Corporations, many of them financial institutions, have instituted a clever way to circumvent the courts and protect themselves from consequences that might otherwise arise from their own wrongdoing. That is the central point to a two-part series published over the weekend by The New York Times, and it is distressing.
Almost every contract now includes a clause that says the signer is agreeing to settle any dispute through binding, individual arbitration. Such a contract could involve signing up for a credit card, cable television or a phone. It could be an employment agreement, online shopping or an application for a student loan. It could be almost anything in every aspect of modern life.
Typically buried in the fine print – the part nobody reads – that clause effectively precludes taking the company to court, especially in class-action lawsuits. A great many disputes between customers and corporations are over relatively small amounts of money per individual that together add up to a great deal. As one consumer lawyer told the Times, “When banks make mistakes or do bad things, they tend to do them many times and to many people.”
When those aggrieved consumers can band together in a class action, they can afford to press a lawsuit. The point is rarely to enrich themselves (only the lawyers do that) but to correct the behavior.
But as one law professor was quoted as saying, “Without a class action, if someone loses $500, they will not be able to do anything about it.”
They could go to arbitration where an ostensibly independent and impartial third party decides the case. Except that arbitrators are usually picked by the company – the defendant – and often are hired by the same company for repeated cases. The proceedings are confidential and there is no judicial oversight. Normal courtroom rules do not apply, nor do legal strictures concerning conflict of interest.
The Times quoted an appeals court judge saying, “Private judging is an oxymoron. This is a business and arbitrators have an economic reason to decide in favor of the repeat players.”
It is hardly surprising then how things tend to work out. Citing one example, the Times found that, “Roughly two-thirds of consumers contesting credit card fraud, fees or costly loans received no monetary awards in arbitration.” It also found that from 2010 to 2014 only 505 customers took a case to arbitration over less than $2,500. And in that time Verizon, with more than 125 million subscribers had to deal with only 65 arbitrations. Most people just go away.
A Boston federal judge, and Reagan appointee, told the Times that with arbitration and the associated class action bans, “[B]usiness has a good chance of opting out of the legal system altogether and misbehaving without reproach.”
Nowhere is that more frightening than in health care. A Florida ob-gyn office tells expectant mothers they cannot take a complaint to court. In nursing homes, even if the patient’s family wins in arbitration the facts remain hidden from other families.
That prompted 34 U.S. senators – all Democrats and not including Colorado’s Michael Bennet – to write the administrator of the Center for Medicare and Medicaid Services saying nursing homes that employ arbitration clauses should be ineligible for federal payments.
The senators are on the right track. Arbitration has its place, but it works when done fairly and agreeably. A lawyer working on the ethics of the practice summed it up clearly for the Times, saying, “Once it’s forced, it is corrupted.”