The Arbitration Trap

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You’re using a product – a phone, a credit card – and something goes wrong. The fees weren’t what you thought they’d be. The phone doesn’t work as advertised. You try to get relief by calling the company, waiting on hold with customer service. You write letters, to corporate headquarters and the Fair Trade Commission. You’re mad, and you feel like you’ve been ripped off, and you decide to bite the bullet and sue. Except you can’t.

You can’t sue, because tucked in the fine print of the contract you signed when you bought the phone, or signed up for the credit card, was a mandatory arbitration clause. That piece of the agreement says that if a dispute arises, the only way you can pursue justice is by meeting with an arbitrator. An arbitrator picked by the company, in a place the company chooses. You can’t have a day in court. No jury of your peers.

You can’t generally just opt out of this forced arbitration. The provisions are baked in to the products we use every day. Our cell phones, cable and Internet. Credit cards, payday loans, car loans, mortgages. Car rental contracts. You can hardly talk or move or buy anything without signing away your rights.

It’s bad enough that thousands of people every day are signing away a core constitutional right without realizing it. But the problem with mandatory arbitration isn’t just that you can’t get a trial. It’s that the arbitration people are stuck with is so unfair.

Arbitration is not just a friendly, low-hassle, let’s-talk-it-over alternative to a mean, scary court proceeding. Time after time, arbitration has been found to favor corporations over complainants. One report from 2007 found that consumers in California arbitration cases won just 4 percent of their cases. The companies typically choose the arbitrator and the location. Consumer advocates argue that arbitrators reach decisions that please the corporation, rather than decisions based on facts, in hopes of getting repeat business.

Vildan Teske calls this a “new dystopia.” The Minnesota-based lawyer represents servicemembers trying to save their homes from foreclosure and their cars from repossession, particularly when they’re overseas on active duty. They’re supposed to be protected by the Servicemembers Civil Relief Act (SCRA), which gives men and women of the military some extra breathing room on contracts when they’re deployed. But as Teske told a Senate Judiciary Hearing this week, she’s found that mandatory arbitration clauses are over-riding her clients’ rights.

One client lost his house while serving in Iraq, she said. The lender had multiple documented violations of the SCRA, including failing to go to court and get permission to foreclose. When Teske’s office investigated the case, she found that the lender had initiated 80 other foreclosures that also violated the law. They decided to file a class action suit. No dice.

“It turned out that in the thick stack of closing documents he had been directed to sign when he purchased the house years before, there was a mandatory arbitration clause,” Teske said. And that clause included a ban on class actions. “He lost his right to a day in court and his constitutionally guaranteed right to present these facts to a jury. One cannot escape the irony that while he was serving his country and protecting our freedoms, he had lost his freedoms and rights under our constitution.”

A recent study by the Consumer Financial Protection Bureau found that that nine out of ten arbitration clauses ban class action lawsuits.

Alan Carlson knows all about those class action bans. Carlson owns a restaurant in Oakland, Calif., called Italian Colors. Some of the people who came to eat there paid with American Express cards, which carry high fees for his business. The agreement with American Express bans him from offering discounts for paying in cash or with another card, and that irked Carlson. He got to talking with a customer who happened to be a lawyer, and wound up filing a suit against American Express, asserting that the company was violating anti-trust laws. But it turned out he couldn’t sue them, because at some point, years after he first signed up with American Express, the company had added a mandatory arbitration clause to his contract. And it barred Carlson from banding together with other customers in a class action.

Carlson fought for his right to launch a class action suit, filing a case that went to the Supreme Court. In June, the court ruled in favor of American Express. The decision meant that even if the cost of one person suing a corporation would far exceed any money they might win, the courts can’t override the class action ban in an arbitration clause. Essentially, the court gave corporations a green light to arm-twist consumers into signing away their right to unite. People have to sue the corporations one by one, even if they have all been screwed the exact same way. I’ve spent four years visiting one courthouse in Detroit, watching people try to challenge credit card companies and banks, and I can tell you that that one-by-one approach is not working very well for consumers.

The Italian Colors ruling came on the heels of three other cases, one a year since 2010, each eroding consumer rights and strengthening the very binding nature of those arbitration agreements. And I say agreement loosely, since most people didn’t actively agree to the terms.

Taking consumer disputes out of the courts has implications not just for justice, but for transparency. The proceedings and outcomes of arbitration hearings are often kept private. There’s no public record, as in a court hearing or trial. Discovery, in which litigants have to provide documents, is limited at best. So consumers, advocates and journalists have much less to go on, as we try to understand the patterns and practices of the country’s big corporate institutions.

The Arbitration Fairness Act of 2013, introduced by Sen. Al Franken (D-MN), would start to turn the tide. It essentially makes mandatory arbitration illegal in most consumer and employment contracts. Or it would, if it passed.

“Everyone in D.C. says that small businesses are important, and here is a real opportunity for Congress to actually do something to protect small businesses,” Carlson told the Senate committee. But Congress had that opportunity six years ago, when the Arbitration Fairness Act of 2007 was introduced. And again in 2009. And in 2011. The legislative effort began before the series of Supreme Court decisions, and before Congress ground to a near-total standstill. Consumers may have a while to wait before they can assert their rights.

Kat Aaron is a journalist who writes about money and the courts. She spent four years visiting the 36th District Court in Detroit, to document the experiences of litigants and lawyers. She was a 2012 Alicia Patterson Fellow, and she tweets at @kataaron.

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