When are arbitration agreements not enforceable? When they’re hidden in the fine print. The “hidden arbitration clauses” are taking away your legal rights.
Arbitration provisions are tucked away in the fine print of consumer and workplace contracts, forcing many Americans to give away their right to a jury trial.
Arbitration is reshaping the legal landscape, appearing in everything from employment contracts to the terms of service of your favorite app. But what exactly is it?
Legal issues must be settled in private arbitration rather than in court, according to arbitration agreements. Arbitration does not use a jury; instead, a third-party arbitrator or panel makes the judgments. The idea is that disagreements will be settled more quickly if they are addressed outside of court.
Initially, arbitration was employed to settle disputes between businesses. When workers and customers were initially presented with these agreements, however, something essential happened: the conditions were no longer subscribed to willingly and consciously, but sometimes without the other party’s awareness.
These provisions are often hidden deep inside a contract and contain a lot of jargon. As a consequence, many workers and customers sign them without realizing they are waiving their right to a jury trial, including class action lawsuits. (Remember how you rushed through the “terms of service” box?)
A Chart illustrating Arbitration’s Popularity Over Time
Since the 1920s, arbitration agreements have been in use. However, 14 Supreme Court rulings between 1985 and 2015 established arbitration as the industry norm. Here are some pivotal milestones in the company’s history.
1925: Federal Arbitration Act
Arbitration is made legal. Originally designed to provide an alternate legal method for business disputes.
1991: Gilmer v. Interstate / Johnson Lane Corp.
A non-union employee who was subject to an arbitration agreement could not resolve a workplace discrimination issue in court, according to the court. Arbitration agreements are becoming more popular among employers.
1999: Meeting of the “Arbitration Coalition”
Alan Kaplinsky, a corporate attorney, convenes a meeting of major banks and financial institutions to examine arbitration agreements. Arbitration is becoming more popular in the financial industry.
2011: AT&T Mobility v. Concepcion
Plaintiffs fight to file a class action lawsuit against AT&T. The Court rules in favor of AT&T’s class action waiver, causing other companies to adopt similar waivers.
2013: Italian Colors v. American Express
Plaintiff asserts their right to file a class action lawsuit against American Express under the Sherman Act, which permits people to sue monopolistic businesses. The court ruled in American Express’ favor.
Arbitration Agreements Can Be Found Almost Anywhere
The Pew Charitable Trusts are responsible for this image.
In the vast majority of circumstances, you will not be allowed to opt out of arbitration agreements. You may either accept the conditions and work for the corporation or buy the goods, or you can refuse.
According to the National Employment Lawyers Association, one-third of America’s nonunion workforce was compelled to sign arbitration agreements in 2010.
In the financial industry, they’re much more common: In 2016, the Pew Research Center revealed that 70% of big banks had mandatory arbitration agreements in place, and 73% employed class action waivers.
Despite banks’ claims that consumers voluntarily signed up their rights, PEW found that 95% of respondents desired the right to a trial if they had a disagreement with their bank.
James Young, an attorney with ClassAction.com, explained how common arbitration has become.
“These clauses have allowed big businesses to force both customers and employees into an arbitral system that appears to be rigged for almost every type of legal dispute: consumer fraud, unsafe products, employment discrimination, nonpayment of wages, and countless other state and federal laws intended to protect citizens from corporate wrongdoing.”
You may be bound by an agreement’s terms even if you don’t sign it.
Individuals who refused to accept arbitration agreements have been barred from going to court in certain situations.
Fonza Luke refused to sign her employer’s arbitration agreement, but when she wanted to file a workplace discrimination complaint, she was informed it had to be handled in arbitration, according to Mother Jones. Her employer claimed that by showing up for work, she had consented to their requirements.
General Mills claimed that by “liking” the corporation on Facebook, you agreed to arbitrate their dispute.
The Sixth Circuit issued a similar ruling this year. Former University of Phoenix workers attempted to file a class action lawsuit against the institution, claiming they were never required to sign an arbitration agreement. The court decided that continuous employment showed acceptance of the employer’s demands, based on Kentucky law.
This interpretation is found in consumer agreements as well. By purchasing a product, for example, you have agreed to a company’s terms—whether or not you know what those terms are. In one extremely farfetched incident, General Mills claimed that by “liking” the corporation on Facebook, you agreed to arbitrate their dispute.
Arbitration without consent is unconstitutional.
The most troubling feature of forced arbitration is that it deprives workers and customers of their legal rights.
“Businesses essentially moot the legal system by including such terms in every potential contract.”
“Mandatory arbitration limits your ability to obtain remedy,” James Young said. “Businesses essentially moot the legal system by including such terms in every potential contract.” The consequence is diametrically opposed to our Constitution’s founding fathers’ objectives.”
When the Second Circuit recently held that Uber may not drive a class action complaint into arbitration, the right to a jury trial was safeguarded. They concluded that the fine print of the app’s online agreement did not adequately notify purchasers that they were surrendering this right.
U.S. District Judge Jed Rakoff explained the decision by saying that a jury trial “may be renounced only if the renunciation is knowing and voluntarily.”
Many nursing facilities are presently demonstrating the value of deliberately handing away your rights. Families believe that their loved ones did not comprehend what they were signing when they agreed to arbitration agreements when they arrived to the facility. When families attempt to sue nursing facilities for neglect or maltreatment, they are denied legal recourse.
The Centers for Medicare and Medicaid Services (CMS) attempted to prevent this by enacting a regulation limiting arbitration agreements in nursing facilities. A Mississippi federal court, however, stopped this in November 2016 (only days after the regulation went into force).
National Labor Laws are Broken by Mandatory Arbitration
Employers run the danger of breaking labor rules by blocking class action litigation. Employees may organize against their employers under the National Labor Relations Act (NLRA) by joining unions or taking collective action.
Employers often contend that the Federal Arbitration Act supersedes the NLRA, and many courts have unfortunately agreed. Currently, the constitutionality of forced employee arbitration agreements is determined by the court district that is hearing the case.
This contradiction compelled a review by the Supreme Court. A lawsuit between the National Labor Relations Board (NLRB) and Murphy Oil USA is one of the numerous cases awaiting trial.
The National Labor Relations Board (NLRB), which enforces labor laws, is appealing a Fifth Circuit Court of Appeals decision that Murphy Oil may utilize forced arbitration agreements to prevent employees from launching class action lawsuits. They claim it is in violation of the National Labor Relations Act.
(Part 2 may be found below.)
Arbitration may be used to conceal corporate wrongdoing.
Companies like arbitration and class action waivers because they keep legal conflicts out of the public eye. However, this is just what consumer and employee activists fear. They claim that without the possibility of public litigation, corporations would be more prone to make mistakes, and customers and workers will be less willing to come out with concerns if they feel they are the only ones affected.
Recognizing the threat, 16 attorneys general wrote to the Consumer Financial Protection Bureau (CFPB) in 2013, expressing their concern that “unlawful business practices” would spread as more corporations banned class lawsuits.
The Consumer Financial Protection Bureau (CFPB) reacted by proposing a regulation that would prohibit financial institutions from employing binding arbitration. They stated that class action lawsuits provide customers a voice in the legal system, dissuade firms from engaging in unlawful behavior, and make a company’s conduct more apparent to the general public.
The Consumer Financial Protection Bureau (CFPB) enacted a regulation in June 2017 prohibiting banks and credit card issuers from pushing clients to sign class action waivers, thus depriving them of their right to a day in court. “Arbitration provisions in contracts for items like bank accounts and credit cards make it practically difficult for customers to take firms to court when things go wrong,” said CFPB Director Richard Cordray.
Consumer activists and leftist Senators like Al Franken applauded the action, while Republican politicians pledged to repeal the regulation and restructure (if not abolish) the Consumer Financial Protection Bureau. Meanwhile, the regulation is set to go into effect in September 2017 and will apply to contracts that start in March 2018.
Wells Fargo is a current illustration of why the CFPB’s regulation is necessary and why class action lawsuits are important. The bank was found guilty of extensive fraud for illegally creating bank accounts and credit cards for consumers. Customers who had their credit ruined were advised they couldn’t pursue a class action lawsuit because they committed to arbitration when they started their accounts.
Customers of Wells Fargo were eventually allowed to file a class action lawsuit. A court gave preliminary permission to a $142 million settlement for Wells Fargo customers who were damaged by the bogus accounts scandal in July 2017.
Employees and customers have a lower chance of winning.
Companies earn more favorable results in arbitration than in court, according to statistics. This isn’t surprising, given that employers choose the arbitrator and set the terms for the procedures.
Only 21% of over 4,000 workplace arbitration decisions submitted between 2003 and 2007 were determined to be in favor of workers, according to a Cornell University research (lower than in employee litigation). Employee lawsuit awards were found to be 5 to 10 times higher than arbitration awards on average.
Companies also have an advantage in consumer arbitration: between 2010 and 2014, just one-third of complaints against fees, fraud, or expensive loans were won by consumers.
Plaintiffs’ lawyers are well aware of this prejudice.
“The method has been widely researched and experimentally demonstrated to provide better results for firms while producing poorer consequences for customers and workers,” James Young said. “Most plaintiff lawyers avoid working in arbitration procedures because of the underlying unfairness of the process and the difficulties of earning a career doing so.”
Smaller Disputes Are Too Expensive to Resolve
The expense of arbitration, in addition to the adverse odds, is enough to deter workers and customers from raising grievances.
Class action lawsuits have the advantage of providing more workers and customers with access to the courts at a lower cost. They are especially useful for disputes over lesser sums of money (such as a $30 concealed mobile phone bill or $2,000 owing in overtime pay). Smaller offenses may be less challenged if this option is eliminated.
Between 2010 and 2012, the average disputed amount in consumer arbitration throughout the financial sector was $16,000, according to the CFPB. Only eight lawsuits per year were over disagreements of $1,000 or less.
Arbitration expenses for consumers averaged $206 in the CFPB’s analysis. They may, however, reach six digits in exceptional situations.
This was the case for Stephanie Sutherland, who was told a dispute over overtime pay with Ernst & Young would cost her $200,000 in arbitration fees. The courts overrode Ernst & Young’s class-action waiver since the cost of arbitration would prevent her access to the courts. However, this was later reversed in the Court of Appeals.
Arbitration in the Future
Due to overcrowding in the courts, the legal system typically considers arbitration as a cost-effective means of reducing the number of cases that go to trial. According to the New York Times, four out of every five class action cases were sent to arbitration between 2010 and 2014.
“Consumers and workers may anticipate arbitration to continue to expand as a means of restricting or diminishing their rights.”
James Young says Arbitration in the Future is depressing: “Passage of a federal arbitration fairness act seems highly unlikely in the current political climate. Consumers and employees should expect continued expansion of arbitration as a way of limiting or reducing their rights.”
Although progress has been sluggish, there has been some success in prohibiting workplace arbitration. The Fair Pay and Safe Workplaces executive order, signed by President Obama in 2014, states that organizations with government contracts worth $1 million or more cannot ask workers to sign arbitration agreements.
Several efforts have been made to go even farther by ensuring that every American worker is protected. The Arbitration Fairness Act has gone through many revisions, the most recent being in 2015. Senator Al Franken (D-MN) led the bill, which would protect all employees from forced arbitration.
Senator Franken, a vocal opponent of arbitration, co-sponsored the Restoring Statutory Rights Act with Senator Patrick Leahy (D-VT). Arbitration agreements that contravene consumer protection or employment discrimination laws would be prohibited under the bill.
“It may take some time for reasonable people to comprehend just how much is at risk here.”
In an ” target=”_blank” rel=”noopener noreferrer”>Emory School of Law panel, Professor Myriam Gilles said the way forward is to continue to “regulate, legislate, and innovate.”
“It may take some time for reasonable people to comprehend just how much is at risk here.”
Frequently Asked Questions
Why are arbitration clauses bad?
What invalidates an arbitration clause?
A: An invalid arbitration clause is one that does not meet the requirements for an effective agreement, such as a rejection of jurisdiction or a stipulation on the manner in which proceedings will be conducted.
Are arbitration clauses enforceable?
A: In general, arbitration clauses are not enforceable in the United States.
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- a mandatory arbitration clause in an employment contract may not be enforced if