The case against mandatory consumer arbitration, Federal Arbitration Act of 1925 allows, Lack of transparency, Gives companies free pass for low quality and abusive practices, When risk of being held accountable is low there is less incentive for companies to do the right thing


From the Center for American Progress.

“The Case Against Mandatory Consumer Arbitration Clauses”

“In response, users might be expected to sue. Even if individual victims did not choose to sue because of the costs involved, an attorney might file a class action lawsuit to represent thousands of wronged consumers. However, customers had already—largely unknowingly—agreed to a mandatory arbitration clause in the fine print of their card contracts. This effectively signed away their right to sue, individually or through a class action. Under such a clause, individuals waive their Seventh Amendment right to a civil trial by jury in favor of meeting with an arbitrator—someone chosen by the company involved—to act as judge and jury.

This is entirely legal, due to the Federal Arbitration Act, a 1925 law designed to help businesses resolve their contractual disputes quickly and easily outside of court by validating agreements made by private arbitrators. Over the past three decades, courts have taken a broader view of arbitration clauses to include relationships between businesses and individuals; since then, these clauses have become ubiquitous in contracts, determining how potential disputes will be handled long before a dispute arises. The clauses may include bans on participating in class action lawsuits, as well as requirements that individual disputes go to arbitration.”

“The consequences of arbitration clauses

At a minimum, mandatory arbitration clauses may dissuade victims from pursuing claims. In just one example demonstrated by a New York Times analysis of 57 million Sprint customers nationwide, only six customers sought arbitration between 2010 and 2014. It is unlikely that so few customers would pursue a complaint against a large company. Of course, not all customer complaints will result in legal action. Internal customer service practices may potentially resolve many concerns before reaching that point. However, recognizing that they are unable to take the company to court, many customers may decide to drop their claims rather than pursue an arbitration process that has low odds of success.

When arbitration is a required mechanism from the start rather than a voluntary way to settle disputes with consumers and workers, it gives companies a free pass for low quality and abusive practices. When the risk of being held accountable is low, there is less incentive for companies to do the right thing. In addition, because arbitrators are likely to want to do business with a company in the future, they have a built-in reason to side with the company over the consumer.

The most economically vulnerable individuals are also the most likely to be affected by these clauses. Just as Yvonne Cardwell, the Whataburger employee, was told she would need to travel several hours if she wanted to be present when an arbitrator reviewed her case, products targeted to low-income families are often more likely to include arbitration clauses. A recent report by The Century Foundation found that 98 percent of students receiving federal funds to attend for-profit schools have an arbitration clause in the enrollment agreements that students are required to sign before attending school. Notably, virtually no public or nonprofit higher education institutions in the study used forced arbitration clauses in their enrollment agreements—only for-profit institutions. Given for-profits’ poor track record, this is troubling: Among students who enrolled at these schools in 2001 and 2002 and received federal financial aid, 57 percent were earning less than $25,000 annually 10 years later, suggesting that the economic benefits of their programs were limited. Just as prepaid cards and payday loans frequently contain arbitration clauses, these clauses at for-profit colleges reduce institutional accountability for places that serve those who are most economically vulnerable.”


Mandatory arbitration clauses, which are increasingly upheld by the courts, have in many cases tipped the scales of justice away from consumers and workers by making it more difficult for them to successfully challenge wrongdoing. Taking matters to court often results not only in better outcomes for victims, but in deterring future bad behavior. By limiting the use of these clauses in contracts, regulators and policymakers can reverse a trend of restricting legal remedies and thereby encourage accountability in the marketplace through the realignment of incentives.”

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