By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as scribbles occasional travel pieces for The National.
The Consumer Financial Protection Bureau (CFPB) has yet to take action against the widespread use of mandatory arbitration clauses in consumer contracts. These clauses require consumers to submit to mandatory arbitration in the event of a dispute– and crucially, waive their right to pursue class action litigation, an admittedly flawed mechanism that occasionally and erratically forces corporations to pay some price for abuses they’ve committed against consumers.
I discuss this issue at greater length in this post from last year, Business Groups Aim to Strong-Arm CFPB on Arbitration, which outlines the general problem.
I have no special insight into what, if anything, CFPB director Richard Cordray is going to do about issuing the long-delayed rule that was expected either to eliminate or circumscribe the use of mandatory arbitration clauses, and I instead refer interested readers to this recent post In Ballard Spahr’s Consumer Finance Monitor, Will he or will he not issue the arbitration rule?, which lays out some key issues,
If the CFPB were to issue a new rule at this time, Republicans in Congress would almost certainly invoke the Congressional Review Act (CRA) to scupper it– and when Trump would inevitably approve that action– future rule-making in this area would be precluded. I’ve discussed how this mechanism works in various posts discussing the CRA, including Trump and Congress Use Congressional Review Act to Roll Back 14 ‘Midnight’ Rules; More to Follow?:
the CRA allows rules finalized during the past 60 session days to be overturned, by a simple majority vote in both houses on a CRA resolution of disapproval, using expedited procedures, followed by a presidential signature. If the president vetoes the CRA resolution, the regulation could still be rescinded if a 2/3 majority in each house votes to override the presidential veto. Crucially and importantly, once the regulation has been successfully voided, the regulatory agency is barred from reviving the rule in “substantially the same form”– forever–in the absence of new legislative authority.
The CRA was originally intended to prevent an outgoing administration from enacting a flurry of last-minute measures that would constrain a new administration and/or Congress, but there is no reason it cannot be used by Congress to overturn agency rule-making of which it does not approve.
California Action
As I’ve written is occurring in other policy areas, state actions may be the major game in town for reining in corporate excesses for the duration of Trump administration– especially given Trump’s well-known business-friendly bias and the anti-regulation predilections of the Cabinet he’s installed (see, for example, EPA, Agencies to Rescind Clean Water Rule and States Launch New Joint Probe into Company Sales and Marketing Practices for Opioids).
On the arbitration front, the Consumer Finance Monitor reports, California anti-arbitration law nears passage:
California’s legislative effort to allow consumers to sue financial institutions for fraud even though they have agreed to arbitrate such disputes passed the Assembly Judiciary Committee this week and is expected to pass the full Assembly later this summer. The bill, which passed the state Senate in May, would amend California’s civil procedure rules governing arbitration to prohibit courts from granting a motion to compel arbitration made by a financial institution which seeks to apply an otherwise valid arbitration agreement to a purported contractual relationship fraudulently created by the institution with the consumer’s personal identifying information and without the consumer’s consent.
Unfortunately, that same source concludes that even if the California measure is passed:
[it] will be preempted by the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable.” For example, the U.S. Supreme Court has held that states are prohibited from creating categorical exceptions to the FAA that Congress did not authorize.
I think this analysis is correct, and given precedents and the Supreme Court’s composition, state anti-arbiratration initiatives will likely count for nothing. So, unlike in other areas where state policies can be important, absent some federal action, mandatory arbitration clauses are here to stay– for the moment at least
Which sucks for consumers.
Some Democrats Take on Mandatory Arbitration
Five Democratic Senators– Richard Blumenthal, Al Franken, Patrick Leahy, Edward Markey, and Ron Wyden– wrote a letter to AT&T in June, requesting information on deals and promotions that the company offers to its customers, as well as its use of mandatory arbitration clauses in consumer contracts.
This letter referred to:
[a] recent CBS News investigation revealed that over the past two years, over 4,200 AT&T customers have made complaints against AT&T and AT&T-owned DirecTV alleging that the company is not honoring its deals and promotions, resulting in subscribers being overcharged for services (citation omitted).
Allow me to quote at greater length from the Senators’ letter regarding the problems raised by forced arbitration, as it well-summarises that system’s flaws from the perspective of consumers:
Forced arbitration provisions in telecommunications contracts erode Americans’ ability to seek justice in the courts by forcing them into a privatized system that is inherently biased in favor of providers and which offers virtually no way to challenge a biased outcome. Forced arbitration requires consumers to sign away their constitutional right to hold providers accountable in court just to access modern-day essentials like mobile phone, internet, and pay- TV services. Also, forced arbitration provisions frequently include a class action waiver; language which strips consumers of the right to band together with other consumers to challenge a provider’s widespread wrongdoing.
As reported by the New York Times, most consumers lack the means or will to fight a powerful corporation alone in arbitration. This is particularly troubling in the telecommunications context when consumers can be overcharged for relatively small amounts of money, but when multiplied over a large base of affected customers, can amount to millions of dollars.
What’s ATT’s response?
Let’s allow a ATT a free and fair opportunity to set forth its position. According to their June 30, 2017 Letter to the Senators:
At the outset, no AT&T customer is ever ‘forced’ to agree to arbitration. Customers accept their contracts with AT&T freely and voluntarily; no one ‘forces’ them to obtain AT&T wireless service, DirecTV programming, or other products and services.
Well.
Now that I’ve stopped chortling. Ahem. Strictly speaking, that may be true. No one pops out of a dark alley, gun in hand, and says: “Sign up for AT&T now– or else.”
But, what’s the reality?
Allow me to turn to this Ars Technica report, AT&T: Forced arbitration isn’t “forced” because no one has to buy service, for an answer:
While AT&T is correct that no one is forced to sign up for AT&T service, there are numerous areas of the country where AT&T is the only viable option for wired home Internet service. Even in wireless, where there’s more competition, AT&T rivals Verizon and Sprint use mandatory arbitration clauses, so signing up with another carrier won’t necessarily let customers avoid arbitration. One exception is T-Mobile, which offers a way to opt out of arbitration.
So, if you’re in a part of the US where AT&T is the only game in town and you must sign up for their service or forego the benefits of being wired, what does that mean? Again, from Ars Technica:
The terms of service for AT&T Internet and DirecTV require customers to “agree to arbitrate all disputes and claims” against AT&T. Class actions and trials by jury are prohibited, although individual cases in small claims courts are allowed. AT&T doesn’t offer any way to opt out of the arbitration/small claims provision, so the only other option is not buying service from AT&T. By contrast, some home Internet and TV providers such as Comcast offer a method for opting out.
That sound like forced arbitration to me. I wonder what readers think, and encourage you to weigh in in comments.
What Do the Senators Think?
Even after a little poking around, the only answer I found came from Senator Franken. While I note that The Hill has covered the issue, in AT&T, senators spar over customers’ right to sue, please allow me to turn again to the Ars Technica account, which includes the detail that Naked Capitalism readers crave– and indeed, have come to expect:
Franken was not convinced by AT&T’s response. In a statement provided to Ars, he continued using the phrase “forced arbitration” to describe the AT&T customer contract clause. AT&T claimed that its arbitration clause is “customer-friendly,” but Franken said, “There’s nothing ‘friendly’ about AT&T’s take-it-or-leave-it contracts that eliminate consumer choice and take away Americans’ ability to resolve legal disputes with their telecom provider in a court of law. Further, forced arbitration agreements that prohibit customers from banding together as a class deter consumers from seeking justice and allow widespread wrongdoing by powerful corporations to go unchecked.”
An arbitration clause can only truly be customer-friendly if it “is entered into voluntarily after a dispute has arisen—and after a customer has fully considered their options—to ensure that Americans are not deprived of their constitutional rights,” Franken said.
Franken has introduced legislation to bar forced arbitration clauses. I don’t expect this proposal will go anywhere soon– given that Republicans control Congress, Trump is President, and even the nominally independent CFPB has failed to confront the problem, despite years of mulling both it and the appropriate response.
But I do want to note Franken’s proposal is on the table, and perhaps would be part of future legislative program– or the agenda for a future CFPB uncowed by worries about a CRA overturn– if we turn the corner and can move to a more progressive future.
Small beer perhaps, but maybe something to consider.
25 comments
Comments are closed.
If the forced arbitration issue becomes a successful wedge in the anti-monopsonist movement, then I say on that measure alone, Well Done! How long must Americans endure the depradations of an economy that relies upon their good will, and preys upon the atomized public?
You missed the biggest battle happening now. Forced arbitration in nursing home contracts.
Advocates got Obama CMS to ban them, then for profit industry group sued last November. They got a preliminary injunction.
Now CMS is dropping lawsuit and doing a complete roll back and is going to validate them, undermining the last remaining defense: unconscionably of contract.
Here’s link: https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2017-Fact-Sheet-items/2017-06-05.html
Also, don’t overlook the Kindred case in the Supreme Court this year, which ruled that you must specifically exclude the ability to enter into binding arbitration for powers of attorney.
My partner has been trying to get his elderly mother, who has advanced dementia, into a nursing home for some time. Last week his father was about to sign paperwork to admit her into an assisted living facility here in Texas, for-profit and as far as I can tell, private-equity owned. When I printed the residency agreement for them I was surprised at the amount of space and detailed language devoted to a binding arbitration clause, over two pages. By comparison, the agreement devoted under two pages and considerably less specific detail to description of the services the company was obligated to provide. Not to mention that they offered a special discounted rate which the facility representative claimed applied only if the contract was signed by 6 p.m. local time last Friday…and they didn’t send over the more than 40 pages of required paperwork until 3pm Friday. Needless to say, the deal was off by that point.
Sounds like a cry for consumers’ unions that would tie to labor unions representing the workers at AT&T, Verizon, Comcast, etc. Relying upon court suits to redress grievances is costly, takes too long, and often, as the article suggests, does not fully compensate for lost services and money.
Left unchecked, arbitration could become the standard for all services both private and governmental. Our other option, the suit, makes lawyers rich and busy (a Democratic Party goal since the 1970s, and part of their appeal to the professional class while jettisoning labor). Makes the Repubs intent to remove the suit possibility.
Just another brick in the wall…
Here’s the thing that most people who have not been involved in litigation don’t understand: he who has the most money wins.
Our courts are not a place you can expect justice. So, why should anyone care about these clauses? Our courts are beyond corrupt, so even without these clauses no one gets a fair shake in litigation. Period.
Just part of the Caste system here in the USA.
There are legally three classes of “persons”, Corporations are the first, with the greatest rights and powers, LEO are the second class with their very own “Law Enforcement Officers Bill of Rights”, the the third class are the commoners such as myself.
And of course we do have the American Nobility who are not subject to the laws of the land unless they offend their peers.
Not sure if the scope of this extends to employment contracts, but ending forced arbitration was highlighted by Susan Fowler (of Uber fame) as the #1 thing that tech companies needed to do to improve their game:
https://www.susanjfowler.com/blog/2017/5/20/five-things-tech-companies-can-do-better
I think it totally does extend to employment contracts, and it is also a prominent theme in the misclassification suits. I’m not sure who Fowler means by ’employees’ but I’m unimpressed with the focus on grievances up in the high-rise buildings in the engineering department. Misclassification is the elephant in the room. Arbitration has been a major factor in stymying attempts to get into that very question of who her reference to ’employees’ includes and excludes.
From http://www.courthousenews.com/judge-oks-27-million-deal-california-lyft-drivers/ :
“Liss-Riordan said that ‘unfortunately’ the U.S. Supreme Court has allowed corporations to elude labor class actions by using arbitration agreements, which require workers to waive their rights to seek justice through courts or participate in class actions.
‘That’s the main issue,’ Liss-Riordan said. ‘Congress should pass the Arbitration Fairness Act.’
On Tuesday, Minnesota Sen. Al Franken and other congressional Democrats reintroduced that legislation, which would prevent companies from adding clauses to contracts that require arbitration for ’employment, consumer, antitrust and civil rights disputes.'”
I thought no citizen can sign away their constitutional rights? “Forced arbitration requires consumers to sign away their constitutional right”
Back in the 80s I was involved in litigation against certain brokers and brokerage firms in which all the customer agreements mandated arbitration. At the time it was still unsettled as to whether a customer could be “forced” to waive certain rights to litigate under, e.g., certain SEC rules such as 10b-5. A theory was that congress had deemed unethical trading to be of such public importance that compulsory arbitration couldn’t be enforced. We had one district judge agree.
To address your waiver of constitutional rights–criminal defendants waive their 4th, 5th, and 6th amendment rights all the time. In criminal law at least that waiver has to be knowing and specific–no blanker waiver like in onsumer agreements.
Even still, these types of consumer agreements are adhesion contracts whereby the purchaser has no choice in the bargain and should be disallowed. As far as criminal defendants waiving their constitutional rights, most are similar to adhesion contracts whereby the criminal has no “real” choice. The only way I see to prevent these abuses of power is to have within the justice department District Defense Attorneys as well as Prosecuting Attorneys eliminating the disparate cost of litigation.
Indeed. The most common waiving of 6th amendment rights by criminal defendants is to accept a plea bargain that is the equivalent to the fiction of an euphemistic free contract in which one of the parties has no true leverage to do anything other than sign it
I’m not American but I checked your constitution and it says (Amendment 14): “nor shall any State deprive any person of life, liberty, or property, without due process of law;”. Is not mandatory arbitration depriving people of this right?
Well, no, because the Constitution is only binding upon the government. Private parties (and employers) can do largely whatever they want. Whether this is ethical or conscience-able is another matter
Citizens are being induced (“forced” is such an ugly word) every day into signing away Constitutional rights as a condition of employment via an increasingly common mechanism known as Non-Disclosure Agreements.
Anders, to explain it to someone from the outside, the legal fiction is that you’re not signing anything away, but you’re exchanging your right for some other benefit. So as purely a matter of contract law, that’s a legitimate contract.
And it’s why AT&T says, look, this isn’t forced arbitration, because no one is requiring consumers to purchase mobile or other services from that company.
These non-disclosure agreements (NDAs) and agreements to engage in mandatory arbitration of employment disputes that are mentioned elsewhere in this thread: they’re all clauses contained in contracts that people “freely” sign with their employers. Once you’ve signed onto such terms, good luck trying to sue your employer.
It’s all done totally “in a rights-respecting manner,” as Hans Hoppe would say.
The attraction of a privatized judiciary is the litigants require the judge to obey their terms.
Usually the essential feature of an arbitration is secrecy. The things businessmen get caught out doing are despicable and reveal the absence of morality / decency. There are also non-competitive agreements that bind cartels together against the interests of their customers. Who can forget the global shipping freight agreements of 1970s whereby some western shipping companies publicly conspired to prevent competition.
As is usual with secrecy clauses, the great unwashed public will be the victim and the venal regulators and their furtive friends the winners.
RBHoughton, I don’t know anything about this collusion story but it is very interesting. Do you have a reference? Is this the same as the rate-setting conferences and alliances among the container-vessel lines, or something else? Thanks!
I was remembering the Freight Conferences and the industry employees who operated the policing of fixed prices.
Interesting – I would like to dig into this more. Thank you :)
Lets face it the clauses should really be called the anti class action clause, as in most cases the potential recovery from an individual claimant is so small that no lawyer would take the case on a contingency fee. And most could not afford to pay by the hour. As sort of implied by one comment a lot of these individual cases are small claims court sized.
I was presented with a EULA just the other day. At the very bottom, in all caps, was “YOU AGREE TO GIVE UP YOUR RIGHT TO SUE” etc.
I hope this practice gets stomped down, and hard. As it stands everything is going to come with a EULA, and every EULA will have mandatory arbitration in it: why not? Doing an end-run around the legal system by requiring your customers to settle out of court removes the possibility of precedent, too.
Judges and lawyers are happy to be cut out of the process? I still don’t see why they support arbitration.
Scalia and his minions have spent the last three decades tying the courts’ hands on protecting consumers from adhesion contracts. Just another feature of neoliberal “freedom of contract.”