Arbitration:Wiping Out Consumers
Rights? BY Hossam M.
Fahmy
The use of consumer arbitration is increasing
rapidly. Many companies, banks, corporations, and retail stores
choosing arbitration over trials are adding mandatory arbitration
clauses in contracts with their clients. The use of consumer
arbitration expanded eight years ago when Bank of America initiated
its current policy.1 At that time notices of the new
arbitration requirements were sent along with monthly statements to
12 million customers, encouraging thousands of other companies to
follow the same policy. A growing number of companies are requiring
their customers to agree to use arbitration, and not the courts, to
resolve disputes. First USA Bank, the largest issuer of Visa Cards,
with 58 million customers, began requiring mandatory arbitration in
1997. In April 1999, American Express took the lead among many other
credit card companies turning to arbitration clauses.2
Edward Anderson, the managing director of the National Arbitration
Forum, one of the nation’s major arbitration providers and the
company selected by American Express to resolve any disputes, was
quoted acknowledging, “People who draft contracts have been
including [mandatory-arbitration provisions] like
popcorn.”3
According to Jim Michaels, managing
counsel in the Federal Reserve Board’s (Fed) division of consumer
affairs, the Fed is looking carefully at the use of arbitration
clauses in all consumer credit agreements including mortgages and
car loans, to make sure “consumers are not being deprived of their
rights.”4 According to the American Arbitration
Association, the nation’s oldest and largest arbitration
organization, 95,143 disputes were filed in 1998, up 20 percent from
1997.5
Companies contend they are turning to
mandatory arbitration in an effort to resolve disputes more quickly
and less expensively than they could through a court settlement.
Supporters of arbitration clauses say that along with helping to
unclog the courts, such clauses provide benefits for companies and
customers alike by reducing the time and expense of resolving
disputes. Peter Magnani, a spokesman for Bank of America, stated
“‘Our goal and our customers’ goal is the same. … We want to see a
fair and just resolution as quickly and inexpensively as
possible.’”6
This appears to be a logical and fair
explanation for Bank of America’s actions, however, less magnanimous
forces may also be at work. Companies, banks, merchants, and
corporations may also be attracted by the opportunity to reduce the
risk of high jury awards as well as reduce legal costs.
Banks that have used arbitration in commercial transactions
report that their overall legal costs were reduced.7 Most
mandatory arbitration clauses eliminate choices for consumers by
turning contracts into adhesion contracts that require compulsory
arbitration.8 Companies and corporations tend to add
mandatory arbitration clauses in the fine print of contracts, often
in ways that are nearly invisible to all but the most careful
readers.9 Other companies wipe out customer’s right to
sue by sending out notices of new arbitration requirements in the
form of envelope stuffers.10 The clauses may also be
buried in a pile of documents a consumer is asked to sign quickly
during settlement, or tacked to the back of a sales
receipt.
Even the most ardent critics of mandatory
arbitration acknowledge that the process can be helpful. Infact,
properly employed and structured mandatory arbitration can be quite
useful.11 As Mark Budnitz, professor of law at Georgia
State University and a strong critic of mandatory arbitration
clauses, said, “‘There’s no question that arbitration is an
excellent, wonderful dispute-resolution device.’ … But if it’s so
good for consumers, then why don’t companies make such provisions
‘very clear and explain everything to consumers,’ and not try to
hide the terms in bill stuffers or a pile of
documents?”12 The answe r is that results are not
generally good for consumers. Mandatory arbitration clauses are
designed to protect companies from suits and high juridical awards
and minimize compensation a consumer can receive.
An example
is the following clause sent by American Express to clients in April
1999:
By using this card after June 1, any
disagreements will have to be submitted to an arbitration company
selected by American Express. The decisions will be final and
binding and can’t be appealed unless an award is for more than
$100,000. Taking a closer look at this clause and analyzing its
mandatory arbitration clause:
- Cardholders lose the right to sue American Express after
June 1.
- American Express has the exclusive right to choose the
arbitrator. Plaintiffs do not have the same right.
- The decision is final and binding and can not be appealed by
card holders unless the award is for more than
$100,000.
Keeping in
mind that American Express has a 30 days billing cycle, the dispute
is likely to be due to a monthly bill. The number of card holders
that have a credit line of more than $100,000 is substantially
limited and those card holders are not likely to challenge such an
award.
Assuming that American Express has an internal policy
that card holder compensation should not exceed the amount of
$100,000, AMEX is likely to be the party challenging the award, not
a consumer. Looking at the terms of the clause, it is not difficult
to predict that most of the clause terms are in favor of American
Express.
Companies, banks, merchants, and corporations, who
are usually repeat players in arbitration and favor these clauses,
tend to spend a lot of money specifically designing their forms of
dispute resolution procedures.13 The companies, by designing their
own arbitration procedures, have subtly tilted the playing field in
their favor.
In interpreting the 1925 Federal Arbitration
Act,14 the U.S. Supreme Court has recently held that
government policy favors arbitration over litigation so long as the
process is fair.15 It is worth saying that this law was
originally intended to encourage arbitration between businesses,
however courts have actively expanded the law’s scope to include
disputes between a business and its
consumers.16
In a recent case decided by the U.S.
Supreme Court, a purchaser of a mobile home and a resident of
Alabama brought a purported class action against the lender,
asserting claims that the lender had violated the Truth in Lending
Act by failing to disclose as a finance charge the Vendor’s Single
Interest insurance requirement. She also alleged that petitioners
violated the Equal Credit Opportunity Act by requiring her to
arbitrate her statutory causes of action. The agreement provided
that all disputes arising from, or relating to, the contract,
whether arising under case law or statutory law would be resolved by
binding arbitration.17
The purchaser contended
that the arbitration agreement’s silence with respect to costs
created a risk that she will be required to bear prohibitive
arbitration costs, and thereby be unable to vindicate her statutory
rights in arbitration.18 The Supreme Court ruled in
December 2000 against the purchaser, holding that an order
compelling arbitration and dismissing a party’s underlying claims is
a “final decision with respect to an arbitration” within the meaning
of the Federal Arbitration Act, and is thus immediately
appealable.19 The court also held that an arbitration
agreement that does not mention arbitration costs and fees is not
per se unenforceable on the theory that it fails to
affirmatively protect a party from potentially steep arbitration
costs.20
This ruling by the U.S. Supreme Court
simply means that a party resisting arbitration bears the burden of
proving that Congress intended to preclude arbitration of the
statutory claims at issue.21 It also means that a party
seeking to invalidate an arbitration agreement on the ground that it
would be prohibitively expensive bears the burden of showing the
likelihood of incurring such costs.22
Courts tend
to treat consumers as if they have willingly contracted for private
dispute resolution by signing the contract and thereby have accepted
the terms in it. For example, the Seventh Circuit ruled in 1997 that
a purchaser of a computer system directly from the manufacturer was
subject to the arbitration clause enclosed in the box in which the
computer was shipped.23 The consumer argued that he was
not aware of the clause because it was not prominently displayed,
but the court held that by failing to read the documents, the
consumer had accepted the manufacturer’s
terms.24
Consumers challenging mandatory
arbitration clauses have achieved limited success. One of the rare
successful cases against Gateway shows clearly that companies, in an
attempt to protect themselves, even make it difficult for the
customers to apply for arbitration under their rules. In that case,
the customer was unable to reach the computer maker’s promised
round-the-clock helpline and did not accept the terms in the
mandatory arbitration clause requiring that all disputes be handled
by the rules of the ICC that require customers to pay $4,000 in
advance for claims involving $50,000 or less. The customer
challenged the provision in state court, arguing that the
arbitration fees would almost double the cost of his $2,500
computer, and thus were unconscionable. A New York appeals court
agreed, and ordered that the dispute be handled by another
arbitrator with more moderate fees.25
Courts also
tend to look with disapproval on laws viewed as unfairly hostile to
arbitration, which are usually challenged by companies opposing any
attempt to regulate the use of clauses including changes in font
size, terms, and the use of these clauses. In 1999, the Supreme
Court invalidated a Montana statute that mandated how companies had
to disclose the use of arbitration.26
The same
companies that are strong supporters of arbitration when it favors
their causes, are willing to dispose of arbitration and favor
litigation if it is in their best interest.
A clear example
of this is that customers of Kaiser Permanete Co., which operates
HMO plans in 17 states, can encounter different arbitration polices
depending on where they live. The company currently uses arbitration
in Massachusetts, California, and Colorado. In the other 14 states,
Kaiser customers can sue for malpractice or any other
grievance.27
The company’s given reason for using
arbitration in some states but not others is that state laws are
different. But arbitration experts strongly believe that the company
simply assessed whether it would fare better financially in a
courtroom or in arbitration.28 One writer has suggested
that the contracted basis of arbitration is lost when consent
between the parties is not real or where great power disparities
exist between the parties.29
Several general
characteristics are discernible under mandatory arbitration clauses.
The system undoubtedly gives certain advantages to repeat players to
maximize their long-term gains over consumers who may seek justice
but participate with fewer resources.30 In arbitration, a
consumer has limited information and to speed up the deliberation
process the rights of discovery are generally limited. Such
restrictions clearly put consumers at a disadvantage because they
cannot search for company records that may establish a pattern of
harm. This means that illegal actions by companies, banks, and
merchants can go undetected, such as the practice uncovered in
recent class action suits in which many retailers were improperly
trying to collect debts that already had been forgiven in bankruptcy
proceedings.31 As Professor Budnitz has commented, “The
public cannot get the information to protect themselves, the way
they can if there was a trial.”32
Repeat players
are more able to mobilize legal and other resources to maximize
long-term gain and use arbitration to their advantage. In disputes
that take place between merchants and single consumers, the
informality usually works against the one-time player
customers.
The fact that repeat players insist on mandatory
arbitration clauses in their contracts and relations with customers,
clients, and patients, confirms the doubts about such repeat
players. Several lawsuits have already unsuccessfully challenged the
bias of presumed repeat players. According to Tomme Fent, an
Oklahoma lawyer, most arbitration costs are not so extreme, but high
enough to deter complaints. In almost all parts of the country, it
can cost $80 to $100 to file a case in court, however in arbitration
cases consumers sometimes have to pay hundreds of dollars just to
file a complaint and then more for the cost of the arbitrators,
whose fees can range from $600 to $1,600 a
day.33
Fent further contends that she usually wins
these disputes in court, but has never won one in arbitration. “[A]s
soon as people walk into the door with an arbitration clause,” said
Fent, “I tell them their chances are no better than 50-50 and it
will cost them a significant sum of money just to take the chance. A
lot of clients are willing to take the chance but the costs are what
makes it prohibitive.”34
Conclusion
Fent
is probably optimistic about the 50-50 chance of consumers. The
costs of filing for arbitration is high compared to trial and the
arbitration clause itself might include higher costs. With such low
odds of winning cases that challenge an arbitration clause, lawyers
who represent consumers may no longer be willing to take arbitration
cases on a contingency-fee basis. Consumers may end up with nowhere
to go. Unable to file in court, they are priced out of arbitration,
and the companies are insulated from any liabilities. Mandatory
arbitration clauses are designed to protect the best interest of
those companies, to deprive consumers from their right to sue, to
minimize the amount of compensation the consumer may receive in
court, and to lower the overall legal cost of their companies.
Mandatory arbitration clauses do not generally benefit consumers.
The advantages of arbitration for repeat players will
continue to increase over time as companies become more skillful at
navigating the procedure.
Recommendations
- For consumers who do not want to lose their right to sue, the
only recourse is to refuse to do business with any company that
requires mandatory arbitration. However that is increasingly
difficult because more and more companies are requiring it.
- Customers should inspect contracts and purchase agreements to
determine if they contain an arbitration clause and pay special
attention to any provisions that request travel to resolve a
dispute.
- To avoid an arbitration clause governing a bank account or a
credit card, consumers likely will have to take their business
elsewhere.
- When presented with an arbitration form by an insurance agent
or a doctor, consumers should ask if they will be treated without
signing it.
- Individuals should try to negotiate over arbitration clauses
in certain private transactions.35
Carrie Menkel-Meadow, a professor of law at the
University of California at Los Angeles, said that after arranging
to lease her house through a real estate agent she reviewed the
contract only to discover that it had an arbitration clause.
Menkel-Meadow determined to preserve her option to sue, crossed out
the arbitration paragraphs. “ I’m an expert in the field, and I
don’t want someone else making my choices for me,” she
said.36 The agent accepted the change. Her advice to
consumers is to try to negotiate, you might be surprised when it
works.37 Reforms are needed to alter power relations
between the parties:
- Class actions and aggregations of claimants can make some
one-time players more like repeat players.38 An example is
organizational client groups and litigation strategies.
- The use of repeat-player lawyers committed to particular
social changes objectives and not just to professional
roles.39
- There are ways of converting one-shotters into repeat players
in the system. Applying these reforms might seem like an easy
task, yet it is not, for social changes depend more on
conventional party and judicial politics than social
structure.40
- The Federal Arbitration Act (FAA) needs to be
amended41 to protect important rights of the one-time
player consumers who cannot effectively bargain with a repeat-play
contractor.42
- The consumer area clearly needs the kind of rigorous
examination of the repeat player and one-shot ADR outcome
evaluations.
