Mandatory Arbitration

It’s hard to do anything these days without signing some kind of contract. Want to start service with a cell phone provider? You’ll need to sign a contract. Ordering some kitchen appliances online? You have to scroll to the bottom of the company’s Terms of Service and check that box that says “I agree” first. Starting a new job? Plenty of paperwork and contracts to sign there too. We’ve become used to contracts; to seeing legal jargon everywhere we go and to needing to agree to it to do pretty much anything we want or need to do.

It’s not necessarily a bad thing. Contracts were initially used to protect both parties and provide guidelines to follow in the event that one or both parties were, for some reason, unpleased with the agreed upon transaction. They were meant to help make navigating any legal proceedings easier and less troublesome for everyone involved. In recent years though, corporations and employers have been slipping in arbitration clauses that not only make legal recourse impossible for the consumer, they protect the actions of the company regardless of whether they acted ethically or not.

What is Arbitration?

Simply put, arbitration is a means of solving disputes outside of the courtroom. If two parties have a disagreement, arbitration is used to find an unbiased solution to the problem. An arbitrator is like a middle man. They’re the one who listens to both sides’ stories and decides what the outcome of the dispute will be.

The above definition is rather broad, as there are several different forms of arbitration:

  • Mandatory: Disputes that fall under mandatory arbitration must be solved by arbitration. There are no other options. Both parties give up the right to sue, file a class action lawsuit, or even appeal the arbitrator’s decision.
  • Voluntary: This form only takes effect if both of the disgruntled parties agree to seek arbitration after the problem arises and/or after they have tried to solve it via other means.
  • Binding: In most cases, the decision resulting from a dispute solved with binding arbitration is permanent. It can only be altered by a court under specific circumstances, as in fraud or the misuse of power.
  • Non-binding: If the decision is non-binding, one or both parties may reject it and seek a trial in court instead. In many cases though, if both parties agree to the initial decision it can become binding.
  • Forced: This is, perhaps, the worst kind there is. Favoring the company and not the consumer, forced clauses are the ones you are required to agree to before you can receive the service or product you’re requesting.

Why and Where Are Arbitration Clauses Used?

For the purposes of this article, we’ll focus on forced arbitration and how it affects the individual. You see, consumers should have the right to sue a company or file a class action lawsuit if they believe they have been taken advantage of or treated unfairly. The reason companies like these clauses, is that it completely blocks the individual consumer from taking any legal action. While this should be totally illegal, according to the Supreme Court, it’s not.

The tricky thing is knowing when and where to look for these clauses. In many cases, you simply cannot get around having to agree to one if you want the service or product you’re trying to get. These agreements can be found in contracts for various industries, including but definitely not limited to:

  • Credit cards
  • Checking accounts
  • Fast cash loans
  • Prepaid cards
  • Student loans
  • Car loans
  • Cell phone service contracts
  • Retirement accounts
  • Employment agreements
  • Investment accounts
  • Nursing homes/facilities

How Does Arbitration Affect Consumers?

Corporations and businesses try to justify using these clauses by claiming that they save everyone far more time and money than a traditional lawsuit would and that, by extension, this lowers the cost of the product to the consumer. A research study performed by the Consumer Financial Protection Bureau says otherwise, however. According to the study, the CFPB “found no evidence that arbitration clauses lead to lower prices for consumers.”

Not only does it not lower costs for the consumers, it’s not more convenient for them than a lawsuit would be either. Arbitration cases can take years to settle and are often held in a location that makes it difficult for the claimant to be present for the hearings. The biggest downside of arbitration is that it blocks consumers from forming the class action lawsuits that could not only be won, but could prevent the company in question from treating more consumers unfairly in the future. Without the right to band together to file a class action suit, consumers must fight corporations one-on-one, one by one; a very ineffective means of provoking substantial change.

How Much Does Arbitration Cost?

The cost of the arbitration itself is split, requiring the disgruntled or injured individual to shell out hundreds or even thousands of dollars if they want to keep the case moving along. Public Citizen, a consumer watchdog group, performed a study to compared the costs of arbitration to that of a court case.

In one of the examples given, a claim that is worth $80,000 would cost over $9,000 to arbitrate. That same claim would cost roughly $250 to file in a state court. Add to the cost the arbitration fees, which could easily surpass $10,000, administrative costs, and the fees you owe your attorney, and it becomes clear why arbitration is anything but good for the consumer.

How Can You Protect Yourself?

When something as damaging as arbitration is so widespread, it can be very difficult for consumers to protect themselves or fight back. That said, there are precautions you can you take to try to limit your exposure to arbitration, or at least understand your options a little bit better.

The following are tips given by ABC News in regards to mandatory arbitration protection:

  • Before signing any contract, scrutinize it thoroughly while looking for mandatory and/or binding arbitration clauses.
  • Some contracts allow for the consumer to opt out of mandatory arbitration. T-Mobile provides an excellent example of this as their terms and conditions state they allow their customers 30 days to opt out of their arbitration procedures. After that however, you’re locked in for good.
  • If you come across an arbitration clause that is too restrictive for your tastes, seek another company to do business with.
  • If opting out and finding an alternate company are not an option, make your opinions known before signing the contract. Consider crossing out the arbitration clause, writing something to the effect of, “I object to this mandatory arbitration clause, but am signing this contract because I am told I have no choice” and then initialing your statement.
  • Have you ever gotten a notice from a company notifying you of “changes to your contract”? This is an opportunity for them to sneak something in that was not part of your original agreement. Read the changes carefully.
  • In the event that a company files an arbitration case against you, don’t ignore it. Respond immediately with a written letter, send it via certified mail, and consider speaking to an attorney ASAP.

You may be a little flabbergasted after reading this, and rightly so. How can you help? Call your local congressman, or write him or her a letter calling for reform and requesting the passing of a law that would limit forced arbitration. Want arbitration to come to an end? It will be a long and hard fought battle, but there is power in numbers and if enough people act together, it may just work.