Forced arbitration...

End forced arbitration

Big business has been exploiting consumers for too long. It's time for regulators to crack down.

By Sonia Gill and Amanda Werner

For more than a quarter century, Big Business has engaged in a stealth campaign to block consumers, employees and small businesses harmed by corporate lawbreakers from finding justice in a court of law. Buried in the fine print of countless contracts for everyday goods and services is language that bars people from holding corporations accountable in court for illegal, and sometimes dangerous, conduct. Instead, individuals are forced to take on companies in an unfair, privatized system of arbitration — a process that tilts heavily in favor of the arbitrator’s corporate benefactors.

Within the next few weeks, regulators are set to strike back. The Consumer Financial Protection Bureau and the U.S. Department of Education are expected to propose rules to rein in the abuses of forced arbitration, making for a growing number of federal agencies taking action against this unfettered exploitation of American consumers. The long-awaited moves are critical to protecting consumers from the worst practices by Big Business.

If you have a credit card or checking account, there is a good chance you have signed away your legal rights in one these rip-off clauses. The same is true if you have a cellphone, bought a car from a dealership or attended a for-profit college. Many American workers will also find themselves unable to seek relief in court when wronged by their employer. In just the past 10 years, forced arbitration clauses have become so ubiquitous in American life that many people will find they have signed away their rights without even knowing it.

Arbitration substitutes an unaccountable private decision maker for an impartial judge and jury, and consumers have little opportunity to present evidence or appeal a bad decision. Unlike a public court case, an arbitration is a closed proceeding in which evidence and decisions are often kept secret, leaving law enforcement agencies, regulators and members of the public with no way to monitor systemic corporate misconduct. Forced arbitration amounts to a license to steal, since companies have little incentive to correct bad behavior if they can get away with it — and even profit from it.

One case in point: Wells Fargo was recently sued by several of its customers for using the personal information of existing customers to open fake accounts in their name in order to boost sales figures. When customers filed suit against Wells Fargo to recoup the fees charged for these bogus accounts, Wells Fargo simply pointed to the forced arbitration clause in the customer agreement. Even more remarkably, the court granted the company’s motion to force the customers’ case into arbitration.

Forced arbitration is inherently biased in favor of corporations because arbitration firms rely on repeat corporate players to bring in continued business for future disputes. This dynamic encourages the well-documented “repeat player bias” in arbitration: Companies that frequently arbitrate are far more likely to prevail than consumers with a one-time complaint. After all, arbitrators cannot stay in business if they bite the hand that feeds them.

More direct conflicts of interest are also possible. In 2009, the Minnesota attorney general barred the largest consumer collection arbitration firm in the country, the National Arbitration Forum, from arbitrating consumer debt collection disputes after it found the firm hid its extensive ties to the debt collection industry in an astonishing system of backdoor dealing.

No one should ever be forced to give up constitutional and statutory rights and other legal protections. Industry and their sympathizers tout arbitration as a fair and cost-efficient resolution to disputes that is beneficial to consumers, yet they take pains to preserve their own right to resolve disputes against consumers in court. It is the height of entitlement and hypocrisy to deny consumers this same right to choose how to settle their disputes. Agencies with the power to act on forced arbitration clauses should do so in the most expansive way possible — preserving consumers’ ability to join their claims together in a class action, as well as pursue disputes individually in court.

The need for regulation to fix this problem is clear, and key agencies are taking steps in that direction. Last month, the Department of Education released a proposal to address the explosion of forced arbitration clauses used by the for-profit college industry. Many for-profit schools have profited mightily from federal aid while lying to students about their educational services and job prospects, yet these schools have successfully shielded themselves from accountability after driving students into debt for a worthless degree. As the department recognized in a statement, schools use forced arbitration to “effectively prevent students from seeking redress for harm caused by their school and hide wrongdoing from the Department and the public.” The Department must live up to its commitment to put an end to schools using fine print to trap students into signing away their rights.

In a broader context, the CFPB is moving toward a proposed rule to restrict forced arbitration in consumer financial contracts. Data collected in the CFPB’s arbitration study — by far the most comprehensive study of arbitration in consumer financial contracts — demonstrates that forced arbitration clauses effectively bar consumers from bringing class actions when companies cheat large numbers of individuals out of small amounts of money. If the forthcoming proposed rule follows the approach made public in connection with the small-business review process, it is likely to restore consumers’ right to join together to challenge abusive financial practices and recover the money taken from them.

The Centers for Medicare & Medicaid Services is also considering a limitation on arbitration clauses in nursing home contracts. Agency action is needed to address the many long-term care companies that receive vast sums of federal money while forcing vulnerable, elderly individuals and their families to sign arbitration contracts as a condition of care.

Without strong federal action, corporations will continue to simply opt out of liability for breaking the law with clever legalese. Regulators at the Department of Education, CFPB, CMS and other agencies must answer this call. To ensure no one is forced to trade in their legal rights just to participate in everyday life, we need strong, expansive rules from every agency with the power and authority to protect Americans against abusive corporate schemes.