How Arbitration Clauses Are Stripping American Citizens Of Their “Right To Go To Court”

By inserting individual arbitration clauses into a soaring number of consumer and employment contracts, companies like American Express devised a way to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices.

Thousands of cases brought by single plaintiffs over fraud, wrongful death and rape are now being decided behind closed doors. And the rules of arbitration largely favor companies, which can even steer cases to friendly arbitrators, interviews and records show.

The sharp shift away from the civil justice system has barely registered with Americans. F. Paul Bland Jr., the executive director of Public Justice, a national consumer advocacy group, attributed this to the tangle of bans placed inside clauses added to contracts that no one reads in the first place.

“Corporations are allowed to strip people of their constitutional right to go to court,” Mr. Bland said. “Imagine the reaction if you took away people’s Second Amendment right to own a gun.”

– From yesterday’s New York Times article: Arbitration Everywhere, Stacking the Deck of Justice

By Michael Krieger: I’ve followed the dangerous trend of the increased corporate use of arbitration clauses in contracts for several years now, and yesterday’s New York Times investigation into their civil liberties destroying nature, is one of the best pieces I’ve seen on the subject to date.
What’s so fascinating about this article is it goes all the way back to the origins of the practice, during which lawyers representing big banks got together with Philadelphia attorney Alan S. Kaplinsky to strategize on how best to write class-action bans into arbitration clauses. It also explains how current Supreme Court Chief Justice John Roberts had been actively petitioning the high court to uphold such bans while he was a corporate lawyer, and then led the way to a 5-4 decision to solidify the bans after becoming Chief Justice.
In practice, what these bans essentially achieve is to allow companies to nickel and dime consumers and their employees while leaving very little recourse available. While the individual infractions are generally minor financial burdens, when aggregated across a large number of victims, it can amount to billions of dollars.
Let’s turn to some excerpts from the Times article for additional information:

On Page 5 of a credit card contract used by American Express, beneath an explainer on interest rates and late fees, past the details about annual membership, is a clause that most customers probably miss. If cardholders have a problem with their account, American Express explains, the company “may elect to resolve any claim by individual arbitration.”

Those nine words are at the center of a far-reaching power play orchestrated by American corporations, an investigation by The New York Times has found.

By inserting individual arbitration clauses into a soaring number of consumer and employment contracts, companies like American Express devised a way to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices.

Over the last few years, it has become increasingly difficult to apply for a credit card, use a cellphone, get cable or Internet service, or shop online without agreeing to private arbitration. The same applies to getting a job, renting a car or placing a relative in a nursing home.

So for almost all commercial transactions Americans engage in, consumers are essentially relinquishing their right to sue, since individuals simply cannot take on a large corporations on their own.

Some state judges have called the class-action bans a “get out of jail free” card, because it is nearly impossible for one individual to take on a corporation with vast resources.

By banning class actions, companies have essentially disabled consumer challenges to practices like predatory lending, wage theft and discrimination, court records show.

“This is among the most profound shifts in our legal history,” William G. Young, a federal judge in Boston who was appointed by President Ronald Reagan, said in an interview. “Ominously, business has a good chance of opting out of the legal system altogether and misbehaving without reproach.”

Once again, the tragedy of the banker bailouts comes back to haunt us. It set the precedent that the rich and powerful are above the law. 

More than a decade in the making, the move to block class actions was engineered by a Wall Street-led coalition of credit card companies and retailers, according to interviews with coalition members and court records. Strategizing from law offices on Park Avenue and in Washington, members of the group came up with a plan to insulate themselves from the costly lawsuits. Their work culminated in two Supreme Court rulings, in 2011 and 2013, that enshrined the use of class-action bans in contracts. The decisions drew little attention outside legal circles, even though they upended decades of jurisprudence put in place to protect consumers and employees.

One of the players behind the scenes, The Times found, was John G. Roberts Jr., who as a private lawyer representing Discover Bank unsuccessfully petitioned the Supreme Court to hear a case involving class-action bans. By the time the Supreme Court handed down its favorable decisions, he was the chief justice.

Corporations said that class actions were not needed because arbitration enabled individuals to resolve their grievances easily. But court and arbitration records show the opposite has happened: Once blocked from going to court as a group, most people dropped their claims entirely.

Law enforcement officials, though, say they have lost an essential tool for uncovering patterns of corporate abuse. In a letter last year to the Consumer Financial Protection Bureau, attorneys general in 16 states warned that “unlawful business practices” could flourish with the proliferation of class-action bans.

Thousands of cases brought by single plaintiffs over fraud, wrongful death and rape are now being decided behind closed doors. And the rules of arbitration largely favor companies, which can even steer cases to friendly arbitrators, interviews and records show.

The sharp shift away from the civil justice system has barely registered with Americans. F. Paul Bland Jr., the executive director of Public Justice, a national consumer advocacy group, attributed this to the tangle of bans placed inside clauses added to contracts that no one reads in the first place.

This is eerily similar to how consumers are giving up their privacy rights by agreeing to “terms of service” contracts they never read. For the most recent example, see: Privacy Advocates Raise Alarm Over Snapchat’s Updated Terms of Service – Calling it “Scary”.

“Corporations are allowed to strip people of their constitutional right to go to court,” Mr. Bland said. “Imagine the reaction if you took away people’s Second Amendment right to own a gun.”

Many judges across the country did not object to companies’ requiring consumers to use arbitration. But they bridled at preventing those consumers from banding together to bring a case.

State law guaranteed citizens a means to defend their rights, and contracts that tried to take that away were “unconscionable,” many judges said. In other words, class-action bans were unfair.

At the other end of the spectrum, the chamber also criticized so-called coupon lawsuits that generated big paydays for lawyers and little money for consumers. In one, against a television manufacturer accused of selling sets with fuzzy pictures, plaintiffs each received $25 or $50 coupons while their lawyers collected $22 million.

“It’s not like the class-action system is a land of milk and honey,” said Matthew Webb, a senior vice president at the Institute for Legal Reform, a chamber affiliate.

While this is true, it misses the point. For example…

Brian T. Fitzpatrick, a former clerk to Justice Antonin Scalia who teaches law at Vanderbilt University, said criticizing class actions for small awards was misleading. By their very nature, the lawsuits are intended to help large groups of people get back small individual amounts, Mr. Fitzpatrick said.

“Without a class action, if someone loses $500, they will not be able to do anything about it,” he said.

With state courts still blocking their efforts, Mr. Kaplinsky’s group focused on getting a case to the Supreme Court.

In 2010, the Supreme Court agreed to hear a case. In AT&T v. Concepcion, customers said the company had promised them a free phone if they signed up for service, and then charged them $30.22 anyway.

Once again, the ruling involved the California courts and their rejection of a class-action ban as “unconscionable.” By then, Mr. Roberts was chief justice.

When the court ruled 5-4 in favor of AT&T, it largely skipped over Mr. Pincus’s central argument.

With the Supreme Court marginalizing state law, the only option left for consumer advocates was to use a federal law to fight back.

The case centered on the Sherman Act, a muscular antitrust law that empowered citizens to take on monopolistic entities. Conservatives and liberals on previous Supreme Courts had consistently found that Americans should be guaranteed a way to exercise that right.

Until…

On June 20, 2013, the justices abandoned the precedent and ruled in favor of American Express.

Arbitration clauses could outlaw class actions, the court said, even if a class action was the only realistic way to bring a case. “The antitrust laws do not guarantee an affordable procedural path to the vindication of every claim,” Justice Scalia wrote.

Signs posted in a theater in Los Angeles and a hamburger joint in East Texas informed guests that, simply by walking in, they had agreed to arbitration. Consumer contracts with Amazon, Netflix, Travelocity, eBay and DirecTV now contain arbitration clauses. Even Ashley Madison, the online site for adulterers, requires that clients agree to them.

It is virtually impossible to rent a car without signing an agreement like Budget’s, which reads, “Arbitration, No Class Actions.” The same goes for purchasing just about anything online, which makes adding the clauses even easier.

James Pendergast had no idea he had agreed to arbitration until a class-action suit he filed on behalf of Sprint customers in Miami was thrown out of court. They had sued the company after noticing that their monthly bills contained roaming charges incurred in their homes.

The cost of arbitration was far more than the $20 charges Mr. Pendergast was contesting. And his lawyer, Douglas F. Eaton, advised him that winning would require high-tech experts at a six-figure bill.

If he lost, Mr. Pendergast might even have to pay for Sprint’s lawyers. “Why would anyone risk that?” Mr. Eaton said.

The data on consumer arbitration obtained by The Times shows that Sprint, a company with more than 57 million subscribers, faced only six arbitrations between 2010 and 2014.

“Just imagine how many customers Sprint can take money from because of arbitration,” Mr. Pendergast said.

Sprint declined to comment.

The above is exactly why banks have been so aggressive in using these clauses. Nickel and diming millions of people who have no recourse can equal billions of dollars. For example…

Few industries more keenly understood the potential of arbitration clauses than financial firms. A particularly bruising set of lawsuits starting in 2009 revealed an accounting device that more than a dozen banks employed on debit card transactions. Customers accused the banks of deducting big payments like monthly rent before taking out smaller charges like those for a pack of gum — even if the customer bought the gum first.

Changing the order of transactions, the lawsuits said, allowed the banks to increase the number of times they could charge overdraft fees, typically $35 a pop. Forced into court, the banks settled the cases for more than $1 billion.

At least seven of the banks in the overdraft cases have since added arbitration clauses, The Times found.

A lot is at stake. Since regulations prompted by the 2008 financial crisis crimped profits from trading and other risky activities, revenue from fees has become crucial to banks’ profits.

So they decided to systematically scam their “customers” in response.

Civil rights experts worry that discriminatory labor practices will go unchecked as class actions disappear.

Jenny Yang, chairwoman of the Equal Employment Opportunity Commission, said arbitration allowed “root causes” to persist. Part of the problem, Ms. Yang said, is that arbitration keeps any discussion of discriminatory practices hidden from other workers “who might be experiencing the same thing.”

The saddest part is to see judges who know this is unethical and constitutionally suspect being forced to go along with it anyway. Such as Judge Berle M. Schiller.

Despite his own objections, Judge Schiller said he was bound by the Supreme Court decisions. In his ruling, he noted the “lamentable” state of legal affairs and dismissed the case.

With no other option, Mr. Walton took his case to arbitration. In April, he lost.

The excerpts above are only a small portion of this excellent article, which I strongly suggest reading in full.

In Liberty,
Michael Krieger

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