Listen to this Article
Unlike contracts between commercial actors of comparable bargaining power, you and your employer never came to a separate arrangement regarding the terms of your employment. Nor did you and your cell phone company negotiate the terms of your use agreement. Instead, after you were offered the job, you were handed a set of standard terms that you could either accept or reject in their entirety. And if you rejected them, you were also rejecting your source of income. The same goes for consumer agreements. You either agree to be bound by the terms, or you lose the opportunity to use the good you were otherwise willing to purchase.
So why do companies want their customers and employees to be bound by these non-negotiable arbitration clauses? In a nutshell, they want to avoid the court system. By including these clauses in all employee handbooks and consumer terms and conditions, companies are able to force aggrieved employees and consumers to forego their right to a jury trial and instead bring their grievances before a private tribunal that is typically selected by the same company that included the mandatory arbitration clause.
In addition to waiving one’s right to a jury trial, most of these terms also include waivers that prevent the formation of classes. Unlike ordinary civil actions, which allow similarly situated employees and consumers to file class actions against companies that engage in widespread illegal activity, mandatory arbitration clauses conveniently force these individuals to go it alone. As a result, many individuals who are otherwise entitled to relief never recover anything because they either never discover the illegal activity for themselves or the costs of pursuing an individual action are too prohibitive.
Such class action waivers run contrary to the primary benefits touted by arbitration proponents: cost-effectiveness and efficiency. By barring the consolidation of similar actions, over 90 percent of mandatory arbitration clauses prevent consumers from litigating and resolving cases simultaneously, forcing individuals to bear the costs and risks associated with suing a large corporation, which can even include being forced to pay the company’s attorneys fees. Not only does this arrangement bar recovery for unsuspecting but nevertheless harmed individuals, but it also makes for a great disincentive to those who do realize that they are being mistreated.
In addition to the inefficiencies that undermine the key argument in favor of mandatory arbitration, the CFPB report shows that the status quo actually stacks the deck against consumers and employees. The report empirically validated the long-held suspicion that private arbitrators reward companies for their “repeat player” status to the detriment of consumers and employees, who are unlikely to file another case again in their lifetimes. Specifically, the report made the following observations:
- “Almost all of the arbitration proceedings involved companies with repeat experience in the forum.”
- “Of the 341 cases filed in 2010 and 2011 that were resolved by an arbitrator and where we were able to ascertain the outcome, consumers obtained relief regarding their affirmative claims in 32 disputes…The total amount of affirmative relief awarded was $172,433….”
- Meanwhile, “[o]f the 244 cases in which companies made claims or counterclaims that were resolved by arbitrators in a manner that we were able to determine, companies obtained relief in 227 disputes. The total amount of such relief was $2,806,662.”
While the report does not come right out and say that arbitrators reward the companies that hire them to resolve disputes subject to mandatory arbitration clauses, the inferences that logically flow from the CFPB’s conclusions appear nonetheless damning. The question that remains is whether the regulations that will ultimately flow from this report take meaningful steps to resolve these inequities. But more important than the answer to that question is how the judicial system, namely the Supreme Court, will respond once those regulations become effective. Given the Court’s current idealogical composition, the prospects do not bode particularly well for consumers.