Arbitration 101: How It Impacts the Everyday Consumer
December 17, 2013  //  By:   //  Ripoffs & Scams  //  2 Comments

Consumers may be unaware of their predicament, but in the United States they have been treated to a series of resolutions prohibiting their power to gain justice through the legal system. Whether leasing a car, mortgaging a condo, or buying a new cell phone, consumers have lost most of their rights to air grievances in court and be compensated for a company’s failure. Much of the issue stems from Supreme Court rulings over the past few decades that limit access to the courts and that favor companies in alternative dispute resolutions, specifically arbitration.

What Is Arbitration?

It’s important to understand what arbitration is before trying to grasp the rights afforded under the procedure. In the United States arbitration is a legal alternative to litigation. It works much like guidance counselor and peer mediation in high schools. Both parties—the consumer and the company—agree to have a neutral third party, known as the arbitrator, listen to both sides of the issue and agree to adhere to whatever decision the arbitrator comes to. Arbitrators are not lawyers, judges, or affiliates of the court with any formal training. In fact, any third party can be an arbitrator, although certification processes have arisen in multiple states and local jurisdictions.

The agreement to use arbitration, however, is quite subtle. Think back to the last time you updated your iTunes software, switched to Verizon FiOS from Time Warner Cable, or started a new job. There are dozens of pages of small print with big words and complicated legal phrases attached that you have to agree to before your signature is valid. When was the last time you actually read the terms outlined in these agreement clauses? Probably never. And that’s the problem. One of the key clauses that you’re agreeing to says that you waive your right to sue the entity you are signing a contract with. The issue is that corporation-consumer arbitration often heavily favors the corporations, and because the agreements are binding, not subject to appeal, and non-disclosable, you are left to suffer the consequences that may not do anything to help your dilemma.

 

The Federal Arbitration Act of 1925 and its Historical Impact

Although the history of arbitration in this country started with a requirement that both parties agree to the process, that mindset has changed, mainly because it usually ended up that one party saw litigation more favorable to his cause than the other. The 1925 Federal Arbitration Act (based on the 1920 law passed in New York) established that contractual agreements to arbitrate were enforceable like other contracts, even if one side wished to go to court.

According a New York Times op-ed by Amalia Kessler, a Stanford University law professor, at that point arbitration primarily related to employment and commercial contracts, but in the last 20 to 30 years its definition and scope has expanded and changed, and now impacts consumers as much as commercial entities. A 2008 study from the University of Michigan Journal of Law Reform found that 93 percent of employment contracts have mandatory arbitration clauses, and 77 percent of consumer contracts do. That leaves little room for litigation recourse.

 

AT&T Mobility LLC v. Conception

The Supreme Court’s imprint on arbitration is undeniable. A 2011 decision in the AT&T Mobility LLC v. Conception ruled that the Federal Arbitration Act of 1925 is the law of the land and that it supersedes state laws that stop contracts from prohibiting class action arbitration. This specific suit centered on a couple who claimed AT&T employed deceptive advertising that made consumers believe free cell phones came with contracts. The disagreement eventually became a class action suit in California, at which point AT&T requested dismissal because of a contract clause that only covered individual arbitration. A series of appeals led to the Supreme Court, which sided with AT&T, effectively making class action lawsuits near impossible for consumers.

The decision was 5-4, with Justice Antonin Scalia writing for the (conservative) majority. The minority rightly asked the question “What rational lawyer would have signed on to represent the Conceptions’ in litigation for compensation of fees stemming from a $30.22 claim?” A Forbes article citing a Pubic Citizen report claims that more than 75 class action suits were dismissed in the first year following the decision, with judges claiming that, although the cases clearly merited a class action, they were blocked from allowing one because of the AT&T decision.

 

More Legislation, Less Change 

The same day that the decision in the AT&T case was handed down, the Arbitration Fairness Act of 2011 was announced via press release. The Act, and similar bills introduced in 2007 and 2009, sought to change the nature of arbitration to make pre-dispute agreements to arbitrate unenforceable. The bill argues that the original intent of the 1925 law does not validate pre-dispute forced arbitration for employment, consumer, antitrust, and civil rights contracts. All those bills have stalled and died, but this past May a new version of the bill was introduced.

Another Supreme Court case confirmed the previous decision this year; in American Express v. Italian Colors Restaurant the court approved a clause requiring stores that use American Express to bring antitrust claims individually to arbitration instead of as a class.

 

The Bottom Line

Arbitration makes the most sense when two commercial entities are in dispute because they are on equal footing. They can both better afford the often hefty cost of lawyers fees and the level of claims is typically equal, say if a construction company is suing a company for late payment for services or if the company is suing the construction team for slow production. But it unfairly favors huge corporations when it comes to consumer contracts, especially in terms of class actions. If a person gets into a car accident one week after driving the car off the lot because the brakes were faulty, that person would have to take their claim against the car company to an arbitrator. No matter the outcome of the case, the customer must accept the decision, without the option to appeal, and usually with an order to not disclose the outcome.

Using the AT&T case as an example, when a consumer is cheated out of a small amount of money, it may be difficult to prevail in arbitration either because a lawyer doesn’t want to take the case or the customer doesn’t have the money to fight the system. In these situations, a class action option makes sense, since a group of people fighting a company over the same small amount of money amounts to a large financial situation. Lawyers would be more receptive to the cause, the company would fear the damage more, and the problem would have a better chance of resolution for current and future plaintiffs.

Arbitration has its place in dispute resolution, but the fairness of hidden clauses in contracts will continue to be fought until change comes. (Samantha Schoenfeld) (Image: Flickr | atayxw)

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