Chicago Business Attorney Blog
Mandatory Arbitration: Friend of Big Business and Enemy of Consumers?
Virtually every consumer contract now contains a mandatory arbitration clause that reads something like this: “All claims and disputes arising under or relating to this agreement are to be settled by binding arbitration.” That sounds innocuous enough, at least until you find out what binding arbitration really means.
According to a report from the American Association for Justice, mandatory binding arbitration is a “license to steal.” An example they use bears this out: Back in 1998, an 81-year-old woman named Mabel Strobel was a client of Morgan Stanley Dean Witter. On the advice of her broker, Strobel sold a rental property in San Diego and invested the proceeds in the stock market. In the next four years, through the magic of the market, Morgan Stanley turned her $1 million investment into about $700,000. Strobel claimed the company inappropriately invested her money, considering her investment objectives, risk tolerance and sophistication. Unfortunately, the contract Strobel signed with the brokerage contained an arbitration clause. So she brought an arbitration case against Morgan Stanley. In 2004, an arbitration panel sided with Strobel, holding the brokerage liable for her losses. So we have a happy ending for the consumer, right?
Strobel would have been better off if she had taken what was left of her money and kept her mouth shut. She lost $281,729 because of allegedly mismanaged investments and after the arbitration board’s decision; she was out another $5,350. Why? The board awarded her only $5,000 in compensatory damages and then charged her $10,350 in arbitration forum fees. Morgan Stanley had to pay forum fees as well, but only $6,900.
We’ll never know what the arbitration board made the decision it did. Unlike a court proceeding, the arbitration process is secret.
Corporations dearly love the arbitration process when dealing with consumers, and what’s not to love? They choose where the arbitration will take place. If you live in Florida and have a dispute with Paypal, you will have to travel to California – at your own expense – to have your dispute heard.
The corporation also gets to choose the arbitrator. The consumer rarely has any choice of who will hear the dispute, but even when a choice is offered, it is from a list chosen by the corporation. And while the consumer has no right to appeal the decision of an arbitrator, corporations often reserve the right to cancel an arbitration hearing and take the matter to court. The American Association for Justice puts in succinctly: “In this game, the corporation owns the referees and can move the goalposts.”
Considering that the deck is stacked against consumers from the time they sign a contract, the results of arbitrations are not surprising. In 2007, the Christian Science Monitor newspaper, in an analysis of data from the National Arbitration Forum, found that creditors won 96 percent of the arbitration cases brought against consumers. The Monitor also found that the 10 most frequently used arbitrators sided with consumers in only 1.6 percent of cases, while arbitrators who decided three or fewer cases sided with consumers in 38 percent of cases. In a lawsuit, the city of San Francisco looked at more than 18,000 consumer arbitrations. How many did consumers win? 30, or .16 percent?
The U.S. Chamber of Commerce is the driving force behind arbitration, but only, it seems, when the dispute is between a corporation and a consumer. In a letter to the U.S. Senate, available on the Chamber’s web site, arbitration is called a “time-honored dispute resolution system” for consumer contracts. However, in disputes between entities of more or less equal bargaining power, say between a corporation and a labor union, Steven Law, the general counsel for the Chamber, said “forced arbitration is (a) real poison.”
As an individual, there is little you can do to combat forced arbitration. The contracts containing arbitration clauses are offered on a take it or leave it basis and the U.S. Supreme Court, citing the 1925 Federal Arbitration Act, has confirmed the validity of the clauses, even though the law was intended to apply only to disputes between businesses with equal bargaining power. Without action from the U.S. Congress, corporations will continue to abuse the system to the detriment of us all.
But big business interests are the ones with the clout (money), so guess whose interests your politicians favor? So much for the right to a jury trial. These mandatory arbitration clauses deprive consumers of a right to a jury trial. Big business does not want the consumer grievances to be heard by a jury because the jury is made of ordinary citizens who can mete out the justice that is deserved.