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Mandatory arbitration rarely benefits consumers

Suppose Jane Doe believes that her cellphone company has wrongly charged her an extra $50 for roaming when the phone calls in question were all made from her home. If she cannot get the $50 charge reversed by taking all the reasonable steps she can think of, such as speaking to customer service, then what option does she have? She could sue the phone company, but it normally would not make sense to sue the company for $50 when her legal expenses almost certainly would exceed that amount.

However, if Jane learns that she is not alone in her predicament and that there are many other consumers who have also been treated unjustly by the phone company, then these people could band together and file a class action lawsuit against the phone company. Since a key objective of a class action suit is to help large groups of people get back small individual amounts, such an action would be an ideal way to deal with the unhelpful phone company.

The above logic notwithstanding, a chill wind is now blowing across the American legal landscape in the sense that it is increasingly difficult, if not altogether impossible, for aggrieved consumers to pool their limited resources and seek legal recourse against large businesses with class action claims.

This saturnine state of affairs is the direct result of two recent U.S. Supreme Court decisions. In 2010, in the case AT&T Mobility v. Concepcion, customers complained that AT&T had promised them a free phone if they signed up for service but that once signed up, the company still charged them $30.22. The court disagreed with a California court’s decision to reject a ban on class action lawsuits—as sought by AT&T—and ruled 5-4 in favor of AT&T.

In a second case in 2013, the Supreme Court ruled against small merchants and sided with American Express, essentially saying that arbitration clauses governing the contractual relationship between merchants accepting American Express cards and American Express itself could outlaw class actions, even if a class action turned out to be the only realistic way to bring a case.

These two momentous decisions have allowed companies to insert individual arbitration clauses into all manner of consumer and employment contracts. By effectively precluding class action lawsuits, companies have been very successful in disabling challenges to a variety of insalubrious practices such as predatory lending, price gouging, wage theft and discrimination. So, whether it comes to an individual’s contractual relationship with her phone company or her credit card company or even her employer, it is now very difficult for this person to join with others and challenge companies as an injured class. As reported recently in the New York Times, between 2010 and 2014, of the 1,179 class action lawsuits that companies sought to push into arbitration, judges ruled in their favor in 80 percent of the cases.

There would be nothing wrong with arbitration if both the parties involved in a dispute wanted to make use of this practice. However, the available evidence suggests that the deck is stacked heavily against individual consumers and that the rules of arbitration generally favor large companies that often are able to direct cases to friendly arbitrators. For instance, data collected by the New York Times shows that approximately 67 percent of consumers contesting credit card fraud, fees, or high-priced loans received no money at all in arbitration proceedings.

The other major problem with arbitration stems from its secretive nature. As a result, arbitration keeps discussions of improper and/or discriminatory behavior hidden, and this can result in the perpetuation of, for instance, invidious labor practices.

The deliberate strategy on the part of many companies to use binding arbitration to severely restrict the legal options available to consumers has not, unfortunately, caused the outrage that it should. This is largely because the pertinent arbitration clauses are buried deep in the fine print of contracts that most consumers do not read or do not comprehend or both. This notwithstanding, in this most interesting election season, it is time to make this serious abridgement of consumer rights a prominent issue.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.

3/18/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.


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