Kia Franklin

Mandatory Binding Arbitration = Consumer Frustrations

If I am hurt, if it is not my fault, and if I know whose fault it is, I think I should be able to call upon the law to help fix my injury or at least to bring myself back to as close to normal as possible. After all, that’s what civil justice means—it means restoring the condition of the injured person to the best extent possible and preventing would-be wrongdoers from harming others.

This concept is not a novel one, or at least one wouldn’t think so. It is why we teach our children to seek an adult’s aid rather than take playground disputes into their own hands—because there is someone there to help.

Ironically, one great barrier to civil justice is actually enforced and protected by the law. This barrier is the mandatory binding arbitration agreement. Often nestled in one paragraph or on one of a many slips of paper in a larger contract, these agreements say that if something goes wrong, the parties will not go to court. Instead they will go to arbitration. Arbitration is an informal proceeding in which an arbitrator—not a judge, although sometimes a former judge—hears and settles a dispute arising from a contract. The arbitrator is usually pre-selected by the company that asks you to sign the agreement.

Now, if my kid were in a playground fight I would much rather have a teacher resolve the dispute than the bully’s friend. But this is what arbitration clauses amount to. The arbitrators that companies pick have great incentives to find in favor of the company. Such agreements are perfectly legal and yet far worse than imperfect.

Arbitration clauses are enforceable under the Federal Arbitration Act (FAA), which originally recognized the right of equally powerful companies to agree to arbitrate to avoid the costs and time associated with going to court. But in reality, mandatory binding arbitration costs more and tends to apply more often to contract relationships between individuals and companies, parties of vastly unequal bargaining power. In this context, mandatory binding arbitration often helps the few bad corporate actors bully consumers, employees, and other individuals, all under the law’s protections.

In binding arbitration, what the arbitrator says is what goes. Consumers are left at a dead end. Arbitration decisions are usually not subject to review or appeal, and when they are reviewed by a formal court they are almost never overturned. Thus, enforcement of arbitration agreements now often has the perverse effect of coercing ripped-off consumers into a biased process for having their disputes heard, in which they almost never win.

But who would be stupid enough to sign up for that? Unfortunately, most of us would and have signed an arbitration clause or two. But it may be more a matter of corporate sneakiness than of consumer stupidity. Anyone who owns a credit card or a cell phone, has bought a car or a home, or has participated in one of many other mundane marketplace transactions, has probably agreed to mandatory arbitration. Sometimes we think going to court will never be necessary or believe that arbitration is a reasonable and fair alternative. Often times we don’t even see the mandatory arbitration clause.

Is arbitration itself evil? Not at all. The evil lies in the way in which people are forced into it (mandatory binding arbitration agreements are standard in most industries now) and then subjected to a process skewed in favor of companies. The evil also lies in the fact that the court system is not an available check against corporate abuse.

Those who do end up suffering some harm from this arrangement are left feeling frustrated and trapped. They are left asking, “Where is the law?” The answer, unfortunately for injured persons, is that the law is standing behind the companies, enforcing these agreements. The result is that corporations can continue to hide from their ethical and legal responsibility to their customers.

Posted at 9:45 AM, May 30, 2007 in Permalink | Comments (1) | TrackBack (0)