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Whitfield Bryson & Mason

WBM Fights Threat to Justice Posed By Mandatory Arbitration

The other day I received an email from Dropbox, a popular startup company that allows users to store electronic files in the “cloud,” which makes them accessible from multiple devices. The message begins blandly enough, notifying users that Dropbox’s terms of service had changed. Tucked inside, however, is a notification that Dropbox has added an arbitration provision, which is casually summarized as “a quick and efficient way to resolve disputes, and it provides an alternative to things like state or federal courts where the process could take months or even years.” Those supposedly pesky courts, however, exist for a reason, and that is to provide a remedy for individuals who have suffered a legally recognized harm.

Arbitration may be more expeditious than a standard legal proceeding, but it also stacks the deck in favor of large corporations against injured individuals. The bias is woven into the fabric of arbitrations. Arbitrators, unlike judges, are not appointed by a legislative body or elected by the people. An arbitrator is selected by the parties rather than randomly assigned. Arbitrators need to make a living and, therefore, do not want to offend potential clients who could select them in future matters. Yet, it is only large corporations that are likely to appear before them multiples times, rather than any individual. If the arbitrator rules against the corporation, he or she risks being blackballed by the corporation and others in the industry. On the flip side, an arbitrator who rules against the individual is unlikely to see that individual again so there is no risk to the arbitrator’s business. Regardless of arbitrators’ professed detachment, then, the built-in incentives suggest that their rulings will favor corporations over individuals.

It is no wonder, then, that corporations have spent millions of dollars lobbying courts and legislatures to allow them to write in arbitration provisions into the fine print of everyday contracts and have courts honor them. In a stunning 5-4 ruling in 2011, the Supreme Court gave its blessing to this arrangement in AT&T v. Concepcion, 563 U.S. 321 (2011), overruling lower courts’ orders that claims related to AT&T’s alleged deceptive advertising for free cellphones (which, turned out to not be free) could be brought in court because the arbitration provisions violated state law. The Supreme Court disagreed and effectively held that claims subject to fine print arbitration provisions had to be brought in the private corridors of arbitration rather than in a public, transparent court of law. Corporations have, as expected, rushed to change their consumer contracts to include arbitration provisions, privatizing resolution of potential consumer complaints and insulating themselves from the American justice system.

Dropbox’s change of terms and service also includes another troubling clause, which Dropbox neglected to mention in its email, but which is available here. That provision, separate from the arbitration clause, reads:

No Class Actions. You may only resolve disputes with us on an individual basis, and may not bring a claim as a plaintiff or a class member in a class, consolidated, or representative action. Class arbitrations, class actions, private attorney general actions, and consolidation with other arbitrations aren't allowed.

Class actions and other forms of aggregate litigation referenced (such as private attorney general actions) are important mechanisms for holding wrongdoers accountable when their bad acts harm large numbers of people in a similar manner. For example, suppose Dropbox decided to not have any security of its data system because it simply cost too much and hackers rummaged through everyone’s private files to steal identities. In such a situation, aggrieved consumers would want to hold Dropbox accountable and it would make sense to resolve all consumer data breach claims in a single action, rather than require each of them to hire lawyers and litigate individually. The possibility for resolution of claims in one fell swoop, however, is now foreclosed by Dropbox’s changed terms of service.

Some commenters such as Georgetown law professor Adam Levitin have noted that class actions are “necessary for effective vindication of small value claims.” This is exactly right. In the example above, the costs for most individuals to litigate would be prohibitive and no lawyer would be willing to take an individual case of that kind on a contingency basis due to the likelihood of never recouping attorneys’ fees. For corporations this is a feature, not a bug. They know that if something goes awry and their consumers have legitimate legal claims against them, they can essentially immunize themselves from liability by requiring the consumers to bring their claims individually rather than collectively.

Despite recent adverse precedent, avenues remain for fighting back against arbitration clauses and class action waivers. Indeed, WBM has been successful in persuading judges that their clients’ class action claims belong in court, rather than in arbitration. In one case, homeowners in North Carolina brought claims related to water damage they had suffered because a national builder built their homes without a weather-resistant barrier such as Tyvek. The defendant sought to compel the homeowners to arbitration but the plaintiffs prevailed at the trial court and court of appeals in their argument that the defendant waived any arbitration rights by waiting too long to raise them. WBM, as counsel for lawn care technicians in Pennsylvania who were allegedly cheated out of overtime pay, defeated a similar motion to compel arbitration brought by the lawn care company by persuading the judge that the arbitration provision did not cover the technicians’ particular claims. A similar issue is at stake for WBM in a suit scheduled for oral argument this month in which a plaintiff alleges that her claims against Deutsche Bank for sending a misleading notice of foreclosure falls within an exclusion of the arbitration clause, permitting her to bring her claim in court and as a class action.

Consumers can fight back against the pro-arbitration trend. For example, if you subscribe to Dropbox, you have until later this month to opt-out of its arbitration provision. When companies add arbitration provisions, they frequently mention that there is a small window to opt-out, and consumers should take advantage of this. Consumers should also lodge complaints with companies that attempt to add these provisions. Such efforts recently persuaded Hyundai to abandon its arbitration provision because, as it said in a statement, “we don’t want people to be misled and think we don’t stand behind America’s best warranty.” Consumers should let corporations know that they expect them to stand behind their products and services.