Arbitration Clause Denies You Your Day in Court

by Monica Steinisch

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.

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.

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.

"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.

• Understand the terms of your agreement. Many consumers are not aware they are subject to binding mandatory arbitration. The clause can be part of an agreement's "fine print," and can go by cryptic names such as "dispute resolution mechanism." Even if your original agreement didn't contain a binding mandatory arbitration clause, the company could have amended it to include one without your being aware of the change, by doing something as simple as including an insert with your monthly statement. If you are not sure that you're not subject to binding mandatory arbitration, you may be. Contact the company and ask. Be sure to read all future correspondence from the company.

• Patronize consumer-friendly businesses. Consider giving, or moving, your business to a company that does not include a binding mandatory arbitration clause in its agreements. According to GiveMeBackMyRights.com, a site operated by a coalition of consumer advocacy organizations united to fight binding mandatory arbitration, most credit unions and some small local banks omit the clause in their credit card and lending agreements. Cards that carry the AARP name do not include the clause, either.

  The coalition encourages car buyers to call the dealership beforehand and ask if its purchase or lease agreements contain a binding mandatory arbitration clause. If the answer is yes, find a more consumer-friendly dealer. When getting a mortgage, choose one that does not include a binding mandatory arbitration clause in its forms. Fannie Mae and Freddie Mac, the two largest mortgage investors in the U.S., do not allow binding mandatory arbitration clauses on the mortgages they buy.

• Try to amend the contract. If you're already in the midst of a transaction, or you simply have no other option, try to cross out the binding mandatory arbitration wording in the contract. If offered, take advantage of an "opt out" clause. Rheingold, who chose the credit union-issued credit card he carries because it does not require arbitration, says some large companies are starting to include them in response to state courts' charges that binding mandatory arbitration clauses are "unconscionable," or unfair, because they give consumers no choice. If a binding mandatory arbitration clause is being added to your customer agreement as an amendment to the original contract, don't accept the new terms. That may mean writing a letter to opt out, or it may require you to take your business elsewhere.

• Voice your opinion. If you choose not to patronize a company or you close an account because it requires arbitration, explain why you're taking your business elsewhere. Write your legislators to weigh in on the issue. And share your story at the Give Me Back My Rights Web site.

  "I believe the tide is turning," says Rheingold, citing the recently introduced Arbitration Fairness Act of 2007, which, if passed, would ban binding mandatory arbitration clauses in employment, consumer, franchise, and civil rights disputes.

  Despite some promising developments in Washington, Rheingold stresses the importance of keeping up the pressure on legislators and making the fight against binding mandatory arbitration a grass-roots movement. "The only way we'll get these things changed is if consumers speak up."

Published September 24, 2007

Printed Tuesday, October 7, 2008

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