WASHINGTON—Having one’s day in court is a popular, colloquial expression in America. We take for granted our right to equality of the law before an impartial judge and jury.
However, most Americans are unaware that for everyday disputes arising over the necessities of life—credit cards, purchasing an automobile, employment contracts, investments, mobile phone service—having one’s day in court has become a thing of the past. Why? Because virtually all of us gave that right up when we signed contracts with forced arbitration clauses that waive the right to take a claim to court.
These clauses are usually buried in the fine print of contracts setting forth the conditions of service.
“Whether it is a credit card agreement, Netflix, Verizon, nursing homes—almost everything we buy or purchase—is governed by a contract, which has the fine print language that essentially bars us from going to a state or federal court to get some hearing for the problem,” said Nan Aron, president of Alliance for Justice, a national association of over 100 public interest and civil rights organizations.
Ms. Aron was speaking on a panel, Jan. 29, discussing “Lost in the Fine Print,” at the progressive think tank, Economic Policy Institute. The event was co-hosted by AFJ, EPI, American Constitution Society, and Center for American Progress.
Paul Bland said, “[Forced arbitration clauses] are omnipresent in American society now.” More than 95 percent of all credit card debts are subject to forced arbitration clauses; when buying a car, used or new, virtually all contracts have the clause, and more than 90 percent of the nursing homes have them, he said.
Bland is executive director and senior attorney at Public Justice, and has made this issue his specialty. He has testified before both houses of Congress, has been quoted in more than 100 periodicals, and has appeared often in radio and TV stories.
Forced arbitration is ubiquitous. Alliance for Justice provided some examples: cable and satellite companies, including Comcast, Time Warner and DirecTV; mobile phone companies Verizon Wireless, AT&T, Sprint, T-Mobile, TracFone, and Cricket; credit card issuers American Express, Chase, Citibank, Discover, and Wells Fargo; investment services Vanguard, Fidelity, E-Trade, and Charles Schwab; and online services like Amazon, Netflix, Instagram, Spotify, Ticketmaster, and Microsoft.
“The vast majority of Americans have no idea of the rights they have supposedly given up in fine print contracts,” said Bland.
Never Met Arbitrator
Shown at the event was “Lost in the Fine Print,” –a film produced by AFJ, released on Oct. 6, 2014, and is available for viewing online.
Narrated by former Secretary of Labor Robert Reich, the film describes the lives of three ordinary Americans who came face-to-face with the forced arbitration clause and lost the opportunity to take their case to court. Reich said it is a rigged system.
Perhaps the most surprising case involved Maj. Nicole Mitchell, who had served over 20 years in the Air Force Reserve and was a member of the elite Hurricane Hunters. Everything was fine at her job at The Weather Channel, where she was a popular on-the-air contributor. But in 2008, NBC bought The Weather Channel, and its management began to complain about her training obligations. She was fired in 2010, just four days after she returned from the two-week annual training that she is required to do.
The employer probably violated federal law that protects service members from demotion or penalty in fulfilling their service to the country. But Maj. Mitchell could not sue her employer. She was bound by the forced arbitration clause in the employment contract she had been compelled to sign, said Reich.
Mitchell never even met the arbitrator. She says in the film, “I really don’t think this is what people want their justice system to be like.”
Her problem with her employer was not unusual. Many Guards and Reservists have told her, “We went through the same thing,” she said.
Arbitration can be an affordable and efficient alternative to courts to resolve legal disputes when the arbitrator is neutral. But in the case of Mitchell, the decision-maker was chosen by the same company that allegedly wronged her.
Ban on Class Action
Class action lawsuits enable a person or business of small means to challenge the powerful corporations. Many forced arbitration clauses include a ban on class action suits. The case, American Express Company v. Italian Colors Restaurant, is discussed in the film, where a class action lawsuit was denied by the Supreme Court in 2013.
Alan Carlson had been co-owner of a neighborhood restaurant in Oakland, Calif., for 41 years. About 12 years ago, he noticed that the charges for the American Express swipes were quite high, 30 percent more than Visa or MasterCard. It was costing between $53,000 and $60,000 annually, which is a lot for a small business, according to the other co-owner, Steve Montgomery. American Express is preferred by corporations and high-end customers, and so the business really has no choice but to pay the fees.
Other small businesses had the same complaint with American Express, and so they wanted to join together to sue American Express, charging that as a monopoly, American Express violated antitrust laws. But their contracts with American Express required that their claims be submitted as individual arbitration. Before the Supreme Court, they argued that the costs of pursuing a claim could exceed $1 million, but the maximum recovery for the individual plaintiff would be no more than $38,000. The only practical way to sue American Express was by class action.
The Supreme Court ruled 5-3 against the small businesses. The restaurant owners and the other small businesses will never get their day in court. Justice Antonin Scalia, writing for the majority, said essentially that the Federal Arbitration Act of 1925, which rules arbitrage law, makes legitimate these contracts and it takes precedent over other laws, even though antitrust laws may have been violated. Courts cannot invalidate the barring of class action stated in the contract on the grounds that the plaintiff’s costs of individually pursuing a suit exceeds the potential recovery, he wrote.
Justice Elena Kagan’s dissent said that the Court’s opinion was a “betrayal of our precedents and of federal statutes like antitrust laws.” She thought it was outrageous that American Express can break antitrust laws and the victims have no legal recourse in the courts from which they are barred.
The implications of the American Express decision are immense. Bland said, “It was essentially a green light to corporations to write these clauses into its contracts.”
Other federal statutes can become just as precarious as the antitrust laws. For all practical purposes, forced arbitration clauses and bans on class action can nullify the consumer, employee, and civil rights protections defined in the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Equal Pay Act, and the Fair Housing Act.
There is some hope for relief. The Consumer Financial Protection Bureau (CFPB) has been looking at forced arbitration and soon will finalize a study. CFPB issued a rule, effective in June 2013, which prohibits forced arbitration clauses in mortgage and home equity contracts, according AFJ. The Bureau has the broad authority under Dodd-Frank to ban forced arbitration in all consumer financial contracts, including credit card agreements and private student loans.
Many of the disadvantages of forced arbitration are frequently mentioned. Unlike public courts, most arbitration cases are treated as confidential, according to AFJ. Transcription is not required, and so the details of the case and the results are not in public view. Corporate wrongdoing can be kept secret. Also, arbitration cases can rarely be subject to court review.
Several major firms offer arbitration services from which business can choose. These firms have a financial incentive to rule for the company that selects them if they want to retain a long-term business relationship. These companies will remove an arbitrator who is not on board.
“One NAF arbitrator, a Harvard law professor, was blackballed after she awarded $48,000 to a consumer in a case in which a credit card company filed a claim against the consumer,” states the 2007 Public Citizen report, “The Arbitration Trap.” NAF didn’t want to use her anymore. Compelled to resign, she said that NAF had a bias in favor of the financial services industry.
One study on credit cards in 2007, commissioned by Public Citizen, found that over 94 percent of the time arbitrators from the National Arbitration Forum (NAF) ruled in favor of the companies over the consumer. A spokesperson for the Arbitration Forum responded on the study that the only meaningful comparison is with the courts, and that consumer outcomes in arbitration are the same.