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March 26, 2010  
  
Will the U.S. Supreme Court Let Corporate America Judge Itself?

U.S. Supreme Court Could Shut Courthouse Doors to Consumers, Employees and Small Businesses That Challenge Unfair Arbitration Clauses Buried in Fine Print

NOTE: Public Citizen and Public Justice are co-counsel for respondent Antonio Jackson.

SCHEDULE: Amicus briefs are due April 1; oral arguments are April 26.

Introduction

 Most Americans don’t know it, but when they take a job, buy goods or services of all kinds (anything from a cell phone to a house), put a family member into a nursing home or decide to start a small business franchise, they may be giving up their right to sue. Buried in the fine print of an increasing number of consumer and employment contracts is an arbitration clause, an “agreement” to send all disputes to mandatory binding arbitration. No matter how serious the claim—race or gender discrimination, failure to pay the minimum wage, nursing home abuse, overcharging for services—the decision of the arbitrator is final.

Imagine, for example, that you buy a new house that turns out to be plagued by toxic mold. The home builder refuses to make repairs. You want to sue, but you learn that the fine print of your purchase contract requires you to arbitrate any disputes. It also requires you to cough up an enormous fee—let’s say $50,000—before going to arbitration. And, worst of all, it turns out that the arbitrator works for the local association of home builders. He gets paid by the home builders to arbitrate disputes and he relies on their repeat business. The deck is stacked against you.

Outrageous, right? Under current law, although arbitration agreements are generally enforceable, consumers and workers have the right to go to court and ask a judge to find the arbitration agreement “unconscionable” and therefore unenforceable. Court review is limited, but it at least weeds out the very worst abuses—like the imposition of exorbitant fees, or a corporation picking an arbitrator that’s clearly biased in its favor.

But depending how the U.S. Supreme Court rules in Rent-A-Center v. Jackson, which it hears April 26, consumers and workers might not have that option much longer. Instead, guess who would rule on whether the arbitration clause was too outrageous to enforce?

The company’s arbitrator.

That’s right. The question presented to the Supreme Court in Rent-A-Center is, essentially: Should a company’s hand-picked arbitrator be allowed to determine if the corporate dispute resolution system he or she oversees is fair?

A conflict of interest? You bet. And given that research shows arbitration overwhelmingly favors the company over the consumer, this tightening of the rules would give Corporate America yet another advantage over consumers, employees, franchisees and others who sign arbitration clauses, often without even realizing it. Citizens would have no other place to turn.

Recently, in Citizens United v. Federal Election Commission, the Supreme Court dramatically expanded corporate rights. In decreeing that corporations have a First Amendment right to spend unlimited amounts of money to influence elections, the court in January upended a century of precedent and gave corporations a much bigger voice in government than We, the People.

 Now, in Rent-A-Center, the court could again stack the deck in the battle between average citizens and powerful corporations. The court is expected to issue a decision by the end of June.

The case: Rent-A-Center v. Jackson

 On Feb. 24, 2003, Antonio Jackson, a resident of Sparks, Nevada, was hired as an account manager for Rent-A-Center, a rent-to-own company that provides furniture, electronics, appliances and computers. At the same time, Jackson was given an arbitration agreement and was told that he had to sign it as a condition of his employment.

Jackson, who is African-American, sought a promotion several times but was denied it even though non-African-American employees with less seniority were promoted over him, he said in a lawsuit filed Feb. 1, 2007, in the U.S. District Court for the District of Nevada. Jackson finally was promoted but was fired two months later without cause. According to Jackson, his manager told a customer that he wouldn’t promote Jackson because of his race. In his suit, Jackson alleges race discrimination and retaliation.

 Rent-A-Center asked the court to dismiss the claim because Jackson had signed an arbitration agreement, saying that any dispute would be resolved by an arbitrator, not a court.

 The arbitration agreement Jackson signed also said that an arbitrator will have exclusive authority to resolve any dispute about the agreement itself, including any claim that the agreement is unfair. Jackson argued that the arbitration agreement was unconscionable under state law because, among other things, it was one-sided in favor of his employer and it was presented to him as a non-negotiable condition of his employment.

 Rent-A-Center argued that whether the arbitration clause was enforceable was up to an arbitrator to decide, not a court.

 The district court granted Rent-A-Center’s request to send the matter to arbitration. Jackson appealed, and in a 2-1 decision, the U.S. Circuit Court of Appeals for the Ninth Circuit reversed and said that Jackson should be able to have his day in court.

 “A court must decide the threshold question of arbitrability when a plaintiff challenges an arbitration agreement as unconscionable, but the agreement provides that the enforceability of the arbitration agreement is itself an issue to be resolved through arbitration,” the Ninth Circuit wrote. It sent the case back to the trial court.

Arbitration Stacks the Deck in the Company’s Favor

 Forced arbitration clauses are hidden in the fine print of employment, cell phone, credit card, retirement account, home building, nursing home and assisted living contracts, to name a few. Just by taking a job or buying a product or service, individuals must give up their right to go to court if they are harmed by a company. Because the private system of forced arbitration benefits companies and disadvantages consumers and employees, more and more industries are using the tactic of forced arbitration to evade accountability.

 [Note that mandatory, pre-dispute arbitration clauses are distinct from voluntary, post-dispute agreements to arbitrate. Once a dispute has arisen, an individual is in a much better position to understand the nature of his claim, consult with legal counsel, and weigh the costs and benefits of both arbitration and court litigation.]

 Although the business community often claims that arbitration is cheaper than court, in fact, in many consumer and employment disputes, the high fees associated with mandatory arbitration deter consumers and employees from vindicating their rights. Arbitration providers often require hundreds of dollars in filing fees and thousands more for the arbitrator’s daily or hourly fees.

 Because arbitration companies generally don’t have to report information about their activities to regulators, little data are available on the outcome of arbitrations . However, one state, California, does gather some information. Public Citizen analyzed it and in 2007 found that in credit card disputes decided in California over a four-year period by the National Arbitration Forum (NAF)—which was then the go-to arbitration forum for the credit card industry—consumers lost 94 percent of the time.

 A poll by Lake Research Partners released last April showed that Americans widely oppose corporations using mandatory binding arbitration clauses in the fine print of consumer and employment contracts. More than 70 percent of those surveyed believed they could take their employer or a corporation to court in the event of a dispute, unaware they could be subjected to mandatory binding arbitration. Further, 59 percent of likely voters opposed the use of mandatory binding arbitration clauses in employment and consumer contracts.

Backlash Growing Against Arbitration
 
Noting that corporations’ use of forced arbitration was on the rise, and acknowledging the problems it causes for consumers, employees, franchise owners and others, congressional lawmakers last spring introduced the Arbitration Fairness Act  (H.R. 1020, S. 931). The measure would ensure that the decision to arbitrate is made voluntarily and after a dispute has arisen, so corporations cannot manipulate the arbitration system in their favor at the expense of consumers.

Also pending in Congress are the Fairness in Nursing Home Arbitration Act (H.R. 1237, S. 512), which would eliminate forced arbitration clauses in nursing home contracts, and the Consumer Fairness Act (H.R. 991), which would treat arbitration clauses that are unilaterally imposed on consumers as an unfair and deceptive trade practice and prohibit their use in consumer transactions.

Regulators are getting into the act too. In July 2009, the Minnesota Attorney General sued the NAF, alleging that it had committed fraud and engaged in false advertising and deceptive practices by misrepresenting its neutrality and hiding its ties to the debt collection industry. The NAF quickly settled by agreeing to stop accepting new consumer debt arbitrations.

Then, in August, Bank of America announced it would stop requiring its customers to submit to forced arbitration, saying it was prompted to do so because of customer complaints.

But arbitration really got in the news with the case of Jamie Leigh Jones, who was sexually assaulted by co-workers while in Iraq working for KBR, a division of Halliburton. She sued, but the company tried to get the case thrown out of court because her employment agreement contained a forced arbitration clause. Her case got the attention of Congress, which in December passed a measure that prohibits the federal government from doing business with defense contractors that deny access to the courts to employees who have been raped or sexually assaulted on the job or discriminated against in violation of the Civil Rights Act.

Conclusion

 Americans are already routinely forced to “agree” to arbitration and give up our day in court as a cost of buying a cell phone or accepting a job. But at least we have been able to seek recourse in the courts when an arbitration clause is unfair or illegal. Now, just when the public and Congress are becoming more aware about the risks of mandatory arbitration abuses, the U.S. Supreme Court is poised to free corporations to create their own kangaroo court system, outside the scrutiny of the public courts. That would leave people who have been wronged by corporations without any recourse at all. If the court decides that it’s all right for the only judges of arbitration’s fairness to be the arbitrators themselves, then all American workers and consumers—not just Antonio Jackson—will be harmed.

To read the brief, visit http://www.citizen.org/documents/RentACenterRespondentBrief.pdf. 

To learn more, visit http://www.citizen.org/pressroom/pressroomredirect.cfm?ID=3105.

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