Mandatory Arbitration Clauses Are Discriminatory and Unfair

Most people who are subject to mandatory, pre-dispute arbitration clauses in their contracts for employment, credit, sales or services do not know that they have waived their right to access the courts. By signing a car lease, using a credit card, accepting a new job, buying a computer, or purchasing private health insurance or HMO coverage, they may have waived their rights to hold companies accountable for wrongdoing under local, state, and federal statutory and common laws. Consumers and employees often have no choice but to waive their rights because arbitration clauses are presented in take-it-or-leave-it contracts.

In addition to the denial of consumers’ and employees’ rights to seek remedies in court, arbitration between two parties with unequal bargaining power is too often a discriminatory and one-sided process, benefitting the corporations mandating it. The following are problems faced by consumers and employees who are forced into arbitration by contracts written solely by the corporation:

• Substantial up-front costs. For many consumer and employment disputes, the fees imposed by mandatory arbitration may make it economically impossible for consumers and employees to vindicate their rights. Many arbitrators require hundreds of dollars in filing fees and hundreds or thousands more in hearing fees. Some consumers, particularly those who have just suffered a financial loss, are unable to pay these fees and are therefore precluded from any remedy. Similarly, high fees may preclude employees whose financial future may already be endangered because of their employment dispute from pursuing their anti-discrimination claims. In other consumer claims, the small amount in dispute may be less than the arbitration fees, making any arbitration a losing proposition economically. In contrast, most jurisdictions provide consumer access to small claims courts with minimal fees and costs.
  
  
• Prohibition of class actions. Certain harms inflicted on consumers are small yet widespread so that they would be impractical to pursue unless brought as a class action. Companies are using mandatory arbitration clauses to avoid class actions, making it impossible for plaintiffs with small claims to pursue their cases or afford any legal advice. The prohibition on class actions thereby provides legal immunity for corporations who may have gained a substantial benefit through small injuries to a large number of people.

• Choice of venue. Arbitration clauses often select a venue that favors the corporation, such as requiring arbitration in a location inconvenient to the consumer. Thus, consumers may find themselves having to bear the cost of long-distance travel to make their claims heard. For example, the Internet auction site e-Bay requires its customers to travel to its home turf of San Jose, California, to arbitrate any dispute. This requirement is obviously an impediment to justice for modest disputes of a couple of thousand dollars or less.
  
  
• One-way agreements. Many mandatory arbitration clauses require only one side (the consumer or employee) to resort to arbitration on a particular claim, while allowing the other side (the corporation) to sue in court on the same claim. In addition, sometimes only one side (the consumer or employee) is bound by the outcome of the arbitration while the other (the corporation) is not. Arbitration clauses also may provide certain remedies for one side but not the other — for example, allowing the corporation to be awarded attorney fees, but not the consumer on whom arbitration has been imposed.
  
  
• Choice of arbitrator. Many mandatory arbitration clauses give the company the right to pick the arbitrator, formulate the list of possible arbitrators from which the consumer or employee must select, or select the arbitration organization. When companies establish long-term relationships with arbitration organizations to handle their continuing business, arbitrators have a self-interest in favoring the company in their decisions in order to attract repeat business. Moreover, neither arbitrators, nor those that impose arbitration, are required to keep a public archive of decisions. Therefore, consumers and employees suffer from the disadvantage of not being able to check for biases in prospective arbitrators, even when they have some role in choosing them.
  
  
• Lack of a public record. Because in many cases no written decisions are made available and most arbitration clauses require that all facts relating to a dispute be kept confidential, public discussion on the validity and fairness of a given arbitration finding is discouraged, no legal precedents or rules for future conduct are set and individuals cannot cite previous decisions for precedential effect. Imagine if we had never learned about tobacco company misbehavior from the State of Minnesota litigation.

Since businesses that impose arbitration are likely to keep an archive of decisions, they enjoy the advantage of being able to choose those arbitrators that have ruled for them. And with no public record, the companies can present to the arbitrator favorable cases from their own files while not disclosing cases favoring the employee or consumer.

• Lack of discovery requirements. Many arbitration schemes greatly restrict discovery, the process by which parties obtain information from one another, even though in-court claims cannot be litigated effectively without it. The lack of discovery and adherence to rules of evidence and procedure in arbitration amounts to the wholesale denial of one of the most basic rights in our civil justice system. Lack of discovery may make creditors’ and employers’ discriminatory behavior impossible to prove. Consumers and employees are prevented from discovering patterns of abuse that would reveal the corporation’s culpability; this immunizes companies from sanctions, including injunctions, sufficient to deter continued wrongdoing.
  
  
• Limited judicial review. Under the Federal Arbitration Act, parties are allowed only limited judicial review of an arbitration award and virtually no review of the substantive merits of the award. The courts can review for bias in the process, partiality by the arbitrators, and whether the arbitrators exceeded their powers. But to overturn a decision on substantive legal grounds, the appellant must show “manifest disregard of the law,” an extraordinarily difficult standard to prove. The true scope of review is even more limited because often there is no requirement for any written opinion and no requirement that any voluntarily prepared written opinion include a statement of what law the arbitrators applied or what facts were deemed proven. Any consumer wishing to show bias or partiality or error in applying law or finding fact has an extraordinary burden to meet, particularly where no records of the company’s dealings with the arbitrator are made public and no discovery rules provide for their disclosure.

• Arbitration is ill-suited to decide causes of action based on statutes involving preferred public policies such as civil rights protections. Statutory rights and remedies are not fully vindicated in the arbitration process. The use of unilaterally imposed mandatory arbitration clauses in employment contracts as a condition of employment harms both the individual employee and the public interest in eradicating civil rights violations. Those whom the law seeks to regulate should not be allowed to exempt themselves from the enforcement of civil rights laws. Nor should they be allowed to deprive civil rights claimants of the ability to vindicate their rights in a court of law by a jury of peers.

Likewise, consumer protection statutes designed to ensure the public’s safety embody important public policies. Corporations should not be allowed to avoid those policies by forcing individuals into arbitrations where their rights are not protected.

• Limited remedies. Mandatory arbitration clauses may eliminate some remedies, such as injunctive relief and punitive damages, or shorten the time within which a claim must be brought. These provisions circumvent carefully considered and crafted laws governing the creditor/consumer and employer/employee relationships. Many claims are not worth bringing without the prospect of full legal remedies. By inserting these clauses into their contracts, creditors and employers intend to prevent legitimate claimants from ever receiving justice.