The Trouble With Arbitration? Us

Nearly 40 years ago, when arbitration was largely used as a means of working out labor relations disputes, its viability as a secondary legal system, a shadow court if one was to couch it in a nefarious allusion, was first being realized.  The civil legal system was expensive and time-consuming. It was no longer capable of serving up justice.

The future of arbitration was bright to youthful students at Cornell’s School of Industrial and Labor Relations, who clung to Elkouri & Elkouri’s “How Arbitration Works” like a bible.  Its model was simple, a small claims court for disputes that could expeditiously and inexpensively be decided. What’s not to love?

The New York Times Dealbook has a major exposé on what’s become of arbitration since then, included in nearly every major corporation’s terms as a contract of adhesion, requiring mandatory binding individual arbitration of all disputes.  They are coupled with a waiver of the right to bring or participate in class actions.

At first, these arbitration clauses existed alongside the right to participate in a class action suit, until the Supreme Court held that the Federal Arbitration Act was pre-emptive in A.T.&T. v. Concepcion, and arbitration clauses were enforceable.

Corporations steal $12 at a time. Multiplied by millions, it’s big business. While they apologize for the inconvenience, they don’t really love you enough to stop stealing from you or cheating you whenever possible, and bet that you either won’t notice or won’t complain, and most assuredly, won’t life a finger to stop them.  And they’re right.

What’s the alternative? Class action suits. You remember them, the ones where the class lawyers get millions in legal fees and the members of the class get a coupon good for extra butter on their popcorn.

Corporations hated class actions, and for good reason.  And the argument they made, that class actions failed to serve the putative class members anyway, was borne out in settlement after settlement.  It gave Ted Frank purpose in life, challenging class action settlements that sold out the class in favor of the lawyer, and it’s kept Ted very, very busy.

So the options available to the public were made clear: get screwed by the corporations with whom you do business or get screwed by class actions which failed to redress the actual grievance and only benefitted the lawyers. Cool choice.

But the New York Times’ article dances all around the evils of arbitration without touching the core problem.  The issue isn’t that corporations ram arbitration down their customers’ throat, but that this shadow legal system fails them as well.  If arbitration worked, as the Elkouris hoped it would, there would be no problem.

Except arbitration has become a captive of big business, and consumers have about as much chance of winning as the Christians did against the lions.

Here, it’s a credit card company.  It could just as easily be a car company, or a brokerage house,  It doesn’t really matter who the client is.  It matters that they can capture the revenue stream of the arbitration company.  Once that happens, they own it.

If I’m an arbitration company and you give me 90% of my revenue, I need you.  My Mercedes payment is due every month, and I need your business or I’ll have to drive a Yugo.  I don’t want to drive a Yugo. It’s unbecoming of an important person like an Arbitration company owner.  So I will kiss any part of your anatomy you want to keep those checks coming.

You don’t like an arbitrator because she’s fair?  She’s gone.  You don’t want to pay out more than $12 this week?  Done.  We need to let the consumer win one once in a while to give the appearance of fairness, without ever hurting you too badly?  We understand.  Just keep them checks a’rolling in, and we’ll make sure that you’re happy.

As with the “least dangerous branch,” its acceptance is predicated on trust. Trust that it will be fair. Trust that it will apply sound legal standards. Trust that the side with the winning argument will prevail. Arbitration, in theory, is terrific. Arbitration in practice has lost that loving feeling.

And it’s crafted in such a way as to give it all the indicia of fairness.  The parties get to pick their neutral arb off a list so that one side can’t force their pet arbitrator on the other. Except that everybody on the list is already a pet, because the companies that do arbitration, create the lists of arbs available, know who pays their fees.

When you look at the list, the curriculum vitae of fairness and neutrality are heart-warming. Paragons of virtue, every one of them. To the outsider, it all looks fabulous. To the insider, they know who’s who, and they know which arbs pay homage to their overlords.

Being an arb is a great gig, and no arb wants to sit home with nothing to do. And let’s face it, people are incredibly easy to fool with some facile warm and fuzzy rhetoric about fairness from arbs who have never ruled against a corporation ever. Corporations can keep tabs on their favorite arbitrators. You? Not so much.

Then again, are you really going to hire a lawyer and go to arbitration over $12 anyway?  If the system worked as intended, it still would fail the cost/benefit analysis. And the system doesn’t work as intended.

And despite all of this, there remains one sub rosa problem that reduces these bad options to even more of a farce than they are in the first place:

In interviews, corporate executives and defense lawyers predicted that consumers would use arbitration once it became more familiar. They added that people could also get relief in small claims court, an option often not covered by arbitration clauses. But much like arbitration, few people go to small claims court, according to court data and interviews with judges.

People are getting burned right and left, treated like crap by corporations who makes promises they never intended to keep, knowing full well that most of us will never realize we’re being treated like idiot-ATMs and, even if we do, can’t be bothered to do anything about it anyway.

There are coupled “benefits” that add to the problem, such as paperless statements which most people can’t be bothered to check, and online payments routinely made so that you have no clue what you’re paying for. These too are money makers for corporations (a penny saved, time millions, etc.), which are convenient for consumers but reflect no give-back as corporations pocket their savings.

There are no heroes in this story, but there are plenty of targets for blame.  That said, the biggest target is consumers who have grown so inured to being treated like dirt, buying into the ridiculous television commercials about how much corporations love you while selling defective but shiny products with warranties of ten hours, which they will be happy to honor if you just send your refrigerator back to them in the mail, with proof of delivery.

And if you don’t like it, you can always take them to arbitration.

9 thoughts on “The Trouble With Arbitration? Us

  1. Harry

    One of the perks of your blog is that I often have great 60s tunes swirling in the brain after reading. Today I’m groovin’ on The Righteous Brothers for some odd reason. Thanks.

  2. David Sugerman

    I have been handling consumer and employment class actions for a couple of dozen years, mostly in state court. Nice post, but I have to take issue with two points. First, the abusive class action analysis is overblown. To be sure, there have been some lousy settlements. But the idea that they were pervasive is mostly a US Chamber of Commerce victory of framing and messaging. When most class actions were federalized under the Chamber’s favored Class Action Fairness Act, the problem of coupon settlements went away. But that was not enough for the US Chamber of Commerce. They want them all. Hence, SCOTUS is hearing three more class action cases this term that could kill even more of these consumer protection cases.

    While it matters very little, those of us who do these cases take it upon ourselves to object when we see bad settlements. We also think carefully about the cases. That said, the US Chamber and corporate targets wind up the rhetoric machines to label cases as frivolous, lawyer-fee lawsuits. BP is still referring to our no-offer $400 million consumer fraud win that way. They were overcharging consumers in my state 13,000 times per day. But our lawsuit and jury verdict are “frivolous,” they say. (Thank God they can’t figure out how to load an arbitration agreement into a debit card gas purchase….)

    But the bigger issue is at the end of your post. Seems like you’re operating on a model of choice and autonomy that I don’t think exists. You want the job, you sign the agreement that now has the arbitration clause. You want a credit card or a cell phone? It’s there. Your ISP and cable TV? Yup. Same for the nursing home contract for grandma’s care. This is not a negotiable term. So yes, we can go back to cash only and limit our participation in the market. But that choice is no choice at all. (Not sure whether Whirlpool had an arbitration clause for your refrigerator, but I would not be surprised if their new sales have one.)

    The Supreme Court case law that has given preemptive power to corporations is dubious to anyone who dares to read it critically. While we mere hinterland lawyers will never know for sure, I suspect that the same US Chamber of Commerce fog machine on the evils of class actions motivated the Court to reach the extreme positions that have led to where we are today

    Thanks for holding forth on this. Those of us who have been dwelling in these areas have felt like lone voices. It will be interesting to see whether this new scrutiny gets traction.

      1. David Sugerman

        That’s the quickest I’ve ever convinced you of anything.
        Oh wait. Me? A partisan? Guilty. That said, one way to think about this is which holds the greatest danger: an admittedly imperfect civil justice system, or unbridled corporate predation? As always, thanks for the provocative post.

  3. Corporate Tool

    As the lawyer for a corporation that promoted arbitration in agreements with our corporate clients, our view was that arbitration provided the best possibility for a fair forum for complex disputes. Still, we accepted that some clients had bona fide objections to arbitration so opting out was negotiable. The soul of arbitration is a creature of contact and must be the product of agreement. This is the problem with arbitration in the consumer context. A take-it-or-leave ultimatum tied to essential services is a contract of adhesion to avoid judicial review — especially when required by entire industries. As a supporter of arbitration, I don’t see how this has been allowed on any grounds other than expediency. Where are the courts?

    1. SHG Post author

      That’s really the right question in response to how the courts have addressed these arb clauses. They are contracts of adhesion, yet no court has ever held them so. Why? Beats the hell out of me.

      1. David Sugerman

        I appreciate both comments, esp. Corporate Tool’s. One would think that your sound ideas are no-brainers. Unfortunately, almost all contracts in the consumer world are adhesion contracts, such that most courts have gone on to conclude that adhesion this no longer means voidable. For a while, we managed to beat back many of these clauses using the related concept of unconscionability.

        The theory went that while arbitration is fine in its place (Corp Tool’s theory), a system that strips consumers of rights and prevents them from exercising those rights is a term that must be struck down as unconscionable. In the post-Concepcion case of Italian Colors the US Supreme Court went so far as to say that loss of remedy is no problem. SCOTUS interprets the Federal Arbitration Act (FAAA) as preeminent. The FAA is a very old statute that predates the FRCPs and specifically the class action device. But per SCOTUS, Congress intended to allow class action bans in consumer contracts through the FAA, even though modern class actions did not exist at that time.

        Nor is SCOTUS maintaining intellectual honesty here. The FAA allows an escape from arbitration if the contract is not enforceable under state law. More and more, the federal courts have simply ignored the state law invalidity problem, holding that such state law bases are preempted by the FAA. “That’s some catch, that Catch-22.”

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