Arbitration clauses are a common feature in a large part of my business litigation practice. They are generally enforceable under both federal and state statutes (e.g., the Federal Arbitration Act and the Tennessee Uniform Arbitration Act), and federal and state case law generally uphold them under common contract principles.
Arbitration clauses are supported by strong public policy favoring private dispute resolution, outside of court. These contractual provisions, often between companies and consumers, require disputes to be resolved by a private arbitrator, instead of through the court system. An arbitrator has the power to render a binding decision in much the same way a judge does.
But some are now arguing that mandatory arbitration harms consumers while benefitting companies. There is an emerging public backlash against arbitration clauses propelled by the belief that they prevent consumers from protecting rights provided by federal and state law. Some view arbitration proceedings as the privatization of justice in forums where the decision-makers are beholden to the large corporations which drafted the arbitration clauses in the first place.
Over this past weekend (October 30 – November 1, 2015), the New York Times published two articles detailing an investigation it conducted on the effect of mandatory arbitration clauses over the last several years. In one article, the NYT claims that companies have used arbitration to create an alternate system of justice. It asserts that the arbitration rules tend to favor businesses, and judges and juries have been replaced by biased arbitrators who consider the companies their clients.
As a result, the NYT states, tens of millions of Americans have lost the fundamental right to have their day in court. These arbitration clauses, which the NYT claims most employees and consumers do not read, cover a great number of diverse legal issues including medical malpractice, sexual harassment, hate crimes, discrimination, theft, fraud, elder abuse and wrongful death. The NYT interviewed numerous individuals who believe the arbitration proceedings were biased against them and that they lost many of the advantages and protections they would have had in court, such as the right to discovery and the right to an appeal.
In the second article, the NYT examined the increasing use of arbitration clauses in consumer contracts which required litigants with similar complaints against a company to proceed individually, rather than through the more cost effective class action. The use of such provisions grew exponentially after the United States Supreme Court held in American Express Co. v. Italian Colored Restaurant that courts cannot invalidate arbitration provisions which waive the right of similarly situated claimants to assert claims as a class.
The NYT reports that as a result of the class action waiver, many consumers drop their claims because the cost of litigation far outweighs any potential recovery. For example, a cell phone consumer will not spend tens of thousands of dollars in arbitration to recover a few hundred dollars for improper charges.
The NYT reports that from 2010 to 2014, companies were able to push 80% of class actions into arbitration. Then, once in arbitration, companies would have the class claims dismissed under the arbitration clause’s class action waiver. The NYT states that in 2014 alone, courts upheld the class action ban in 134 out of 162 cases.
The implication is that companies have gained an unfair advantage over consumers who complain of the same harm by forcing the class claims into arbitration and then preventing them from proceeding under the class action waiver. In the financial services sector, the NYT states, law enforcement officials believe the class action ban has cost them an essential tool in uncovering patterns of corporate abuse.
As of right now, arbitration clauses are a mainstay of business litigation. There are grounds under federal and state law to invalidate arbitration clauses, but in a large majority of cases, courts hold they are valid and will force the case into arbitration.
If the NYT investigation is correct, and arbitration provisions with class action bans harm, instead of help consumers, we may see a new push at the federal and state level over the next several years to allow courts greater latitude in invalidating arbitration clauses in contracts spanning numerous industries.