You Should Care About Mandatory Arbitration Clauses

 /  Dec. 6, 2017, 11:24 a.m.


With the Russia investigation plodding on to the steady drumbeat of Mueller indictments, and “dotard” Trump inching us ever closer to nuclear holocaust with “rocket man” Kim Jong Un, it’s easy to forget about the less sensational threats facing American democracy. When you’re being chased by a lion, you tend not to think about the cancer that might get you in a few years. Fair enough. But if we’re to make it through this criminal presidency, it’s important that we take notice of the less exciting ways our democracy is being degraded.

A truly unexciting (but no less terrifying) threat we now face is the rise of Mandatory Arbitration Clauses (MACs) and Class-Action Bans (CABs) in many corporations' consumer contracts. (Think the ones you sign off on without reading before using Amazon or your bank app.) These clauses are decidedly dull, but they have huge ramifications. Used together, they bar wronged consumers from bringing collective suit against a company, compelling them to take all claims to a private arbitrator as individuals instead.

The rise of these clauses started in the early aughts when a group of enterprising financial services companies got together to determine ways to increase profit margins. What they realized was that they spent boatloads of cash on payouts to consumers they had defrauded or acted illegally toward. Now you might be thinking that one easy way to rectify that problem would be by, you know, not acting illegally; but you are not thinking like a financial services company. Instead these companies set out to devise a legal maneuver that would prevent consumers from receiving justified remuneration. What they landed on was the combination of MACs and CABs. They were incredibly effective, and other companies caught on. Since then, these clauses have found their way into the consumer contracts of companies in almost every sector of the economy.

The impact of this development cannot be overstated. By forcing consumers to shoulder all legal costs individually and to bring cases to arbitrators, these clauses have greatly diminished consumers’ ability to receive fair, impartial recourse. However, this is not the worst of it: companies that use MAC’s in their terms-of-use contracts often also include a caveat that they get to pick the arbitrator that will adjudicate the dispute. Practically, this creates an incentive for the arbitrators to make rulings favorable to the corporations, because if they don’t the companies will eventually take their business elsewhere.

A recent review by the Economic Policy Institute (EPI) discovered that these clauses have had catastrophic effects. The number of consumer settlements in the United States and the amount of money awarded per settlement have both plummeted in recent years. The EPI study makes it clear that this is not the result of better behavior on the part of corporations. In fact, a major conclusion is that the success of these clauses in reducing the legal threat from dissatisfied consumers has incentivized companies to behave badly because they know they can practically act with impunity.

The rise in the use of these clauses has been aided and abetted by conservative Supreme Court justices, who have worked feverishly to provide legal justification for them. This has led to some court decisions with jurisprudence so shaky, one might wonder if they had been decided by the companies implementing these clauses themselves.

Take the case of AT&T Mobility LLC v. Concepcion. In 2011, an AT&T customer realized that he was being charged fifteen dollars for a phone that was advertised as entirely free with a contract. After figuring out the same thing had happened to millions of other customers, he called a lawyer and organized a class-action lawsuit, which allowed him to join and share legal costs with the millions of others who were scammed. Up to that point, the system was working as designed: a group of people were wronged, and after organizing they were about to be compensated. However, when they went to court, the judge informed them that AT&T had inserted a MAC and CAB deep within the fine print of their phone contract, and because of this, the class-action suit could not go forward. The plaintiffs decided to appeal on the grounds that a class-action ban in their contract was indefensible given the imbalance of power between them and AT&T.

The Ninth Circuit court of appeals decided in favor of the plaintiffs. In their decision they applied the “three-pronged test,” a legal standard the California judiciary has been using for years to determine whether a class-action suit can proceed. It is as follows: Did the accused have far more leverage than the plaintiffs when deciding the makeup of the contract? Does the case involve damages small enough so as to disincentivize consumers from bringing their cases forward individually? Did the corporation act intentionally to scam their customers out of small amounts of money? The court answered yes to all three questions.

The Ninth Circuit’s legal thinking passes the smell-test: if consumers are powerless to influence the content of the contract they sign, should they really be forced to forgo one of their primary protections against unscrupulous business practices? Most reasonable observers would say no. The corporation would have too much power and too much ability to do harm without penalty. The Supreme Court, however, felt otherwise.

In a shameful five-to-four decision, the court overturned the Ninth Circuit's decision and sided with AT&T. The vast majority of the plaintiffs decided to just pay the illegal charge, as the cost of privately funding the arbitration would have been far greater than any settlement they might have received. Writing for the majority, Justice Antonin Scalia argued that an obscure 1925 law, the Federal Arbitration Act (FAA), barred courts from preventing companies from using arbitration to settle disputes. Like many Scalia decisions, it relied heavily on an absurd, selective reading of statute. The FAA, however obscure, actually includes an exemption for “contracts of employment” and legislators at the time made clear that the law was aimed at enforcing arbitration between trade associations and businesses, not businesses and their customers. The decision demonstrated to AT&T and other companies that they could defraud consumers on a grand scale and never have to face the consequences.

This was not the only recent Supreme Court case where the conservatives on the high court showed a callous disregard for consumers. A few years earlier they had heard a case similar to AT&T Mobility LLC v. Concepcion, involving American Express and a group of clients who accused them of price gouging. In another five-to-four decision, the conservatives made clear that they saw little value in protecting the ability of wronged consumers to seek justice. Again writing for the majority, Scalia argued, “The fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Obviously this is ridiculous. If economic barriers to legal recourse did not constitute an elimination of the right to seek recourse, we would not have public defenders. We would not even have bail that is proportional to the wealth of the defendant. Of course, none of this mattered to the conservatives; there was money to be made for multinationals.

The cases mentioned above are just two out of a seemingly infinite pool of examples of how mandatory arbitration clauses have acted to deer and deny justice. I wish there was an easy answer to this problem, but without a sea-change of opinion on the Supreme Court or the Democrats miraculously winning back the House it does not appear a fix is coming any time soon. Without any economically sound way for consumers to hold corporations accountable, corporations will continue to run roughshod over the rights of their customers. This is a travesty and worthy of our attention. MACs might be boring, but they should certainly make us outraged.

The featured image in this article is licensed under Creative Commons. The original can be found here.

Noah Wintman


<script type="text/javascript" src="//" data-dojo-config="usePlainJson: true, isDebug: false"></script><script type="text/javascript">require(["mojo/signup-forms/Loader"], function(L) { L.start({"baseUrl":"","uuid":"d2157b250902dd292e3543be0","lid":"aa04c73a5b"}) })</script>