Lauren Guth Barnes, a partner in Hagens Berman Sobol Shapiro LLP’s Cambridge, Massachusetts office, recently wrote about little-known binding arbitration clauses and class-action waivers in consumer, employment and other contracts that are thwarting consumer rights and the ability to protect them. The July 2015 edition of the Harvard Law and Policy Review published Barnes’ article entitled, "How Mandatory Arbitration Agreements and Class Action Waivers Undermine Consumer Rights and Why We Need Congress to Act.”

 

The Importance of Class-Action Lawsuits

Class actions are often the only way to protect a group of consumers who have suffered a similar wrong, particularly where the individual damages are relatively small. Single plaintiffs and their legal counsel often cannot justify the time and expense of bringing individual actions against corporate giants. Corporations and their defense counsel are fully aware that even if the corporation committed the same wrong millions of times to millions of customers, very few consumers will sue them just to get back a few dollars.

Class-action lawsuits exist to level the playing field, allowing one or more representative plaintiffs to act on behalf of hundreds, thousands or even millions of similarly situated individuals to hold defendants accountable for the harm they’ve caused. Class actions have long been part of the American judicial system precisely to allow a fair contest and to deter companies from committing wrong by holding them accountable.

 

The Rise of Pre-Dispute Arbitration Contracts

The Seventh Amendment to the United States Constitution guarantees the right to trial by jury, but parties have long been able to voluntarily enter into other arrangements to settle disputes.

The key is voluntary.

Arbitration, which typically involves the selection of a neutral third party to resolve a dispute and does not use the traditional rules of evidence or allow for appeals, began as a voluntary way to resolve disputes between businesses, not between consumers and businesses. Facing pressure from businesses, Congress passed the Federal Arbitration Act (FAA) in 1925 making agreements to arbitrate “valid, irrevocable, and enforceable.” Implicit in the discussions leading to passage of the FAA was the idea that arbitration would be voluntarily entered into by parties of equal bargaining power.

In the past 20 years, companies have begun to quietly but aggressively include mandatory arbitration clauses, as well as class-action bans, in contracts with consumers, employees and others with unequal bargaining power, knowing that consumers are in no position to renegotiate the terms of the contract.

 

Why Forced Arbitration Subverts the Legal Process

Most consumer purchases now require the buyer to sign or acknowledge their purchase through a contract. Consumers who buy a cell phone plan, lease a car, apply for a job, purchase medications, place a family member in a nursing home or make other purchases will have to sign a contract before they get the product they want or the services they desire.

But there's a catch.

The contract, often in fine print, requires that the consumer waive the right to a jury trial and agree to binding arbitration. Many of these contracts also require that the consumer waive any ability to bring a class-action lawsuit. The purpose of these "take it or leave it" contracts could not be clearer – to shield the businesses from liability for negligent and intentional acts, forcing consumers to give up the few tools available to them for fighting back – concerted action in open court in front of a truly neutral judge or jury.

A recent study completed in March 2015 by the Consumer Financial Protection Bureau (CFPB) confirmed that these pre-dispute contract clauses have a chilling effect on providing an effective remedy for consumer complaints. Consumers and employees bring few arbitration cases – they simply aren’t individually worth the money required to hire the arbitrator. Where available, class actions have resulted in substantially greater recovery for consumers and a far greater deterrence effect on negligent or wrongful corporate behavior. And there’s no proof that arbitration clauses and class action bans result in cheaper consumer prices – a pro-arbitration argument frequently raised by businesses.

 

Two Supreme Court Cases Wrongly Allow Pre-Dispute Contracts and Class-Action Waivers

The legality of these arbitration clauses and provisions of the FAA was challenged in two recent U.S. Supreme Court cases, both of which ultimately favored corporations over people.

In AT&T Mobility v. Concepcion, AT&T offered “free” cell phones but required that the consumer pay the sales tax, which amounted to about $30. AT&T’s contracts included both class-action bans and binding arbitration clauses, requiring consumers fighting the dishonest sales gimmick to individually arbitrate for the return of the $30. Both the California Supreme Court and the 9th U.S. Circuit Court of Appeals found the contracts’ clauses unenforceable, recognizing that:

1. the cell phone contract was a “take it or leave it” contract that consumers could not change,
2. the dispute “involve[d] predictably small amounts of damages,” and
3. “the party with superior bargaining power ha[d] carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money.”

In a 5-4 decision, the U.S. Supreme Court reversed, allowing the pre-dispute clauses to stay. The majority decision reasoned that the parties “agreed” to arbitrate and the Federal Arbitration Act would hold that agreement “valid, irrevocable, and enforceable,” despite the fact that consumers had not voluntarily entered into the arbitration agreement.

A short time later, in American Express Co. v. Italian Colors Restaurant, the Supreme Court went further. Italian Colors Restaurant asserted that American Express violated federal antitrust laws when it required that the restaurant accept American Express credit card rates about 30 percent more than other credit cards.

At most, Italian Colors could win no more than $38,549 individually. Even in arbitration, bringing the case would cost several hundred thousand dollars, maybe even a million, to cover expert and other expenses necessary to prove the violation and impact. Forcing plaintiffs into individual arbitrations meant they could not effectively vindicate their rights under the federal antitrust laws; no single plaintiff would spend a million dollars to try to recoup $40,000.

“Too darn bad,” the Supreme Court’s majority effectively said, finding the Federal Arbitration Act trumped other federal laws and required the parties to arbitrate because they had “agreed” to. It didn't matter that the plaintiffs couldn't afford to bring the arbitration.

 

Why Congressional Action is the Best Remedy

These two Supreme Court decisions upheld the validity of binding arbitration clauses and class-action bans in contracts, even where they are used to prevent consumers from effectively fighting violations of state and federal laws or keep consumers from having any remedy. These clauses are appearing everywhere and courts are even enforcing arbitration of requests for injunctive relief to stop unfair trade practices. While some avenues for fighting particularly egregious binding arbitration clauses exist, consumers have little recourse through the judicial system.

Consumers are attempting to fight back.

For example, General Mills faced such backlash in social and print media when it tried to use “liking” its products on Facebook as an agreement by consumers to binding arbitration that the company quickly performed an about-face. The CFPB may decline to allow binding arbitration clauses or class-action bans in the contracts under its jurisdiction. Lawyers and some courts are trying to carve out some exceptions such as when a minor signs the contract, or arguing public policy exceptions. But these are small victories.

Given that the Supreme Court has sided with corporations, consumers’ best bet lies with movement by Congress, amending the Federal Arbitration Act or prohibiting the use of binding arbitration clauses and class-action bans in consumer “take it or leave it” contracts. If the Seventh Amendment is to mean anything, Congress must take a stand on this issue.

Without congressional action, these ubiquitous binding arbitration clauses and class-action bans will continue to lead to the predictable result of both unfairness to injured consumers and a systemic failure to hold accountable those companies who abuse the trust placed in them. Consumers – indeed, the whole American public – loses.