The Rise of Binding Arbitration Clauses

If you’ve ever looked closely at your employment, credit card, or rental contracts, you will see an arbitration clause. It will state that any disputes that arise will be resolved by individual arbitration, not through the court system.These arbitration clauses generally tend to be at the end of lengthy contracts. If you are lucky enough to spot the clause, understanding the legal jargon is a whole new battle. Many people see these binding arbitration clauses as an attempt by large corporations to avoid class-action lawsuits. If someone does want to stand up to large corporations, such as American Express or AT&T, they should be willing to spend hundreds of thousands of dollars to win. Unfortunately, many consumers do not have this kind of money and for a lot of them the battle is not worth the risk of losing money. William Young, a federal judge in Boston, says arbitration clauses are a way for big businesses to avoid being part of the court system altogether. Attorney Generals of many states are worried mandatory arbitration agreements written into contracts will promote unlawful business practices.

This push by corporations to move towards arbitration clauses started about a decade ago on Wall Street. Alan Kaplinsky, a corporate lawyer, was the first to bring together companies and lawyers in 1999 to find a solution for corporations who faced many frivolous lawsuits. The solution they came up with was binding arbitration written into consumer contracts. Since then, the movement has moved into Washington and even made its way into the US Supreme Court. In 2012 and 2013, the Supreme Court ruled that arbitration clauses were perfectly legal. When there was backlack from the legal community, corporations continued to argue that arbitration benefits everyone, even consumers because they are able to solve their grievances more easily. However, the NYT found that people begin dropping their claims if the corporation forces them to go to arbitration.

Corporations also claim they wanted to end class action lawsuit because plaintiff’s lawyers made too much money off the cases, while the consumer was not protected. In many consumer class-action lawsuits, the customers got $25 or $50 cards, while the lawyers made millions. Consumer advocates disagree and say consumers are not protected at all anymore because they have been forced out the courts and the rules of arbitration generally favor corporations. States have been split on whether mandatory arbitration clauses hurt or protect consumers. Congress also got in on the action when it passed the Class Action Fairness Act in 2005. This act allowed companies to move their cases into federal court if out of state courts were considered hostile to corporations. The Federal Arbitration Act from the 1920s was a previous attempt by Congress to promote arbitration. However, the act did not specific and the Supreme Court has never ruled on whether it prohibits class-action lawsuits. The Supreme Court declined to take a case that originated in California against Discover Bank.

Plaintiffs in California have tried to frame their argument in many different ways in an attempt to get the Supreme Court to rule in favor of consumers and against mandatory arbitration clauses. Deepak Gupta, a skilled appellate attorney, tried to frame the Federal Arbitration Act as infringing on states’ rights, while other have tried to argue the issue under the Sherman Act. In addition to possibly hurting consumers, the NYT found that arbitration clauses may also be hurting employees. Applebee’s employees and the Oakland Raiders Cheerleaders were unable to go to court for their working conditions because they had signed a binding arbitration agreement. Therefore, many lawyers are worried arbitration clauses are leading to discriminatory labor practices.

Many of us may have entered into a binding arbitration agreement without even knowing about it. This is due to the fact that many Americans do not read the contracts they sign. However, knowing about mandatory arbitration clauses and the consequences that come with signing a contract that locks you out of the court system is crucial. There has been an attempt by the NYT and other agencies to provide consumers with more information about companies with forced arbitration clauses. Some of the companies forcing arbitration are seen below. We advise everyone to carefully read their contracts and understand the consequences of a mandatory arbitration clause.


Source: The New York Times


About rauschmediation

Rausch Mediation & Arbitration Services
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