A few weeks ago, the topic of arbitration clauses became a contretemps when General Mills tried the remarkably cheeky stunt of trying to assert that consumers who had downloaded coupons or simply liked the company on Facebook had given up their right to sue if they were harmed by using its products and could seek remedy only through “informal negotiation via email” or arbitration. The firestorm of criticism forced the food giant to back down.
But consumers and other customers, like small businesses, are increasingly being denied access to courts though the use of mandated “pre-dispute” arbitration clauses and these are often paired with class action waivers. Anyone who is familiar with libertarian ideas or “free markets” arguments about the virtues of reliance on contracts and markets as the solution to every problem can see how that fantasy simply isn’t operative. Consumers (and notice “consumers” as opposed to citizens) were already at a power disadvantage in doing business with large vendors, which is counter to the libertarian/free market fantasy that individuals can contract freely, as equals, and can rely on the courts to enforce their rights. As anyone who has applied for a credit card or checked a terms of service box on a software license knows, the “agreements” bear no resemblance to negotiated contracts; tehy are take it or leave it propositions. As a new article in the Nation elaborates:
Contracts like these are not negotiated agreements between equal parties. They are applications for services. Known in the law as “adhesion contracts,” they are standardized agreements drawn up by business lawyers, with the arbitration and class waivers usually placed in dense paragraphs in fine print that is unreadable. Few people know about the clauses, fewer read them and even fewer can understand them. Consumers and others who sign such contracts certainly do not “consent” to these conditions in any meaningful sense of the word.
In addition, individuals and small companies lack the financial firepower to go toe to toe with business behemoths in court. And these contracts are frequently designed to deny users access to the judicial system.
Georgetown law professor Adam Levitin wrote that “the fight over arbitration is another chapter in the fight over whether public services should be privatized.” And like past privatizations of public goods and services, the aim is to further entrench the privileges of the powerful. As we wrote recently:
…one of the hoary old notions of jurisprudence is equality before the law. That doesn’t serve our corporate-overlords-in-the-making too well. Subverting jurisprudence over time via inculcating pro-business thinkings through the law and economics movement apparently isn’t good enough for them; they want even higher odds of favorable outcomes. One of them is sneakily getting customers to relinquish their right to sue via getting them to agree to be subject to binding arbitration.
This requirement has long been in place as a condition of getting a securities brokerage account. Although it is difficult to prove, many securities brokerage customers feel that they don’t get the restitution which they deserve through this process (and one might cynically observe that that is a feature, not a bug). Some arbitration forums have been so clearly biased as to lead attorneys general to sue. For instance, as described by Martin & Jones:
The Minnesota Attorney General recently sued the National Arbitration Forum (“NAF”), contending that NAF committed fraud and engaged in false advertising and deceptive trade practices by intentionally misrepresenting its independence and neutrality and by hiding its ties to the debt collection industry. Soon after the case was filed, NAF agreed to a settlement, the terms of which included a requirement that NAF stop accepting all future consumer arbitrations.
The Attorney General’s lawsuit and others recently filed against NAF demonstrated that NAF was anything but the neutral, unbiased forum it represented itself to be. The lawsuits exposed the following: (1) NAF actively concealed the fact that it was owned and managed by the same New York hedge fund which also owned the three largest debt collection law firms which had claims decided by the NAF; (2) NAF helped creditors draft claims to be filed against consumers or referred them to debt collection law firms which would then file arbitration claims against the consumers before the NAF; (3) NAF solicited business from creditors by touting arbitration before the NAF as a less costly and more effective debt collection tool than the courts; and (4) NAF instructed arbitrators how they should rule with respect to certain claims and denied assignments to arbitrators who found against repeat business filers.
In other words, arbitration forums can all too easily become privatized kangaroo courts. And even when generally well-run arbitration panels have serious shortcomings in process, challenging the results of arbitration due to arbitrator bias rarely succeeds.
The Nation gives an update on how the reach of these mandatory arbitration agreements has been increasing, propelled by recent Supreme Court decisions. The article contains quite a lot of detail on the recent Supreme Court decisions, but my take was it didn’t crisply parse out the two-front attack that companies are waging against consumers’ rights to court remedies, admittedly because legal issues are a bit hairy and something of a moving target.
In simplified form, companies are trying to stymie both individual litigation and class actions suits, and the Supreme Court has addressed both issues in key decisions in recent years. A high-level overview from Levitin in May:
I have an op-ed in today’s American Banker on the supposed efficiency and fairness of binding mandatory arbitration..the needle has moved a bit on binding mandatory arbitration in consumer contracts–both ways.
On the downside, the Supreme Court both overturned a state law doctrine preventing binding mandatory arbitration (AT&T v. Concepcion), and then, in a truly shameful opinion, held that class action waivers in arbitration clauses were enforceable, even if it that meant there was no effective way to vindicate federal rights (Amex v. Italian Colors Restaurants)…
On the upside, however, some courts have read the Supreme Court opinions with a fine comb and recognized that they were 4-1-4 (Concepcion) or 4-1-3 (Italian Colors), with Justice Thomas’s concurrence leaving room to avoid arbitration clauses if the entire contract is unconscionable–with arbitration clauses being potential evidence of the unconscionability. That’s exactly the position that the California and Missouri Supreme Courts have taken.
Levitin also pointed out that in Dodd Frank, Congress banned certain types of pre-dispute arbitration clauses, in home mortgages, in broker/dealer and investment advisor agreements, and for whistleblower claims involving commodities and securities fraud. The CFPB has the power to ban pre-dispute arbitration in all consumer financial contracts, and in the late spring, released the first part of its study on this topic.
But keep in mind these Dodd Frank restrictions apply only to certain financial products. A whole swathe of consumer agreements, such as cell phone and cable agreements, nursing home care, airplane tickets, as well as other financial services, aren’t included. And here is where the Nation report gives a more complete picture of the sorry state of play. Key sections:
In recent years, and especially since Chief Justice John Roberts and Associate Justice Samuel Alito joined the Court, a major weapon in this campaign has been the Federal Arbitration Act (FAA) of 1925. The conservatives have used the act to prevent victims of such abuses from seeking redress in the courts, forcing them into pre-dispute arbitration instead. In doing so, they lose a public trial, a jury and a neutral judge, as well as an appeal to a higher court; in many cases they may also have to give up discovery rights. It is not uncommon for them to wind up before an arbitrator who is dependent upon the defendant’s business community for work and fees, and who may not even be legally trained. Not surprisingly, those forced into arbitration almost always fare much worse than they would in court…
Last December, the Consumer Financial Protection Bureau (CFPB) issued a preliminary report, which found that contract clauses mandating pre-dispute arbitration are a “common feature of consumer financial contracts”…
The CFPB found further that about 90 percent of such contracts, including almost all credit card loans, insured deposits and prepaid cards, also prohibit participation in current or future class or other joint actions in both judicial and arbitration proceedings. This usually forces consumers who have been injured in small amounts to drop the matter entirely, even though the defendant may have harmed many others the same way, for too little is at stake for each individual to justify the time, trouble and expense of individual arbitration.
The Nation also notes that post the AT&T v. Concepcion decision, class action suits have been few and far between:
A group of corporate defense lawyers triumphantly reported that since 2011, when the Supreme Court ruled in AT&T Mobility v. Concepcion that the FAA did not allow state courts to nullify class arbitration waivers in consumer cases even if those courts considered them “unconscionable,” plaintiffs had been forced to arbitrate individually in 72 percent of 375 cases. According to a study by Public Citizen’s Congresswatch, at least 139 class actions have been dismissed since Concepcion.
And predictably, low income groups fare the worst:
These recent Court decisions forcing individual arbitration hit the poor especially hard. In North Carolina, payday lending is illegal, but no individual judicial or arbitration proceedings had ever been filed, despite many illegal loans. Paul Bland, executive director of Public Justice, a public interest law firm for victims of corporate abuse, says that in cases resolved before Concepcion, his firm sued on behalf of payday borrowers and obtained more than $45 million in three North Carolina cases, and $20 million in four Florida settlements. After Concepcion, nothing: payday class actions that were still pending were dismissed, leaving these low-income borrowers with no recourse.
The Nation argues that consumer groups need to mobilize on this issue, since most Americans aren’t aware how much their rights to legal remedies have been eroded. Since Elizabeth Warren is increasingly being positioned as the stalking horse to Democratic party presidential nominee presumptive Hillary Clinton, and this sort of “protect consumers from tricks and traps” is in the middle of her beat, she might be susceptible to pressure to show leadership on this issue. Of course, the “don’t rock the corporate moneybags” considerations would lead to the opposite outcome, that of continued inaction (with waiting for the final CFPB report as her cover). This issue could serve as a good litmus test of Warren’s bona fides, whether she is really the middle class advocate she holds herself out to be, or whether her real loyalties are to her fellow elite technocrats.