The Disingenuous Defense of Forced Arbitration

Andrew Pincus argued before the Supreme Court that corporations should be able to immunize themselves from class actions...and won.

In AT&T Mobility v. Concepcion, the Court ruled that corporations can impose arbitration processes on aggrieved customers and deny them the ability to bring class actions. Re-writing an 86-year-old federal statute, the five conservative justices ruled that AT&T could advertise “free” cell phones to lure consumers and then charge them a surprise $30 sales tax without being susceptible to suit, thanks to fine print in the “take-it-or-leave-it” contract that AT&T imposes on its customers.

Recently, Pincus has written in the New York Times and the National Law Journal that Concepcion is “transforming the way disputes are resolved throughout the country” – a transformation which is, he suggests, to the benefit of everyone except plaintiffs’ attorneys. Pincus is correct that a transformation is underway (just this week Microsoft announced that it, too, is inserting clauses in its user agreements to force individual arbitration in response to the Concepcion decision), however, the benefits accrue primarily to Pincus’ corporate clients.

Nearly every aspect of Americans’ everyday lives is controlled by “take-it-or-leave-it” or “adhesion” contracts. We sign them to buy products and procure services. As Amalia Kessler, a Stanford Law professor put it recently, in order to avoid such contracts “[y]ou would have to live in a cave somewhere.” And now in the wake of Concepcion, those contracts also serve to surrender our civil rights and protections as consumers.


The ruling in Concepcion has had widespread detrimental effects in the year since it was issued. Countless consumers have been cheated out of their money and their rights as lower court judges, at times reluctantly, enforce contractual terms that lead to dismissal of their cases from court, leaving unfair arbitration procedures as their only avenue for possible redress.

Pincus lauds this development, noting that, with the Corporate Court’s assurances in Concepcion, companies are increasingly using arbitration in their “customer agreements, supplier agreements and employment agreements [and] [s]ome are even considering inclusion of arbitration agreements in their securities offerings.”

It should come as no surprise that corporations prefer individual arbitration over class action litigation in disputes with consumers, employees, or securities purchasers – in other words, when they control the game. However, a recent survey of Fortune 1000 companies suggests that when it comes to their disputes with other companies, they are dramatically less likely to use arbitration than they were in the past. The survey reveals that only 60% of companies in 2011 reported using arbitration in commercial contract disputes, a considerable drop from the 85% that reported doing so in 1997. Is it possible that corporations have grown wary of arbitration when they aren’t calling all the shots?

After all, certain arbitration firms have been found to rule for the corporation that hired them a whopping 93.8% of the time.

In addition to this “repeat player bias,” the problems with arbitration, particularly in the consumer and non-unionized employment context, are myriad:

• Arbitration proceedings are secretive, to the detriment of both the plaintiffs and the public. 
• Arbitration can be prohibitively expensive, since filing costs often exceed those of state or federal courts. Those costs can increase depending on the value of the claims. 
• The discovery process in arbitration is deficient, as corporations are often the ones setting their own rules for discovery. 
• Federal law makes it nearly impossible to appeal, much less reverse, the decision of an arbitrator.

Yet Pincus persists in touting the supposed advantages of arbitration. He writes, “Most injuries suffered by consumers and employees are individualized and too small to attract a lawyer’s services. Our courts are expensive, overburdened and virtually impossible for nonlawyers to navigate. For these claims, it is arbitration or nothing.”

But Pincus has it exactly backwards. As Judge Richard Posner of the Seventh Circuit Court of Appeals recognized – and as Justice Breyer repeated in his Concepcion dissent -- “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.” The idea that, when class actions are unavailable, 17 million individual claims will be pursued through arbitration is equally unlikely (a reality that corporations count on), and Pincus’ claim that social media will allow plaintiffs’ lawyers to “agglomerate enough individual claims to support the costs of litigating these claims” through arbitration – yet somehow not through litigation – is preposterous.

Equally disingenuous are Pincus’ claims that “the high rate of settlement, without regard to the underlying merits, undermines [the] deterrence justifications” of litigation and that corporations consider class action lawsuits as simply the “cost of doing business.” This claim raises a question Pincus does not address: If corporations are not worried about class actions, why are they fighting so hard to block them?

Furthermore, a jury award is not the only thing that can affect a corporation’s bottom line. Settlements can be plenty costly, as can the bad publicity that the public filing of the suit and succeeding steps in litigation can bring (thus corporations’ preference for low-profile resolution of claims through arbitration).

Finally, let us not forget that our courts are not inherently slow or inefficient; many of them are simply dramatically understaffed. Nearly half of all Americans live in a district or circuit with judicial vacancies for which there are pending nominees. The answer to this crisis is not to divert Americans to a flawed system of dispute resolution, but to demand that those vacancies be filled promptly and with the best legal minds our country has to offer.

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Disappearing Cases

Guest post by Paul Bland

This probably won’t shock you: five members of the U.S. Supreme Court really like mandatory arbitration.

Over the last few decades, the most important cases pertaining to arbitration heard by the Court have been decided 5-4 — with the dissenting four dissenting strongly.

“Mandatory arbitration” sounds complex, but it’s straightforward enough: instead of taking a company that has harmed you to court (filing a lawsuit), you are required to pursue your grievance in arbitration.

Straightforward, yes. Harmless, not in the least. Arbitrations take place in front of an arbitrator, not a judge and jury. Arbitration clauses require people to act individually, and prevent them from joining together in a class action.  They are often costly. They happen behind closed doors. And, historically, they favor business interests over individuals.

That is, if they ever get far enough along to be resolved. Many just disappear.

Let me explain.

In the consumer, employment, medical and securities contexts, this phenomenon is known as “forced arbitration” because unaware individuals have the terms of arbitration clauses dictated to them by corporations (through contracts that individuals are required to sign).

The courthouse doors are slammed shut by these clauses. As a consequence, consumer, civil rights and other cases are thrown out of court.

So what happens then? Are large numbers of valid consumer and civil rights cases actually pursued in and resolved by arbitration, or do they just disappear? Is the Supreme Court really shifting disputes from one forum (court) to another (arbitration), or is it just getting rid of the cases altogether?

At the Ninth Circuit’s 2011 Judicial Conference, a few reporters got an unusual chance to interview Justice Anthony Kennedy. They asked him about the Supreme Court’s shrinking docket. Justice Kennedy responded, “A lot of big civil cases are going to arbitration. I don’t see as many of the big civil cases.”

Now it’s true that a lot of large commercial business-to-business cases are going (and have been going for years) to international arbitration. But have more civil cases involving cutting-edge statutory issues in consumer and civil rights law — the kinds of cases that the U.S. Supreme Court used to decide — been going to arbitration?

The answer largely appears to be no: consumer cases are simply not going to arbitration in any appreciable numbers.

Take the American Arbitration Association and its consumer docket. The AAA is named sole arbitrator in hundreds of millions of consumer contracts. (AT&T Mobility alone has over 60 million customers and requires its customers to take significant disputes to the AAA. Numerous other corporations with AAA clauses have tens of millions of customers.) So with the AAA specified in millions of consumer contracts, are large numbers of consumers rushing to arbitrate their disputes before the AAA?

Not so much. In 2010, the AAA’s complete consumer docket — every single case — for the entire country amounted to around 1,300 cases. Remember, that’s out of hundreds of millions of individuals bound to arbitration by their contracts. 1,300 cases.

The year before, the AAA consumer docket was even lower, in the 900s.

When the National Arbitration Forum was operating (a corruption scandal forced it to stop doing consumer arbitrations in 2009), it averaged a grand total of about 50 consumer cases a year over a five year period.

Each year, hundreds of thousands of consumers send complaints to the Federal Trade Commission or their state attorney general. Hundreds of thousands also file complaints with Better Business Bureaus or post them to online consumer complaint sites.

The reality is that there are millions of consumers in America with legitimate disputes against corporations.

But the one thing most consumers with disputes don’t do is navigate the unfamiliar (and often hostile and expensive) world of forced arbitration. As a federal district court noted in one recent case, while thousands of AT&T Mobility customers had expressed great unhappiness with the corporation’s behavior, only an “infinitesimal” number of its customers would or could in reality go through its arbitration system.

A ton of American consumers have claims, and many involve illegal acts by corporations. But so many of those claims never see the light of the day. Justice Kennedy can say that many important civil cases are going to arbitration. But for consumer cases, Justice Kennedy is wrong. Nearly all of the cases are not going to court, they are just going away.

This blog entry originally appeared on the Wexler Wallace Blog.
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Paul Bland Jr. is a senior attorney at Public Justice. He is responsible for developing, handling, and helping Public Justice’s cooperating attorneys litigate a diverse docket of public interest cases. Paul has argued and won more than 20 cases that led to reported decisions for consumers, employees or whistleblowers in four of the U.S. Courts of Appeals and the high courts of six different states. He is currently handling or assisting with appeals before the U.S. Court of Appeals for the Eleventh Circuit; the California, Florida, Kentucky and Nevada Supreme Courts; and the Maryland Court of Appeals. 

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Arbitration: Is It Fair When Forced?

“Arbitration: Is It Fair When Forced?” was the subject of a Senate Judiciary Committee hearing held on Thursday, Oct. 13.

Sen. Al Franken (D-MN), sponsor of the Arbitration Fairness Act (S. 987) focused his questions and comments on the ways in which mandatory arbitration clauses put everyday Americans at a disadvantage in seeking justice against large corporations. Mandatory arbitration clauses, often embedded deep in the fine print of a contract, compel parties to give up their right to sue in court when they have a dispute. Instead of going before a judge and a jury, people who sign those contracts -- such as cell phone or employment contracts -- to appear before privately hired arbitrators... who are often hired by the corporation.

Among witnesses testifying was Dr. Deborah Pierce, a physician specializing in emergency medicine. Dr. Pierce described the forced arbitration process she underwent when she brought a claim against her employer for gender-based employment discrimination. Because an arbitration clause was a mandatory part of her employment contract, Dr. Pierce was barred from bringing her complaint in a court of law; instead, she was forced to take part in an arbitration process that was skewed in favor of her employer, who had a prior relationship with the organization appointing the arbitrator. Dr. Pierce was required to pay over $200,000 in arbitration costs, including half of the $450/hour fee charged by the arbitrator. People of lesser means simply would not have been able to afford to arbitrate their claims at all. When Dr. Pierce lost her case and argued that the arbitrator did not correctly apply the law to her case, the organization supplying the arbitrator responded that it “does not certify or attest to the abilities, competence, or performance of its arbitrators, and that it does not make any ‘warranties about the ability of the arbitrator to weigh facts and law.’”

Witnesses opposing the Arbitration Fairness Act attempted to argue that forced arbitration was beneficial to ordinary people, claiming that without it companies might not be willing to offer services like credit cards at all.

Questioning Victor Schwartz, a lawyer representing the U.S. Chamber of Commerce, Sen. Franken asked whether he thought it was fair to have people sign contracts with hidden mandatory arbitration clauses.  The Chamber lawyer simply replied “fairness is in the eyes of the beholder,” and other witnesses argued that people wishing to avoid mandatory arbitration could simply avoid opening bank accounts, buying mobile phones, or engaging in any activity that involves signing contracts. Under further questioning by Sen. Franken and Sen. Richard Blumenthal (D-CT), they were forced to concede that it was nearly impossible, in the 21st century to avoid the clauses which appear in the vast majority of credit card contracts, car financing arrangements, cell phone contracts, nursing home residency agreements, and in almost every agreement to purchase a good or service online.

Sen. Sheldon Whitehouse (D-RI), pointed out that the right to a court trial was a right held to be essential to the working of our American democracy by the Founders—so much so that a system to provide for courts of law and the right to a trial by jury in certain situations are written into the Constitution.  He described the situation posed by mandatory arbitration clauses as one in which citizens are unknowingly forced to sign away their rights to a fundamental freedom guaranteed in the Constitution, and wondered if the opinions of some of his colleagues about such clauses might be different if, within the fine print of a contract, people were forced to agree to give up their 2nd Amendment right to bear arms.

The Arbitration Fairness Act, introduced by Senator Franken and co-sponsored by Senators Blumenthal, Whitehouse, and others, would amend the Federal Arbitration Act to state that “no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment dispute, consumer dispute, or civil rights dispute.” This act would return arbitration to its original intent under the law—as a process into which parties of equal power and standing could voluntarily choose to enter when a dispute arose and they both wanted to seek an alternative to litigation. Alliance for Justice is one of many organizations that signed a letter to the Senate Judiciary Committee supporting the Arbitration Fairness Act.

To learn more about the dangers of mandatory arbitration and the ways in which recent decisions by the Supreme Court to uphold forced arbitration clauses are benefiting corporations in evading justice when they violate the rights of ordinary people, download Alliance for Justice’s new report, Arbitration Activism: How the Corporate Court Helps Business Evade Our Civil Justice System.

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CompuCredit v. Greenwood: Does a “Right to Sue” Really Mean a Right to Sue?

This morning, the Supreme Court heard oral arguments in CompuCredit v. Greenwood, a case that will decide whether a federal law requiring that consumers be informed of their “right to sue” voids mandatory arbitration clauses in credit repair contracts.

Plaintiffs in this case are a class of consumers who sued CompuCredit for deceitful marketing tactics under the Credit Repair Organization Act (CROA).  These consumers signed up for credit cards which CompuCredit claimed would help them rebuild their credit. Instead, credit card holders were charged $257 per year in undisclosed fees, plus interest, if the fees were not paid.  The credit card agreement also included a mandatory arbitration clause which the consumers now claim is invalidated by the CROA.

The CROA requires that agreements between credit repair companies and consumers must contain the language: “You have the right to sue a credit repair organization that violates the Credit Repair Organization Act.”  The consumer plaintiffs claim that this language voids the mandatory arbitration clause in CompuCredit’s contracts with them, thus giving them an actual, meaningful “right to sue.” CompuCredit argues that consumers must go to arbitration rather than bringing their lawsuit in court because the CROA requires only disclosure of a right to sue and not an actual right to sue.  Both the federal district court and the Ninth Circuit Court of Appeals ruled in favor of the consumers, holding that the CROA voids the arbitration clause.

The argument today found the justices on both sides of the issue. Justice Ginsberg observed that the statute’s language requiring consumers to be notified of a right to sue must include an actual right to sue, as anyone who read the notice would believe.  Likewise, Justice Kagan observed that the CROA “says you have a right to sue, and you [-- CompuCredits’ counsel --] are asking us essentially to read that language as: You have a right to bring a claim in court, but it's probably going to end up in arbitration because of the nature of your form contract.”  Justice Scalia, on the other hand, was open to CompuCredit’s reading of the “right to sue” language as merely providing notice and not a substantive right because the language creating the requirement was not located in the substantive part of the statute.  

This case comes to the Supreme Court at a time when consumers are increasingly being forced from the courts into mandatory arbitration. The Court’s recent cases involving arbitration agreements have held that they are enforceable under the Federal Arbitration Act. 

Last term in AT&T v. Concepcion, the Court upheld a company’s right to include in its standard contract a waiver of the consumer’s right to sue or participate in a class action.  This was devastating for consumers’ rights because an individual consumer will not have the resources or incentive to take on a corporation when they have been cheated out of a small amount of money and must find strength in numbers to bring such a lawsuit. If consumers are not allowed to band together as a group, corporations will not be held accountable for their deceptive or harmful practices.  One of the few remaining exceptions to the rule in AT&T is where federal law provides an express right to sue.

This Thursday, Senators Al Franken and Richard Blumenthal will lead a Senate Judiciary Committee hearing entitled “Arbitration: Is It Fair When Forced?” to address the problems caused by the Supreme Court’s forced arbitration cases.

AFJ released a special report today highlighting how the Corporate Court has used the arbitration system to help businesses evade justice.

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