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Whitfield Bryson & Mason

The Precarious Future of Forced Arbitration

The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.
- Richard Posner

By now, most practitioners have grasped the vast ramifications of the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion. The Concepcion decision was a watershed decision by the Court, eviscerating consumers’ rights to file class actions against corporate heavyweights. Generally speaking, Concepcion held the Federal Arbitration Act of 1924 (“FAA”) allows corporations to avoid class actions, and force consumers into a corporate-designed system of arbitration, even in situations where state laws are in place to protect consumers from these specific arbitration clauses now rampant in consumer contracts.

While Concepcion has become the poster child for such a stripping away of rights of consumers, many are not aware that other Supreme Court decisions have come down hard on consumers’ ability to pursue their claims in our nation’s courts. Now, in the wake of Concepcion and these other decisions, the Supreme Court is poised to decide American Express v. Italian Colors Restaurant and, by the accounts of some commentators, remove the last bastion for consumers in terms of maintaining their ability to effectively vindicate their rights.

The Worsening Storm?

After hearing oral arguments on February, 27th of this year, the Supreme Court is set to decide the case of American Express v. Italian Colors Restaurant sometime by the end of June. In Italian Colors, a group of small businesses, including the named plaintiff, a California restaurant, accused American Express of an illegal “tying arrangement.” This is to say, the plaintiffs have alleged American Express required them to accept its consumer credit cards that come with high transaction fees as a condition of accepting its personal charge cards and corporate cards, thus taking advantage of the powerful position they hold in the market. 

Though in their contracts with American Express, the merchants agreed to settle their disputes through arbitration, the Italian Colors plaintiffs have brought antitrust claims, and alleged it is not feasible for each individual merchant to arbitrate their individual claims. After the Second Circuit Court of Appeals sided with the plaintiffs, the Supreme Court granted American Express’ petition for certiorari, and is now set to decide whether the arbitration clause, which prohibits class claims, should be enforced if the plaintiffs can prove they would not be able to effectively exercise their federal rights as a result. Ultimately, the plaintiffs are arguing that forcing them to arbitrate their antitrust claims individually would be so prohibitively expensive that they could not adequately protect their rights. 

For consumers, small business owners and any other individuals who at any point finds themselves in an inferior bargaining position when signing a contract with a large multi-national corporation, the ramifications are huge. If the Supreme Court continues their current trend and sides with American Express, there could be to no road forward for such potential claimants, as the current Court’s existing inclination to limit the rights of individuals would be strengthened. This Court seems apt to limit such individual rights, all while allowing corporations unrestricted access to the courts to recoup their own commercial losses resulting from a myriad of issues, such as trademark violations, contract breaches, patent infringements, unfair competition claims, property damage, lost goods, unpaid bills or fraud. According to Joanne Duroshow, Executive Director for the Center for Justice & Democracy at New York Law School, tort cases currently make up only six percent of all civil cases. Corporate America seems determined to retain unfettered access to the courts for themselves, while keeping the rest of us out if our claim is against them.

Interestingly, Paul Clement, former Solicitor General during the George W. Bush Administration, is one of the attorneys representing the plaintiffs in Italian Colors. Clement, a lawyer who typically represents business interests or otherwise more conservative views, here is on the side of the merchants. During oral arguments, Clement stated that individual arbitrations are cost prohibitive for each plaintiff. When asked by Justice Breyer if that meant other plaintiffs could avoid arbitration simply by engaging expensive experts and putting forth elaborate theories in simple cases, Clement responded that it was a district court’s job to sort out whether the plaintiffs have met their burden of proof as to whether it would be feasible to bring a claim in arbitration. Clement then went on to fault American Express for not contesting the cost estimates put on by the plaintiffs. 

Michael Kellogg, one of the attorneys representing American Express, framed the plaintiffs’ claims in Italian Colors as in direct contravention to the Court’s ruling in Concepcion that the FAA preempted California state law prohibiting arbitration agreements not allowing class wide claims. Though conceding the Concepcion arbitration agreement had provisions that made it more favorable than the Italian Colors’ agreement for plaintiffs to bring a claim, Kellogg argued that ultimately such factors, including that of prohibitive cost, were not relevant. Kellogg, along with another counsel for American Express, Andrew Pincus of Mayer Brown, are making the argument that even though it may not be economically viable for a plaintiff to bring a case in court as opposed to arbitration, such a fact should not matter when making the determination of whether a plaintiff is being given an opportunity to effectively vindicate their rights.

What the ultimate disposition of the Court will be in Italian Colors is not certain, as both sides faced tough questioning from the bench, but if the history of the Roberts’ Court is any judge, the outcome may not fall on the side of consumers. Additionally, Justice Sotomayor, who sat on a Second Circuit Court of Appeals panel that considered the case has recused herself, leaving the makeup of the Justices left to rule on the case decidedly more pro big business. Unfortunately, if the Court sides with American Express, citizens will likely be faced with a reality conceded by Kellogg during questioning by Justice Ginsberg, when he stated, “[T]here is no guarantee in the law that every claim has a procedural path to its effective vindication.” On the heels of Concepcion, Italian Colors has the potential to further reduce consumers’ ability to assert their rights in a court of law.

We’re Already in a Tough Spot

In Concepcion, the Supreme Court held that under the FAA, a state had to enforce arbitration agreements even if the agreement required consumer complaints be arbitrated individually instead of on a class-action basis. Now, as discussed above, the Court is considering whether to go further, and overrule the Second Circuit’s decision in Italian Colors that the waiver of the availability of a class action was unenforceable, because such a prohibition against collective actions would impair the plaintiffs’ ability to enforce their statutory rights under federal antitrust law. Though it may be about to get worse, consumers are already reeling from a series of court decisions which have put the interests of Corporate America above their own.

Because of the nature of the way in which we interact with businesses in the modern world, and more importantly the nature of the agreements we make, it is difficult to envision there are many individuals left who are yet to sign an arbitration agreement – even if they are unaware they have done so. Arbitration clauses, generally hidden in the small print, are invariably included to protect the business interest of the company which drafted it, and have many of the features of adhesion contracts. In her testimony before the House Subcommittee, Joanne Doroshow distilled the issues faced by consumers, stating:

Arbitrators are often on contract with the businesses against which a claim is brought. Often the company, not the victim, is allowed to choose the arbitrator. This creates inherent bias and self-interest on the part of the arbitrator – the arbitrator is motivated to rule in a way that will attract future company business. At the same time, arbitration companies have a financial incentive to side with corporate repeat players who generate most of the cases they handle. Arbitrators are also not required to have any legal training and they need not follow the law. Court rules of evidence and procedure, which tend to neutralize imbalances between the parties in court, do not apply. There is limited discovery, making it is much more difficult for individuals to have access to important documents that may help their claim. Arbitration proceedings are secretive. Their decisions are still enforceable with the full weight of the law even though they may be legally incorrect. This is especially disturbing since these decisions are binding. Often victims must split the sizeable costs of arbitration with the defense. Even if the defense handles the costs, this still gives them the ability to “freeze” a proceeding in the rare situation where it seems the arbitrator is moving against them…The principal effect of forced arbitration is to wipe away claims... 

Clearly, whether an individual has signed an arbitration agreement with regard to their employment, home, mortgage, credit cards, cellphone, business, personal health care, etc., such agreements are almost certainly weighted against them in favor of the party with the superior bargaining power. Furthermore, they lack both the procedural and substantive safeguards provided to those same consumers by Article III courts. Additionally, when the right to band together with other persons similarly damaged by these provisions is taken away, and class actions are no longer an option for plaintiffs, corporations are able to add a de facto bar to these claims, as individual plaintiffs cannot afford to bring individual cases where their damages are relatively small. Though individual plaintiff’s claims are often too small to warrant filing a grievance, in the aggregate, the potential class of plaintiffs has frequently suffered tremendous damages. When corporations are permitted to injure persons and remain insulated from being held accountable, they are operating with impunity, and ostensibly being set up to receive a windfall, with only the slightest chance of having to answer for their actions. This is not how our justice system is supposed to operate.

What Can Be Done Now

Regrettably, because of the myriad of court decisions upholding the validity of forced arbitration clauses, and the sheer pervasiveness of these clauses in every area of consumer contracts, we have reached a point where consumers are truly between a rock and a hard place in protecting their rights going forward. One 2008 study in the University of Michigan Journal of Law Reform examined employment and consumer contracts used by 21 major corporations and found mandatory arbitration clauses in 93 percent of the employment contracts and 77 percent of the consumer contracts. If these were the statistics five years ago, pre-Concepcion, imagine where they are today.

In an attempt to address the abject unfairness of forced arbitration, several members of Congress introduced a bill entitled The Arbitration Fairness Act of 2011. Though it has taken several iterations since its initial introduction in 2007, and is yet to make it out of committee, the bill would make predispute agreements to arbitrate consumer and employment disputes unenforceable. The bill, cosponsored by Senators Al Franken and Richard Blumenthal and Representative Hank Johnson, is unlikely to pass in the current political climate in Washington, D.C. without significant pressure from constituents across the country.

There are those that believe a less arduous path to retake some of the rights stripped away by forced arbitration would be for the Consumer Financial Protection Bureau to step in where Congress is unable. The Consumer Bureau is authorized to prohibit or impose conditions or limitations on the use of predispute arbitration agreements in consumer financial product or service contracts if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.  

Now is the time to contact all of our elected officials and challenge them to protect the rights of the people who elected them. Every Senator and Representative needs to know how important this issue is to you and your clients. As Amalia Kessler of Stanford Law School writes: 

Lawyers are often unwilling to represent arbitration complainants because of award caps in the agreements. And increasingly, these accords bar class-wide arbitrations. Because arbitration decisions are typically not disclosed and not subject to appeal, consumers and workers are left without recourse and must bear the cost of unfair, deceptive and harmful practices.

The time to act is now, as soon we will not have any rights left to protect with regard to this abridgment of our rights to seek redress.

Short of changing the substantive law of the Federal Arbitration Act, there are other steps we can take to protect ourselves and our clients from forced arbitration clauses. While some of these steps in and of themselves may seem ineffective or impractical, if enough people put these into practice, consumers may be able to exert enough pressure on corporations that use these clauses to force them to change. According to Public Citizen, a nonprofit group that since 1971 has been promoting, and lobbying for, the rights of individuals as opposed to business interests, these are some areas where an individual can take active steps to protect themselves and their family from ultimately relinquishing their rights through these agreements:

  • Know the terms of your credit card – Shop around for cards that do not contain binding mandatory arbitration clauses. While this isn’t going to apply to most of the most popular cards, many credit union and smaller bank credit cards do not contain such clauses. Credit cards issued by the AARP do not include forced arbitration clauses either. Consider closing accounts that have these clauses, and sending a letter to the issuer describing why you closed the account.
  • Research before you buy a car – Call the dealership before you buy to see if they require signing a binding arbitration clause. Be willing to walk away from an auto dealer who requires such an agreement for the lease or purchase. 
  • Home loans – As above, refuse to deal with lenders who require mandatory arbitration clauses in the loan documents. Notably, both Freddie Mac and Fannie Mae do not allow such clauses. Also, like credit cards, many credit unions do not permit them either.
  • Other creditors and service providers – If you are unable to choose service providers that do not require these clauses to be in your agreement, try disclaiming the arbitration agreement. You can download a form at www.citizen.org, or you can submit a note with your bill claiming you opt out of the arbitration agreement, and if they do not accept your opt-out they must notify you within thirty days. It may or may not work, but it is worth a try.

Take-Away

As is clear by the action steps that are currently available, the current balance of power with regard to arbitration agreements lies clearly with corporate America. Concepcion and other decisions have gone a long way to limit individuals’ access to the courts, and it may be poised to get even worse when the Italian Colors decision is announced by the Court. It seems the best shot at fighting back is to change the substantive law of arbitration agreements by passing the Arbitration Fairness Act, but don’t hold your breath. As Paul Bland with Public Justice testified, “Most consumers and employees have little or no meaningful choice about submitting to arbitration. Few people read or understand the fine print that strips them of their rights; and because arbitration clauses are found in nearly all consumer contracts, most consumers have no choice but to accept them.” Now, at least, the issue is no longer in the shadows, and thousands of people across the country have realized the very real danger they face being subject to these clauses. Now that the enemy is known, it is time to fight with everything we have to take our rights back, level the playing field and reestablish our access to the courts that has been guaranteed since time out of mind.