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Mandatory Arbitration Clauses

Mandatory arbitration clauses are used to deny millions of Americans their right to sue in court.
Buried in the fine print of many form contracts—for employment, rental, credit, phone service, and insurance—are mandatory arbitration clauses that waive the right to access the courts. They force individuals to argue their cases through private arbitration, a costly private legal system that favors defendants.
Mandatory arbitration clauses undermine consumer protections that were designed to level the playing field between big businesses and individuals.
Since 1970, a wide range of laws have been enacted to protect Americans from defective products, negligent business practices, and discrimination in the workplace. Mandatory arbitration clauses circumvent many of these laws and deny Americans their day in court. In addition, the long-standing tendency among arbitrators to “split the difference” between the two sides results in awards to plaintiffs that are substantially lower than court-ordered awards.
Private arbitration is much more expensive than going to court.
Claimants must pay substantial fees just to pursue a case. For example, arbiters’ hourly charges range from $200-$300 per hour, split between the parties. Further, these fees must often be paid in advance, and almost always amount to thousands of dollars.1 For example, an $80,000 consumer claim that would cost $221 to bring in the Circuit Court for Cook County, IL, would cost $11,625 at the National Arbitration Forum, a major arbitration firm.2 In addition, individuals filing claims have usually already sustained a serious economic loss in their dispute with the business—foreclosure on a home, firing from a job, termination of a franchise or dealership. As a result, many people cannot afford the costs of arbitration and are forced to drop their cases.
Mandatory arbitration clauses are used to defeat class action lawsuits.
Nearly every arbitration clause prohibits participation in class action lawsuits. Class actions are the only effective remedy for wide-scale scams. Individuals seldom have the time or resources to recognize, investigate or prove the existence of such fraudulent practices in order to recover their losses.
A pro-business bias is built into the arbitration system.
Arbitration providers are organized to serve businesses, not consumers. Their marketing is targeted entirely at businesses, and their panels of arbiters consist primarily of corporate executives and their lawyers. Since only businesses are repeat users of an arbitrator, there is a disincentive for an arbiter to rule in favor of a consumer or employee. In arbitration, discovery is a privilege, not a right, and many businesses draft arbitration clauses to severely restrict a claimant’s ability to obtain necessary evidence.
Arbitration clauses affect the most important aspects of people’s lives, including their jobs, homes and health.
  • At work—Arbitration firms have convinced employers that the solution to discrimination lawsuits is not to monitor offices and shop floors for harassment, but to impose so-called “early dispute resolution” requirements, including mandatory arbitration. This process reduces an employer’s incentive to keep workplaces free from harassment and discrimination.
  • Small business—Operating a franchise or dealership is difficult enough without worrying about termination or unfair treatment by a powerful corporate partner. Mandatory arbitration clauses make it harder to redress bad faith practices and easier to mistreat franchisees, dealers and contract farmers.
  • Homeownership—In an era of increased complaints about defective construction, homebuilders use mandatory arbitration clauses to deflect lawsuits. Mandatory arbitration clauses are also an important tool in the predatory mortgage lender’s bag of tricks, preventing a victim of predatory practices from suing lenders.
  • Health care—Insurance companies frequently use mandatory arbitration clauses to fend off appeals of denied medical coverage, and HMOs have also used them to avoid medical malpractice suits. More recently, nursing homes and even physicians are using them.
The courts continue to enforce the most unfair arbitration clauses, even when judicial discretion allows them to be struck down.
Judges have the power to invalidate mandatory arbitration clauses that are unconscionable, but few have done so. Many judges see arbitration as a way of clearing their dockets quickly. Unfortunately, judges’ desire to reduce their workloads eliminates the deterrent—the possibility of court action—that motivates businesses to voluntarily comply with the law.
State legislatures have three options to stop the use of unfair arbitration clauses.
Preemption by the 1925 Federal Arbitration Act forbids states from banning mandatory arbitration outright. But states can:
  • Use existing powers through the federal McCarran-Ferguson Act to prohibit arbitration clauses in insurance policies.
  • Ban contract provisions that forbid a party from bringing or benefitting from a class action lawsuit.
  • Adopt the California approach of disclosure, access and impartiality. It requires full disclosure of consumer arbitration outcomes, so that any patterns of bias can be detected. Texas enacted a similar provision for residential construction arbitrations in 2003.

This policy summary is based in large part on information from Public Citizen.

Endnotes
  1. Public Citizen, “Mandatory Arbitration Clauses: Undermining the Rights of Consumers, Employees, and Small Businesses,” 2002.
  2. Public Citizen, “The Costs of Arbitration,” 2002.
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