Nearly four years ago, in a case called AT&T Mobility LLC v. Concepcion¸ the Supreme Court ruled 5-4 that the Federal Arbitration Act of 1925 preempts any state law that prohibits a contract from barring class-wide arbitration. That dense bit of legalese essentially means that any corporation can take away your right to sue them in court, and instead force arbitration of your dispute. Not only that, but you can only arbitrate the dispute as to your claim alone — you cannot include any other people who may have been harmed by the same conduct.
Let’s apply that principle to a fictional example: One million people purchase Wonderland Cable Company’s basic cable package with free equipment upgrades for two years for $50 a month. Six months later Wonderland discovers that customers can easily pirate their content due to a flaw in the original set-top boxes and decides to give all customers a new box containing better piracy controls. The upgrade really eats into the bottom line, so Wonderland adds a $2 “infrastructure maintenance” charge to each customer’s monthly cable bill to avoid taking a loss. A smart customer sniffs out the fee as a disguised equipment charge and seeks to sue Wonderland to eliminate the $2 fee and to refund all the money Wonderland has collected for the fee from its customers.
Easy lawsuit right? Wonderland clearly promised no upgrade fee for two years but then charged one almost immediately. Under current law, however, that lawsuit would be thrown out of court and into arbitration. In arbitration, the smart customer could only seek a refund of the money he or she paid, and could not seek a refund for any other customers. Other customers would have to file and participate in their own arbitration proceedings to seek to recover their improperly charged fees. How many people would do that over a $2 monthly fee? That’s only $24 a year. Given the cost and time it takes to participate in arbitration, most people will simply ignore it and continue to pay. The result in this example is a $24 million win—each year—for Wonderland Cable.
The problems with mandatory arbitration clauses in consumer contracts are clear. First, you don’t have a right to sue in a court of law if the company wrongs you. This means you lose many important rights, and many others are extremely limited. For example, arbitrators, unlike judges, are not required to follow the law. Second, companies tend to prefer arbitration over litigation because the system favors them. They are, after all, the arbitrators’ biggest customers and have no incentive to hire arbitrators who frequently decide against them. That, coupled with arbitrators’ ability to decide disputes independent of legal precedent, creates a dangerous and uneven playing field for consumers. Third, by killing the right to bring claims as a class action, each customer must initiate her or his own arbitration. Since most people do not, or will not, start arbitration, companies effectively insulate themselves from accountability to their customers by paying out to the few who make enough noise. Finally, arbitration proceedings are private and confidential, meaning that companies are able to silence that noisy minority and limit publicity of their wrongdoing. Many customers won’t ever know they’ve been harmed, and the company no longer has to fear negative news coverage.
So how widespread are arbitration clauses? In December 2013, the Consumer Financial Protection Bureau issued a preliminary report detailing the use of arbitration clauses in consumer banking agreements. The report cited arbitration clauses in more than 50 percent of credit card loans, 81 percent of prepaid charge cards and in checking accounts covering 44 percent of all insured deposits. Those numbers continue to rise. Of those contracts, around 90 percent bar participation in class actions in both court proceedings or arbitrations.
Such clauses are not limited to bank and credit card agreements. They are now standard in cable and satellite television contracts, cell phone contracts, auto purchase agreements, nursing home agreements, airline ticket agreements, employment agreements and have begun to expand quickly into Internet commerce sites as part of the terms and agreements that almost no one ever reads.
What can you do? You can find the clause, cross it out and initial it before you sign any contract, though that may not stand in court. You can refuse to do business with companies demanding arbitration, but that is not always practical. The best solution is to voice your concerns to Congress. Short of a rebalancing of the Supreme Court in favor of consumers, the only people with the power to bar mandatory arbitration clauses are the people who make the laws. Contact your congressperson. Or, better yet, vote in members who aren’t diametrically opposed to your own economic interests. You are given a voice in who makes the laws and how the laws are made, so use it.
Chuck Marshall is an attorney at Marshall Law Firm.