A Closer Look at Mandatory Arbitration for Consumers

Article excerpt

Lack of real agreement, the unfairness of the repeat player effect, and the harm secret decisions are doing to our public justice system in mandatory arbitration for consumers have given traditional (i.e., business-to-business) ADR a bad name.

In the John Warner National Defense Authorization Act of 2007, Congress made it unlawful for a lender extending consumer credit to an active duty member of the military or his or her dependent to require the borrower to submit to arbitration. A pending bill, S.2636, would permit a bankruptcy court to decide a core proceeding involving an individual debtor whose debts are "primarily consumer debts" notwithstanding an agreement to arbitrate. H.R. 3010, the Arbitration Fairness Act of 2007, introduced in both houses of Congress, is far broader: it would void pre-dispute provisions requiring arbitration of employment, consumer, or franchise disputes, among others. What is going on here?

It has become increasingly difficult for an individual to enter into any transaction without finding a mandatory arbitration clause lurking in the accompanying fine print. Buy a house, buy or rent a car or other consumer product, schedule surgery, apply for employment, or open a bank, credit card, or brokerage account, and an arbitration provision will likely be part of the bargain. Perhaps emboldened by the Supreme Court's twenty-year run of cases enforcing these provisions under the Federal Arbitration Act, many vendors now insert "class action waiver" provisions as well.

Those who regard agreement as the core of contract law have taken issue with the notion that these provisions ought to create enforceable obligations. There is, of course, no bargaining, and the take-it-or-leave-it nature of the arbitration demand makes it difficult if not impossible to function in the modern economy without "agreeing" to these provisions. Most customers do not see the provisions, and research suggests that, even when they do, they do not know how to assess the likelihood or significance of what seems a far-off, unlikely contingency. An increasing number of courts have agreed, on contract grounds, that mandatory arbitration provisions may be unenforceable because they are unconscionable, particularly if the effect of the provision is also to cancel a right to assert on behalf of a class claims that cannot realistically be asserted by individuals.

Arbitration is said to be good for consumers. It is touted as a simpler, faster, less expensive alternative to litigation, and that reduced cost, it is said, inures to the benefit of all who buy goods and services. Of course, if the process is free or of limited cost to a consumer, arbitration may be the only hope for the resolution of a dispute by a neutral third party. The cost of legal services puts traditional litigation of most consumer grievances out of reach even for the middle class. But arbitration service providers such as the National Arbitration Forum have conducted studies that they say prove that customers actually do better in arbitration than they do in litigation. Claims like these are difficult to evaluate, because these arbitration systems are private. Decisions are not publicly available, and providers guard this information from disclosure. Moreover, recent, publicly available, research demonstrates that many businesses eschew arbitration clauses in their contracts with other businesses, calling in question whether the justifications offered for arbitration in the consumer context are correct.

But what are the costs of mandatory consumer arbitration? We focus on those that ought to be of particular concern to AJS members. At the broadest level, mandatory arbitration is displacing our public systems of dispute resolution for claims between individuals and businesses. Those systems, developed by neutral policy makers, are being replaced by private systems, incorporated by reference in boilerplate contracts. From start to finish they usually lack features that our litigation systems have developed to protect basic liberty and property interests and to provide realistic opportunities to secure compensation for injury and enforce important substantive norms. …