Arbitration Clause Denies You Your Day in Court
If your threat to take legal action against a business doesn't get the concerned reaction you expected, it may be because you signed away your right to sue when you became the company's customer. Many sales and service agreements—from cellular service contracts to insurance policies—now include a binding mandatory arbitration clause, which requires customers to submit any dispute they have with the company to an arbitrator. Before you agree to binding mandatory arbitration, it's important to understand something about this private dispute resolution system and what you can do to preserve your rights.
Binding arbitration potentially biased, costly
Arbitration isn't inherently bad. Consumer advocates acknowledge that voluntary arbitration as an alternative to legal action can offer many benefits to consumers, including saved time and money. This is the case, for example, in most auto lemon law cases.
But, they say, binding mandatory arbitration generally favors big business, strips consumers of their leverage, and can be prohibitively expensive because, in many cases, the cost to the consumer of initiating arbitration exceeds the amount the consumer might be awarded if she or he wins the dispute.
Most credit unions omit the binding mandatory arbitration clause in their credit card and lending agreements.
Observers contend that arbitrators have an inherent bias toward business, in part because they earn their income from the companies that use their services over and over. Financial considerations can put pressure on arbitrators to side with those who have the power to grant or deny them future work. According to testimony at a congressional hearing about binding mandatory arbitration in June 2007, there has been a "tendency of corporate repeat-players to blackball arbitrators who might rule against them."
Even when a consumer plaintiff does prevail in an arbitration case, he or she rarely fares as well as a plaintiff whose similar case is decided by a court. According to Public Citizen, a national nonprofit consumer advocacy organization in Washington, D.C., arbitrators' awards to consumers tend to be much lower than awards that judges or juries make. And, unlike the American civil justice system, binding mandatory arbitration does not permit consumers to appeal a decision against them, regardless of how strong their case is or how unfair the outcome may seem.
Companies that require arbitration and bar class-action suits effectively avoid accountability for their products and practices.
One of the biggest complaints consumer advocates have against binding mandatory arbitration clauses is that they often bar customers from participating in a class-action suit, which brings together many people with similar small cases against the same defendant. Since few individuals could afford to mount a lawsuit against a large corporation, and fees and expenses related to arbitration can run from hundreds to thousands of dollars, a class-action suit often is consumers' only chance for redress. Companies that require arbitration and block class-action suits effectively avoid accountability for their products and practices.
Many consumers are not aware they are subject to binding mandatory arbitration.
"It's a basic fairness issue," says Ira Rheingold, executive director of the National Association of Consumer Advocates (NACA), Washington, D.C. "The notion that the party writing a contract can take away a consumer's access to the judicial system just is not right." Ethical or not, entire industries now impose binding mandatory arbitration clauses, leaving consumers little choice but to accept them.
Advocates, consumers affect reform
Although the U.S. Supreme Court traditionally has upheld binding mandatory arbitration clauses, Congress has passed some limited legislation aimed at curbing their use. Consumer advocates also have had success fighting arbitration clauses in some consumer-friendly states such as California. Efforts continue on both the federal and state levels. In the meantime, you can do some things to preserve your rights and add your voice to the debate.
Financial considerations can put pressure on arbitrators to side with those who have the power to grant or deny them future work.
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