June 10, 2014

Magnifying glass on a contract with selective focus on the word "contract".A new report by Lina Khan, a policy analyst with the New America Foundation, in Washington Monthly shines a spotlight on a growing problem hampering the right of American citizens to access the court system: mandatory arbitration clauses and class action bans. Due to a combination of Supreme Court decisions and heavy lobbying by business interests, corporations are currently permitted to use mandatory arbitration clauses to effectively block the right of citizens to seek redress in the court system. Although the Chamber of Commerce would have the public believe otherwise, consumers often don’t fare well in arbitration. Khan cites a 2007 report by Public Citizen finding that large arbitrator companies ruled against consumers 94% of the time.

The 2013 Supreme Court decision in American Express Co. v. Italian Colors Restaurant gave corporations the ability to include contract clauses banning class actions even when a class action is the only feasible way a citizen could bring a case. This decision, in conjunction with the rise of mandatory arbitration clauses, has resulted in a situation where citizens are left with few legal remedies to address wrongdoing.

Khan provides a helpful summary on how we got to this point:

  • After heavy lobbying by business interests, Congress passed the Federal Arbitration Act in 1925. The FAA was supposed to free judges who were spending time solving corporate disputes that were often procedural in nature. At the time, business interests assured Congress that arbitration would only be used between equally sophisticated litigants that agreed to arbitration.
  • The Federal Arbitration Act remained the status quo until the 1980s when Justice William Brennan declared in the 1983 case Moses H. Cone v. Mercury Construction that the FAA reflected a “federal policy favoring arbitration.” This heretofore unseen language expressing a preference for arbitration, rather than a mere alternative, began a sea change in federal policy.
  • Two subsequent cases expanded the scope of arbitration – a 1984 case limited the power of states to regulate how corporations use arbitration and a 1985 case held that arbitrators could rule on actual law.
  • Vigorous campaigns funded by business interests created the perception that America had a litigation problem. In this atmosphere, the Supreme Court further enlarged the practice of arbitration. In 1995, the Court held that companies could include arbitration clauses in everyday consumer contracts.
  • In 2011, the Supreme Court ruled in AT&T Mobility v. Concepcion that corporations could ban class actions in arbitration contracts. The 2013 Italian Colors decision held that companies could ban class actions even where consumers were left with no recourse.

These court decisions have stripped citizens of their right to seek accountability for wrongdoing in the civil justice system. Corporations and the defense bar are well aware that some actions are economically unfeasible to bring unless an action is structured as a class action. Khan provides illuminating samples of triumphant email newsletters disseminated by corporate law firms after the Italian Colors decision.

Khan highlights additional problems associated with mandatory arbitration clauses that are so prevalent in every contract consumers sign from a dry cleaning bill to an employment agreement:

  • Arbitration allows corporations to keep misdeeds secret from the public
  • Arbitration proceedings may be paid by the corporation, creating a conflict of interest with the arbitrator whose salary is financed by the corporation
  • Arbitrators don’t have to follow legal precedent
  • Arbitration proceedings are not bound by the rules of evidence
  • In some states, arbitrators don’t even have to be lawyers

During 2013, Minnesota Senator Al Franken and Georgia Representative Hank Johnson reintroduced the Arbitration Fairness Act. This bill would bring more fairness to the current state of arbitration and rebalance the rights of corporations and of citizens. Funneling legal disputes into a mandatory arbitration system fraught with conflicts of interest and unfair rules imperils our justice system and will only lead to greater disillusionment among the general public. Without the threat of legal accountability, corporations may feel emboldened to act with impunity and trample over the legal rights of citizens. At The Cochran Firm, D.C., we vigorously support the Constitutional right of citizens to seek justice in the legal system.