The Sneaky Clause That Can Block You from Fighting for Your Rights
The New York Times recently reported on how arbitration clauses in many common agreements are “stacking the decks” against consumers.
For example, page five of a credit card contract used by American Express contained a clause stating that in the event of a dispute the company “may elect to resolve any claim by individual arbitration.”
Alternative Dispute Resolution
Arbitration is a form of “alternative dispute resolution,” or ADR. It’s an “alternative” to courtroom-type litigation in front of a judge (and sometimes a jury).
In arbitration, the parties each present their evidence and arguments to one or more arbitrators, who then issue a decision just as a judge or jury would. The process is usually faster and cheaper than traditional litigation.
Parties end up in arbitration for various reasons:
- Arbitration may be ordered by a court.
- The parties may agree to binding arbitration (as in season 2 of Silicon Valley).
- There may be an arbitration clause in a contract.
Arbitration has many advantages over traditional litigation as a way of resolving disputes – who doesn’t like “faster and cheaper”? The problem, as reported by the Times, is that people don’t realize that they’ve signed (or clicked) away their right to fight “illegal or deceitful business practices.”
Many questionable business practices don’t cost consumers big money. Instead, consumers find that they’ve been “nickel-and-dimed” out of relatively small amounts that don’t seem worth fighting over.
However, those “nickels and dimes” can add up to millions or billions of dollars when enough consumers are affected.
A class action is a lawsuit filed by an individual or a small group of people on behalf of others who are similarly affected. Class actions are worthwhile for lawyers to bring because they generally take them on a contingency basis and get a share of the proceeds – which can be in the millions.
As reported by Forbes, lawyers come out better than consumers in class actions.
Looking at every consumer class action filed in federal court in 2009, researchers found that the percentage of class members (i.e., consumers) who actually got ANY money ranged from a high of 12% down to a low of 0.000006%.
Sometimes, class actions are settled with a court order that the offending company must provide coupons to the class members. As Forbes notes, with coupon settlements “clients win the privilege of buying discounted products from the same companies that supposedly ripped them off, while the lawyers are paid in cash.”
Even when consumers are awarded some cash, the generally small per-person amounts mean that filling out the paperwork to get it might not be worthwhile.
All of the above might make it sound like class actions aren’t all that wonderful for consumers -- and they aren’t. But with arbitration clauses, consumer give up even the slim chance of getting something out of a class action…. And corporations know they can get off scott-free.
As the Times reports:
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.
Refusing to Enforce Arbitration Clauses
Recognizing the downside of arbitration clauses for consumers, courts in some states have refused to enforce them. This issue is now before the US Supreme Court.