How Mandatory Arbitration Cheats Consumers

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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.

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  1. Clive

    Many of the right-wing parties who campaigned in the recent European elections did so with manifestos which were highly critical of the European Court (which is able to overturn decisions of even Supreme Courts of EU member states, it’s sort-of like a Supreme Court’s Supreme Court, roughly the same as the US Federal Supreme Court being able to outrank States’ Supreme Courts).

    This is probably because the European Court is one of the last remaining holdouts against neoliberalism. Generally, it does a very fine job of upholding individual rights against state and corporation rights. In my opinion, it consistently produces “good law”.

    The European Court was asked to consider the questions of binding mandatory arbitration. It ruled (sorry, as is usually the case, this is a long, long ruling and I include only for reference) that:

    “Nor do the principles of equivalence and effectiveness or the principle of effective judicial protection preclude national legislation which imposes, in respect of such disputes, prior implementation of an out-of-court settlement procedure, provided that that procedure does not result in a decision which is binding on the parties, that it does not cause a substantial delay for the purposes of bringing legal proceedings, that it suspends the period for the time-barring of claims and that it does not give rise to costs or gives rise to very low costs for the parties, and only if electronic means is not the only means by which the settlement procedure may be accessed and interim measures are possible in exceptional cases where the urgency of the situation so requires.”

    (emphasis mine). In other words, States can have mandatory ADRs (Alternative Dispute Resolution procedures) but while they can be mandatory, the cannot be binding. If they were binding, the European Court has ruled would invalidate the higher principle of a Right to a Fair Trial.

    As an aside, this of course incenses Europe’s ultra right wing parties — and even the more traditional right-of-centre ones. What they want is “power” returned to “nation states”. Presumably the “nation states” would not be such meanies to big business and let them have their mandatory binding arbitration. So there’s a lesson for everyone here. Which is: whenever you hear anyone talking about “transferring power” from agent A to agent B, sit up and take notice. They might well be indulging in regulatory or legal arbitrage, merely shopping around for a cushier deal. But I digress…

    So, if the European “Supreme Court” has ruled that mandatory binding arbitration is incompatible with the right to a fair trial, what exactly is the US Supreme Court smoking >

  2. Scott

    One of the most troubling aspects of these decisions is the lack of discussion regarding the constitutional issues surrounding mandatory arbitration. The seventh amendment is supposed to guarantee the right to trial by jury:

    “In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any court of the United States, than according to the rules of the common law.”

    The text appears to be very straightforward and, based on my understanding, the amendment was passed rather explicitly to limit the ability of judges to control the outcomes of civil trials, as many Founders saw judges as (rightly) biased. The purpose of arbitration is to do the exact opposite and slate the results in favor of the moneyed interests. Under a strict interpretation of the constitution, mandatory arbitration should be unconstitutional, but given the makeup of federal courts, especially the Supreme Court, what the constitution actual says is less important the political and financial views.

    1. MaroonBulldog

      For the first 140 years or so of United States history, courts would not enforce an agreement to submit a dispute to arbitration in the future, but they would enforce an arbitration award issued by an arbitrator to parties who had already submitted their dispute to arbitration voluntarily in the past. Things changed around 1925 when Congress enacted the Federal Arbitration Act, directing federal courts to enforce agreements to arbitrate future disputes involving “commerce”, which still had a narrow constitutional definition at the time. New York, California, and other states also adopted state arbitration acts, directing state courts to enforce agreements to arbitrate disputes in the future, using similar language to the federal arbitration act. The expansive enforcement of arbitration clauses today results from the expansive definition of “commerce” that Congress could regulate, starting in the New Deal, combined developments of preemption doctrines under the federal Supremacy clause. The U. S. Supreme Court’s expansive enforcement of arbitration clauses is not some recent thing to be blamed entirely on John Roberts; it has been going on since the 1980’s.

  3. washunate

    “But consumers and other customers, like small businesses, are increasingly being denied access to courts…”

    Great article. The two-tiered justice system is one of our most fundamental problems of political economy.

    I would put that sentiment in the active voice, naming names:

    The educated technocratic elite in law, academia, and government are denying access to courts for consumers, small businesses, and other actors who lack insider connections and substantial wealth.

  4. cebepe

    I’m an attorney who has litigated many cases, and also often served as Arbitrator. I question the perception that courts are bastions of justice for the little guy, and that arbitration is a tool of corporate power. As for trial by jury in small consumer cases, please folks bear in mind the costs, which very often exceed any possible recovery. What’s missing from this discussion is acknowledgment that these civil cases are all about “damages” (money), and that cost-effectiveness, so familiar an economic concept to all readers of Naked Cap, is also critical in lawsuits. The first plain fact is that the cost of lawsuits is prohibitive, and the second plain fact is that courts are very slow. If you do away with arbitration, you do not automatically make the courts available to plaintiffs, because of the prohibitive cost of court cases. To garble Marie Antoinette, if bread (arbitration) is made unavailable, that doesn’t mean the people get to eat cake.

    1. Ben Johannson

      I don’t think the argument here is that doing away with arbitration will make it allright, but that arbitration is used to further disadvantage individuals against institutions with vast financial resources. Nothing can be of greater importance in a society than justice so we need to seriously look at how the financial burden is apportioned. Given how sclerotic and costly the civil process can be we should reconsider whether a system of “the best justic money can buy” is serving our interests.

      An idea thrown out for the hell of it: nationalization of the legal profession.

    2. Clive

      Hi cebepe

      The European Court considered the points you raise in great detail (it’s in their judgement which was handed down that I linked to in my comment earlier). It isn’t that they are completely without merit. The cost to litigants, the cumbersomeness of court proceedings, the almost essential requirement that you have representation — all these and more mean that court proceedings might not always be the best method for resolving disputes. Personally, I think it is probably on balance best that there are mandatory ADRs.

      But the problem is when they are binding and mandatory. As the European Court’s judgement points out, the same things that make ADRs useful (informality and not necessarily parsing every line of the contract or statute literally, the probably lack of representation, their not being considered to form part of case law with all that that entails, their speed of being convened, the “economies of scale” because they can follow boilerplate processes and operations, the possible lack of public oversight or the opportunity for the public to observe proceedings, their freedom to use channels other than strict face-to-face — and many more) are the very same things which might (notice I say “might”, not “inevitably”) preclude a litigant being able to have access to a fair trial.

      Okay, the European Court could have got it completely wrong. But why is that ? What makes the Supremes so darn sure ?

      In short:

      Mandatory arbitration: Yes. Binding arbitration: Yes. Mandatory binding arbitration: No.

      It’s also worth considering here that in Europe, this matter wasn’t resolved by people chatting in a blog comments section. It went to the highest court in the continent after passing through a member state’s court system and I think we can conclude from that process that all these issues got aired and considered. The European Court judged that mandatory binding arbitration was a threat to getting a fair trial and that threat outweighed the — apologies for the trite phrase — “convenience” of any mandatory binding ADR system.

      1. MaroonBulldog

        Around 1925, Congress and state legislatures made mandatory predispute binding arbitration clauses enforceable in the United States, in the face of a historical attitude of judicial hostility toward enforcing them. Congress and state legislatures can reverse that policy whenever they want to.

    3. armchair

      The discussion is about “mandatory” arbitration. Cebepe, why don’t you explain, from your experience, what recourse the claimant has if the arbitration doesn’t go well? Why don’t you explain where they can file an appeal?

      1. MaroonBulldog

        There is no appeal from an arbitration award unless the parties to an arbitration agreement have spelled out an agreement for appeal to another arbitrator–there has been some impetus to do this in some agreements, lately, but historically this was an unusual practice. A court can vacate an arbitration award on very narrow grounds–basically, for corruption by the arbitrator or on a showing the the arbitrators, exceeded their authority under the agreement to submit the dispute to arbitration, but a vacated award just leaves the parties with an unresolved dispute.

    4. Yves Smith Post author

      You don’t indicate which side you’ve litigated for, and as an arbitrator, you have a vested economic interest in the current bad system.

      You finesse the issue that after Conception, the “pre-dispute” arbitration is paired with a waiver of class action. The campaign against class action suits has gone in parallel with deregulation, and for good reason. Class action suits are one of the few ways that corporations can get dinged in a major way for penny-ante cheating, like charging undisclosed foreign exchanges on non-dollar charges.

      In addition, you also miss the deterrent value of the occasional “mad as hell” wealthy client who sues to make a point and gets media traction for his case. I know one of those guys and years ago he did do some real damage.

      Plus you ALSO sidestep how arbitration is stacked against consumers. What good is phony recourse?

  5. mellon

    It may not seem obvious to many people, but the MOST outrageous “arbitration” hijacking of the rights of people are the free trade agreement courts, which enforce the maoral and illegal FTAs, which hijack democracy for corporations.

    Their arbitral bodies now are seen as superior to national courts, and national courts must enforce their rulings!

    They supersede national laws. A good example of how horrible this is for a country’s rights is the recent pair of Achmea B.V. v. Slovak Republic cases (read this first- the summary starts on Page 13)

    (Achmea I) (the case starting in 2008) (Slovakia lost 29 million euros for trying to limit health insurers profits – is appealing)

    (Achmea II) (the case starting in 2012) (Slovakia was stopped from implementing single payer law its people had voted for) Decision PDF here

    Please also see the concise description of the Slovakia situation in this article covering the UK NHS privatization protests – UK anti-TTIP protests to focus on NHS privatisation.

    ““Locking in liberalisation laws”

    But protestors are still worried that once a service is privately owned, it will become “extremely difficult” to renationalise it.

    With the introduction of the controversial Investor-State Dispute Settlement, or ISDS clause, compensation would also have to be paid to the private company in case of renationalisation, Hillary warned.

    “You wouldn’t even have to pay them compensation for losses, but also for potential losses of profit in the future,” Hilary claims.

    To illustrate his point, Hilary takes the example of Slovakia, where a bilateral trade deal was signed with the Netherlands, leading to the privatisation of the health insurance sector. Today the new government, which had campaigned against the move and promised to renationalise the sector, is sued by a Dutch company called Achmea.

    After the renationalisation, “Achmea took it to an arbitration court and they won €29.5 million,” Hilary recalls.

    Like with TTIP, Slovakia and the Netherlands had agreed on a bilateral deal which contained the same clause on arbitration tribunal.

    “It’s the same principle using the same basis of investment to state settlement. This shows a clear precedent, we have cases where they have been successful in suing governments and this one is particularly important because it’s in Europe,” Hilary warns, “when you have opened up a service, then, if you put into your trade agreement schedule the services that the country is prepared to commit, it means that it is binding the liberalisation you have agreed to.”

  6. armchair

    There was a study a couple of years ago estimating the time it would take to read privacy policies and user agreements. It is an academic study, so you can choose which part of the study to quote, but it is fair to say it take 201 hours a year based on the data in the study. Of course, you can find plenty of advice out there that you should always read the fine print, along with cooking whole foods, daily exercise, working toward a promotion, spending quality time with your family, changing the oil in your car, getting 9 hours of sleep, taking kids to practice, volunteering and smelling the roses.

  7. Justicia

    Another, under the radar, effect of these ubiquitous mandatory arbitration clauses is the diversion of commercial disputes to private law arbitration forums, which undermines the development of the common law.

    Our common law legal system (inherited from England) is premised on transparent judicial review — judges must publicly explain the reasons for their decisions which are reviewed by higher appellate courts. This serves to ensure doctrinal consistency and prevent corruption (similar cases should lead similar outcomes unless distinguished by legally relevant facts). Lawyers can read past cases to assess how their client is likely to fare given prior rulings involving similar fact patterns.

    Arbitration tribunals rarely, if ever, publish the underlying rationale for their decisions and arbitrators are not bound by legal precedent in deciding cases. As more and more disputes are decided by arbitrators, the common law withers. If this trend continues, public jurisprudence in the areas of employment, investments, consumer products, healthcare, et al, will become a thing of the past.

  8. Justicia

    A must read on this subject: Janet Radin’s book Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law.

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