You aren’t likely to pay much attention to forced arbitration clauses until you get trapped by one, and by then it’s too late. These clauses, found in many consumer contracts, take disputes out of the courts, and require settlement through an arbitrator. The arbitration process is supposed to be cheaper, faster, and more fair than the judicial system. But critics point out that arbitrators often find in favor of the companies that hire them—the same companies that are trying to avoid lawsuits by slipping these clauses into their contracts.
Today, U.S. Sens. Al Franken (D-Minn.), Richard Blumenthal (D-Conn.) and U.S. Rep. Hank Johnson (D-Ga) are introducing the Arbitration Fairness Act, which will eliminate forced arbitration clauses in employment, consumer, and civil rights cases, and allow consumers and workers to choose arbitration after a dispute occurs.
Although this isn’t the first time this legislation has been introduced, there is a special sense of urgency this time around. In April 2011, the Supreme Court ruled that companies can ban class action suits in contracts with the help of—guess what?—forced arbitration clauses. In AT&T v. Concepcion, the Supreme Court overturned a lower court decision allowing a class action lawsuit to proceed despite the fact that the contract customers signed required disputes to be settled through binding mandatory arbitration.
According to Franken’s press release, “The majority of the Court held that the Federal Arbitration Act barred state courts from protecting consumers from these arbitration clauses. The effect of this decision essentially insulates companies from liability when they defraud a large number of customers of a relatively small amount of money.”
Binding arbitration clauses are slipped into all kinds of contracts. More than three years ago, I described how I found one of these clauses in my contract with Comcast, the provider of my Internet, phone and television services at the time. I also recently pointed out that if you dispute an item on your credit report online, at least one of the major credit reporting agencies will require you to agree to arbitration to settle any disputes.
Want to know how bad this is? The Consumerist put together this interactive tool to walk you through it: Mandatory Binding Arbitration: The Worst Choose Your Own Adventure Ever
Few consumers realize how far-reaching arbitration clauses can be. The Boston Globe recently told the story of a man who committed suicide after losing half of his life savings. His family believes a bank advisor may have misled him into shifting his savings into more aggressive investments. After his death, the discovered they couldn’t sue because of a mandatory arbitration clause. Multiple lawyers told them they would likely lose in arbitration.
It’s one thing to put arbitration clauses into business contracts, where the parties can negotiate. It’s quite another to put them into consumer or employment contracts where the only option is to take it or leave.
Here are a few of the problems identified by the Fair Arbitration Now Coalition, an organization largely comprised of consumer advocacy groups:
- They usually bind the consumer, but not the company, which retains its right to take a complaint to court.
- The company or employer generally picks the arbitration company. (Imagine if companies who were being sued could pick their judge. Would we stand for that?)
- Despite being advertised as cheaper, it frequently costs more than taking a case to court. In addition, consumers must often travel to more distant venues, racking up additional costs.
- Arbitrators don’t have to follow the law, and if they are wrong, there is no public review of decisions as with court cases. There is no right to appeal.
Most importantly, they point out that “forced arbitration strips our most basic rights and makes many employee and consumer protections unenforceable.” Is that really what most Americans want? If not, then hopefully they’ll let their elected officials know how they feel about The Arbitration Fairness Act. And hopefully, this time Congress will listen.
[Related: How to Order Your Free Annual Credit Report]
Image: John Taylor, via Flickr.com