Mandatory Arbitration Clauses: Undermining the Rights of Consumers, Employees, and Small Businesses

Mandatory Arbitration Clauses:

Undermining the Rights of Consumers, Employees, and Small Businesses

Feb. 24, 2005

Today most Americans are bound by at least one mandatory, pre-dispute arbitration clause. Buried in the fine print of a billing insert, employee handbook, health insurance plan, or dealership or franchise agreement, these clauses waive one’s right to access the courts, diverting cases to a costly private legal system that favors defendants. Arbitration clauses are achieving their intended purpose?undermining consumer protection, civil rights, and other laws that level the playing field between big businesses and individuals. The individual is left with no choice but to waive these rights, because arbitration clauses are presented on a take-it-or-leave-it basis.

How Individuals Are Disadvantaged by Arbitration:

Arbitration was conceived as an informal, expedited process for resolving routine disputes between businesses. But when it is imposed on a weaker party, such as a consumer, arbitration can be used to defeat valid claims. Arbitration has several unique characteristics that make it harder for individuals to prevail in a dispute with a business:

High costs: A claimant must pay steep filing fees just to initiate a case?seldom less than $750. These fees do not cover the arbitrator’s hourly charges, which are generally in the range of $200 to $300 per hour, split between the parties. All these fees must be deposited in advance, and almost always amount to thousands of dollars. Because the claimant has usually sustained a serious loss in the dispute with the business?foreclosure on a home, firing from a job, termination of a franchise or dealership?most individuals covered by an arbitration clause cannot afford these costs and are forced to drop their cases.

Bias: Arbitration providers are organized to serve businesses, not consumers. Their marketing is targeted entirely at businesses, and their panels of arbitrators consist primarily of corporate executives and their lawyers. Since only businesses will be repeat users of an arbitrator, there is a disincentive for an arbitrator to rule in favor of a consumer or employee if he expects further retentions. There is also a long-standing custom among arbitrators to “split the difference” between two sides’ positions. The result is that arbitration awards to consumers and employees are substantially lower than court awards. Comparisons of average awards by arbitrators and courts in employment cases and medical malpractice cases show that arbitration claimants receive only about 20 percent of the damages that they would have received in court.

Limited discovery: Discovery is the process by which litigants obtain information and evidence in the possession of their opponent or third parties. In arbitration, discovery is a privilege, not a right, and many businesses draft arbitration clauses to severely restrict the claimant’s ability to obtain necessary evidence. Moreover, since arbitrators do not have the power to enforce subpoenas, claimants must sometimes file lawsuits to get compliance?defeating the purpose of arbitration.

Prohibition of class actions. Nearly every arbitration clause prohibits participation in class action lawsuits. Class actions are the only effective remedy for wide-scale scams that rip off individual consumers or farmers in small amounts. Individuals do not have the time or resources to recognize, investigate, or prove the existence of such fraudulent practices.

Inconvenient venue.   Arbitration clauses often require that hearings be held in a location inconvenient to the claimant. Individuals may have to bear the cost of long-distance travel to have their case heard.  For example, the Internet auction site e-Bay requires its customers to travel to its home turf of San Jose, California, to arbitrate any dispute.

One-way requirements.
   Most arbitration clauses require only the weaker party (the consumer, employee, or franchisee) to arbitrate its claims, while allowing the dominant party (the corporation) to sue in court on its claims. Thus, a sexual harassment victim can be forced to arbitrate a discrimination claim against a former employer while litigating identical issues in court if the employer sues to stop her from joining a competitor.

No public record. While proceedings and records of the courts are open to the public, most arbitration clauses and provider organizations require that proceedings be kept confidential. As a result, only the businesses that impose arbitration can track past decisions and know which arbitrators have ruled for them. Public discussion of the fairness of an arbitration ruling is discouraged, even if the case raises policy issues of wide concern. Moreover, arbitration sets no legal precedents to guide a company’s future conduct.

Limited judicial review.    Parties are allowed only limited judicial review of an arbitration award. A decision may only be overturned when there is fraud or “manifest disregard of the law.” This is a high hurdle, because arbitrators need not issue written findings of fact or legal conclusions. Oddly enough, courts will refuse to hear appeals of arbitration decisions even when both sides have agreed to let a court do so!

Limited remedies. 
  Courts can provide a range of remedies that are not available to a claimant in arbitration.  Injunctive relief?a court order compelling the offending party to do something, or prohibiting that party from taking some action?cannot be obtained through arbitration.  Punitive damages, which may be awarded by a judge or jury to “punish” particularly egregious behavior, are also not available in arbitration.