR STOPPING THE USE OF MANDATORY BINDING ARBITRATION?

Yes! In 2009, in the case Vaden v. Discover Bank, the U.S. Supreme Court actually made it a bit easier for consumers to challenge these clauses in court.

Also in 2009, both the National Arbitration Forum and American Arbitration Association said they would not take part in arbitrated credit card collection disputes—temporarily, at least. Also, as a result of a lawsuit by Minnesota Attorney General Lori Swanson against several huge banks, Bank of America Corp. agreed to drop arbitration clauses in consumer contracts—for a few years, at least. Bank of America’s agreement came some four months after the bank voluntarily stopped enforcing arbitration agreements with existing customers. JP Morgan Chase & Co. brokered a similar deal.

But ultimately, Congress and state legislators must pass laws to restrict the use of mandatory binding arbitration. As was noted on the Fair Arbitration Now blog:

Luckily, there are members of Congress who will stand up for consumers and employees. Senators Al Franken (D-Minn.) and Richard Blumenthal (D-Conn.), and Rep. Hank Johnson (D-Ga.) announced the introduction of the Arbitration Fairness Act of 2011, S. 987 and H.R. 1873. So far, 11 other senators and 62 representatives [including Iowa Rep. Bruce Braley who is featured in Hot Coffee] have co-sponsored the legislation. They concur that arbitration should be agreed to by both parties after the dispute arises (not inserted in the fine print of one-sided adhesion contracts).

 

For more about “Caps,” check out these public interest organizations:

 

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