Binding Mandatory Arbitration Reform
A series of United States Supreme Court decisions have changed the meaning of the [Federal Arbitration] Act so that it now extends to disputes between parties of greatly disparate economic power, such as consumer disputes and employment disputes. As a result, a large and rapidly growing number of corporations are requiring millions of consumers and employees to give up their right to have disputes resolved by a judge or a jury, and instead submit their claims to binding arbitration.

Binding Mandatory Arbitration Reform

The Problem: Americans Forced into Binding Mandatory Arbitration and Denied Access to a Jury of Their Peers

“A series of United States Supreme Court decisions have changed the meaning of the [Federal Arbitration] Act so that it now extends to disputes between parties of greatly disparate economic power, such as consumer disputes and employment disputes. As a result, a large and rapidly growing number of corporations are requiring millions of consumers and employees to give up their right to have disputes resolved by a judge or a jury, and instead submit their claims to binding arbitration.” (1)-S. 1782, Arbitration Fairness Act, Sec. 2 (1), 110th Cong. (2007)

Most Americans do not know it, but, on a regular basis, they inadvertently sign away their right to go to a public court and have a trial by jury. Often found nestled in a small section of a contract for things like a credit card or a form for a patient about to undergo surgery, arbitration agreements have a large impact on a person’s ability to exercise his or her legal rights. If faced with a dispute that cannot be amicably resolved — for example with a bank, student lender, credit card company, wireless service provider, or utility provider — a person would not be able to take their dispute to a court of law. Instead she would be forced into a proceeding run by a private service picked by the company with whom she has the dispute, and bound to abide by the results of that proceeding.

Arbitration is supposed to be a low-cost, fast alternative to regular litigation, but the reality of binding mandatory arbitration is far different. (2) Arbitration is an informal, private dispute resolution process where the parties to the dispute hire an arbitrator (a private individual who is not necessarily a judge or a lawyer) to hear and decide their case. However, the underlying structure of binding mandatory arbitration speaks to its inadequacies. First, mandatory arbitration essentially requires consumers to pay for two dispute resolution systems: the public court system through their taxes and the privatized version when they actually enter arbitration. The added cost of an additional system is also reflected in the exorbitant and indefinite fees consumers often must pay just to bring their case before the arbitrator, which can reach into the thousands of dollars. (3) And, up against big companies that have lawyers on their side, consumers usually still need to hire a lawyer to represent them in the arbitration.

Second, despite all of the extra money spent on arbitration, it nonetheless lacks most of the protections taken for granted in the public court system that ensure fairness, accountability, and neutrality to the parties to a lawsuit. Many arbitration proceedings limit the discovery process, which allows parties to demand information and documents from one another. Without discovery, defendants can withhold important evidence and thus conceal their actions and avoid legal liability. Arbitration also offers little opportunity for review or appeal in a real court, no obligation for an arbitrator to issue a written opinion, and little requirement that the arbitrator rely on the law to decide cases. (4) The process also contains weak conflict of interest standards for the arbitrator, which means that arbitrator biases run unchecked.

Third, arbitration companies and arbitrators have an inherent financial interest to rule in favor of defendant corporations (a problem directly related to the weak conflict of interest standards mentioned above). Because these large corporations are more likely than any individual consumer to require arbitration in future matters, they are considered “repeat-players” that arbitration companies should appease to secure future business. This severely undermines the notion that arbitration is a neutral process. Arbitration companies face the threat of losing profits or being dropped as a corporate client’s designated arbitrator if they too frequently rule for consumers and against these repeat-players.(5)

The primary obstacle to necessary arbitration reforms— such as state consumer protection laws and state court rules that would restrict use of arbitration proceedings is the Federal Arbitration Act (“FAA”), passed into law in 1925. The FAA established that arbitration agreements are enforceable. Before the FAA, the judiciary took a hostile view to these agreements and often invalidated them, but after the FAA’s passage, courts have generally enforced them except in rare cases.

But since 1925 the nature of agreements subject to arbitration has changed from voluntary agreements negotiated between corporations to “take it or leave it” contracts between consumers and corporations that permeate contracts throughout entire industries and lines of products.(6) A 1985 Supreme Court ruling articulated the judiciary’s generally favorable leaning toward enforcing arbitration clauses, even those between a corporation and consumers, workers, service purchasers, and other individual parties with less bargaining power.(7) As such, courts often nullify enforcement of state consumer protection laws that limit the use of mandatory arbitration agreements and federal laws providing a right to access the courts for certain grievances. (8) While arbitration agreements between equally positioned corporations are often appropriate or even helpful dispute resolution tools, arbitration generally works to the disadvantage of inexperienced consumers who go up against large corporations on an infrequent basis.(9)

The consequences of being tied to an arbitration requirement run the range from mere inconvenience to pure injustice. It can mean being forced to spend more money replacing a defective product (for example, your microwave, laptop, or cell phone) or inadequate service (for example, your Internet, cell phone, or credit card), or going without the product or service altogether. But these are only some of the many types of claims covered by arbitration clauses. People are also often forced into arbitration proceedings over high-stakes issues such as employment discrimination claims or dangerous and defective products. Being bound by an arbitration “agreement” can mean losing one’s job, enduring persistent discrimination, living in uninhabitable conditions, or being unable to procure adequate health services or obtain just compensation for medical negligence.

A more extreme, yet increasingly common example of the ills of binding mandatory arbitration involves nursing home patients who are forced to take their claims of abuse, sexual assault, or medical negligence to arbitration rather than a court of law. (10) In one such case, a New Mexico district court found an arbitration clause enforceable because an elderly husband could have placed his wife in a different nursing home that did not require arbitration, even though this would have required him to drive 120 miles round trip to visit her.(11) People often do not appreciate the extent to which binding mandatory arbitration undermines consumer choice and compromises fairness and equity until it is too late. Binding mandatory arbitration undermines public accountability under the law by privatizing and concealing these disputes.

The Policy Proposal: Support the Arbitration Fairness Act’s
Amendment of the FAA to Protect Public Law and American Citizens

In order to cease the continued abuse of the Federal Arbitration Act and the rights of American consumers and employees, our nation’s next President must support the effort to amend the FAA and restore it to its original purpose. To do this, the next President should urge the passage of the Arbitration Fairness Act of 2007, introduced by U.S. Senator Russ Feingold (D-WI) and U.S. Representative Hank Johnson (D-GA), which would amend the FAA to exclude enforcement of mandatory arbitration clauses in consumer disputes, employment discrimination disputes, and other legal issues to which it was never intended to apply.

Very recently, a small number of discrete exceptions to the Federal Arbitration Act have been carved out. The beneficiaries of these exceptions — from farmers to military personnel to car dealers (though not yet car buyers) — represent groups that share a common concern about fairness for less powerful bargaining parties. For example, automobile manufacturers can no longer hold car dealerships to an arbitration clause, and payday lenders can no longer enforce such agreements against military personnel.(12) While these advancements are steps in the right direction, incremental protections of discrete groups leave vast numbers of Americans vulnerable to the harmful effects of binding mandatory arbitration.

The Arbitration Fairness Act of 2007 is a proposed amendment to the Federal Arbitration Act that would prohibit pre-dispute binding mandatory arbitration agreements in all contracts involving employees, consumers or franchisees, and “in disputes arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power.”(13) This revision to the FAA preserves the enforceability of arbitration agreements between powerful or well-resourced corporations or those that were truly negotiated between any parties after a dispute arises, but prohibits arbitration clause in standard-form adhesion contracts between large corporations and smaller businesses or individuals. It also clarifies that it is the court’s role, and not that of contracting parties or the arbitrator, to determine enforceability of an arbitration agreement.

Further, the bill observes that as binding mandatory arbitration agreements are currently employed most consumers have no choice but to submit to arbitration or else give up necessary products, services, or employment opportunities.(14) It notes that: “While some courts have been protective of individuals, too many courts have upheld even egregiously unfair binding mandatory arbitration clauses in deference to a supposed Federal policy favoring arbitration over the constitutional rights of individuals.”(15) This is particularly troubling in light of proof that “many corporations add to their arbitration clauses unfair provisions that deliberately tilt the system against individuals.”(16)

The Arbitration Fairness Act of 2007 would vindicate the rights of American citizens and restore access to the civil justice system. For this reason, the next President should champion this legislation.