What is Forced Arbitration?

Many Americans are unfamiliar with binding arbitration clauses, also referred to as forced arbitration clauses or forced arbitration, which force disagreeing parties to cede their right to settle potential disputes within the court system. Corporations and businesses often use these clauses in contracts and terms of service agreements with consumers and employers in order to circumvent the court system, usually to their own benefit and often to the detriment of consumers and employees. By accepting or agreeing to a forced arbitration clause, a person essentially gives up the right to settle any related dispute with the other party before a judge (and possibly a jury). These clauses exclude the right to form a class action lawsuit as well. Instead, disputes are brought before private arbitrators who are often biased against individuals. This is a disturbing notion, given that individuals must give up their constitutionally guaranteed day in court.

The Problem with Arbitration

Though many Americans are not familiar with forced arbitration, it is ubiquitous. According to Pew Charitable Trusts, nearly 9 out of the 10 largest banks include these clauses in their contracts for basic accounts. Similar clauses can be found in contracts for financial services, cable TV and Internet, cell phones and even Omaha Steaks. Many of these products and services are arguably essential to function in modern American society (though perhaps not freeze-dried meat). So simply refusing to do business with companies that use forced arbitration is not an option for most Americans who need cell phones or access to banking services to function in modern society. Arbitration clauses are also often found in employment contracts, which can affect an employee’s ability to seek legal redress for issues such as workplace sexual harassment or discrimination. Simply finding another job is not always an option, giving employees no choice in the matter.

Additional problems arise when parties actually engage in arbitration. For example, arbitration relies on private arbitrators to resolve conflicts between parties who are often retained from the American Arbitration Association or other similar groups. Arbitrators often have a vested interest in ruling in favor of the companies that retain their services, despite their insistence that they maintain strict standards and rules to ensure neutrality.

Arbitration issues are not limited to conflicts of interest with the arbitrators. According to the New York Times, there are no rules or regulations that cover the handling of evidence or the summoning of witnesses, as there would be in the judicial court system. Rulings can limit awards and vary by individual. This means two people with the same dispute could receive different results from the same process. Finally, arbitration outcomes are usually kept secret and cannot be appealed.

On the other hand, proponents of forced arbitration, such as the U.S. Chamber of Commerce (which is a lobbying group, not a government agency) and the Heritage Foundation (a conservative think tank), argue that arbitration favors trial lawyers and benefits consumers. Though this is a somewhat valid claim, it misses the point entirely. The purpose of taking a company to court or joining a class-action lawsuit is not for personal enrichment, but to hold businesses accountable when they act unethically or defraud consumers. Since many regulatory agencies are underfunded and/or understaffed, the court system is one of the few remaining options for those seeking redress.

In Recent Events

Recently, forced arbitration has led to scandals in for-profit schools and banking. For-profit schools, such as DeVry almost universally utilize forced arbitration clauses in their enrollment contracts, while very few private non-profit universities and no public or state schools employ them. Given the spate of unethical behavior from for-profit schools, which ranges from fraudulent acts to deceptive recruiting, it should come as no surprise that these institutions would try to keep consumers from holding them accountable and taking them to court.

Further, it recently came to light that Wells Fargo Bank had opened unauthorized accounts in customers’ names in order to meet sales goals. Wells Fargo, like many other large banks, utilizes binding arbitration clauses in its contracts with customers, preventing customers from bringing litigation against Wells Fargo. Recently, the bank has tried to enforce these clauses with the very same customers it defrauded after those customers sued. In effect, Wells Fargo is attempting to utilize forced arbitration to escape the consequences of its unethical behavior.

The Solution

There have been attempts to address the problems with the unfair system of forced arbitration. Under the Dodd-Frank Act, the Consumer Financial Protection Bureau has been attempting to craft new regulations limiting arbitration in the financial sector. The Department of Education has made similar efforts with for-profit schools. Sen. Al Franken of Minnesota and Rep. Hank Johnson of Georgia introduced the Arbitration Fairness Act of 2015, which eliminates the use of forced arbitration clauses in consumer and employment contracts (the full text of which can be found here). Unfortunately, with Congress and the White House under Republican control, any reform in arbitration seems very unlikely.

There is no problem with arbitration, provided all parties involved have knowingly and willingly agreed to it and were not coerced or given no other option. Ultimately, the proliferation of forced arbitration clauses following several Supreme Court rulings has led to more and more businesses effectively opting out of accountability in regards to their employers and customers.

While the U.S. legal system is imperfect, forcing consumers and employees into a private, justice system only benefits those with large legal and financial resources: large corporations and businesses. Corporations may now be entitled to legal protections as persons, but their rights should not come at the cost of the 7^th Amendment, which enshrines the rights of real human beings to their day in court. Why should one class of “person” be entitled to justice, while another class is effectively excluded?

Image Source: Google Images; Lieff Cabraser Civil Justice Blog