Are Arbitration Clauses as Bad as the New York Times Says? A Quick Review of Contracts I've Signed
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Back in October 2015, the New York Times ran a three-part series regarding the rise of private arbitration clauses in commercial contracts. The series discussed the rise of binding arbitration clauses in consumer contracts. Most of the time when we click the “I Agree” box on some check out form, we’re agreeing to a contract saying that any disputes will be sent to private arbitration firms and that you are waiving your right to bring a claim in court.
If you’re most people, you probably never read the dozens of contracts you checkbox your agreement to every week. I’ll admit that I’ve probably read in full about 1% of the agreements I’ve signed my name to – big-ticket things like leases, car sales, etc. But what about everything else? So I thought it would be interesting to go back and pull out the dispute resolution terms of agreements I’ve signed in the last month or so (to the extent that I can remember them), and see what shape the arbitration clauses were in.
But first, a couple comments on the issue raised in the Times.
AT&T v. Concepcion and Class Action Waivers
The first part of the Times's series discusses companies’ reliance on class action waivers in arbitration clauses to effectively make it impossible to organize class actions. It is definitely worth a read.
We’ve all heard of class actions – a couple “named plaintiffs” bring an action on behalf of a “class” made of all the people who suffered the same injury from the same defendant. Among the many benefits of a class action, the biggest is that it lets people aggregate a pile of small claims that aren’t worth fighting about into one big claim that’s definitely worth fighting about. If a company costs me $30, it might be worth sending a couple letters but I’m not going to spend hundreds or thousands of dollars bringing a lawsuit. So the company has no incentive not to keep dicking people out of the $30. But if I can bring a class action on behalf of 50,000 people who lost the same amount, I suddenly now have a $1.5 million claim that an attorney might take on contingency.
Of course companies hated class actions, because (1) who likes to have to pay for bad shit you’ve done, and (2) the presence of class actions as a remedy brings “entrepreneurial” class action lawyers who dream up potential claims and then go searching for token victims – and if you’re facing a potential eight-figure judgment it doesn’t matter how bullshit the claim is, it creates pressure to give in to a settlement demand.
So business folks lobbied and legally schemed, and managed to get a Supreme Court decision upholding terms in binding arbitration clauses in which the consumer agrees not to bring any type of class action. As a result, for the moment, companies that employ class-action waivers have a huge shield against being held accountable for misbehavior that hurts a lot of people a small amount. These waivers can be simple, like this language from my contract with Hotels.com: “Any and all proceedings to resolve Claims will be conducted only on an individual basis and not in a class, consolidated or representative action.” Or they might be complicated, like this excerpt from an agreement with HRBlock: “You and the H&R Block Parties also agree that each may bring claims against the other in arbitration only in your or their respective individual capacities and in so doing you and the H&R Block Parties hereby waive the right to a trial by jury, to assert or participate in a class action lawsuit or class action arbitration, to assert or participate in a private attorney general lawsuit or private attorney general arbitration, and to assert or participate in any joint or consolidated lawsuit or joint or consolidated arbitration of any kind.” Emphasis theirs. Functionally, the biggest difference between these clauses is how they reflect the size of the stick shoved up in-house counsel’s rear end when drafting contracts.
Anyway, these clauses are terrible and it’s terrible the Supreme Court allows them. I’m betting consumer advocates take another run at this in the post-Scalia era and I hope they’re successful. But, all else being equal, realistically most of us will not be much impacted by these clauses. Only a handful of us will ever be named plaintiffs in a class action, and only occasionally will we be members of a class. Bringing a class action is a BIG DEAL, and it will drag on for years. As for being a class member – in my 32 years I’ve probably received notice of being in three or four successful classes, earning me maybe a couple hundred dollars total. Is there a society-wide effect on customer service and quality when this method of accountability is missing? Probably. Class action waivers are terrible and people should continue to fight to end them, but in terms of the day-to-day life of 99% of people, it really won’t affect you.
The Privatization of Justice
The second part of the Times's series argues that privatizing the arbitration process allows for bias towards the large repeat-players and provides inferior justice.
I was less on board with this part, because I think they lean a little too far towards the scaremongering. As the article points out, there is the risk of bias where a company is a repeat player at arbitration – arbitrators make their money by being selected to judge cases, and if the repeat players continually veto you because they believe you’re too harsh, you might feel pressured to lean in their direction. But at the same time, in my experience this is less of a concern with the major players in arbitration, AAA and JAMS – it’s more of a concern where a contract mandates a smaller arbitration firm that significantly depends on the big player for business, or if the contract gives one party the right to select the arbitrator (something I’ve seen in commercial contracts between sophisticated companies).
Some of the other language in the story was, frankly, over the top. “Little is known about arbitration because the proceedings are confidential . . . . The secretive nature of the process makes it difficult to ascertain how fairly the proceedings are conducted.” I mean, that’s crazy. The JAMS and AAA rules are online – and they’re a lot easier to understand than any state’s Code of Civil Procedure – and most every commercial attorney will have arbitration experience, it’s not some mystery. And while the Times decries that “proceedings can devolve into legal free-for-alls” – we sometimes to called it "cowboy law" – that’s not necessarily to the detriment of the plaintiff, who will either be a layperson with a small claim or perhaps represented by a smaller firm that might enjoy the opportunity to play a little loose – the proceduralism of a court can give a tactical advantage to the larger party with more resources that can "paper over" the smaller litigant and drown them in evidentiary and procedural motions. The fact, for instance, that the normal rules of evidence don’t apply is great for plaintiffs, because when you hold the burden of proof it’s a godsend to be able to use hearsay, documents that aren’t properly authenticated, etc. to prove your case.
And as for the fact that these folks aren’t judges – well, trust me there’s a lot of state judges at the trial court level that make terrible decisions, usually because they’re so overworked they can only devote a small amount of time to each motion or hearing they see that day. Arbitrators are paid hourly, so they’re not going to over-stuff their docket; they just need to fill up their hours. The Times article relies on stories of litigants with good cases not succeeding at arbitration – though good according to them, as there’s no way to know whether they got screwed or just had bad claims. Well, a lot of people with good claims leave courtrooms unsatisfied too, as do an even greater number who think they had good claims.
Granted, bias is an issue, but so long as the standard AAA or JAMS rules are followed, the consumer does get a veto over arbitrator selection. In both cases, the service sends a list of 5, 10 or 15 names (usually for our purposes five with JAMS and ten with AAA), with each side being able to strike arbitrators. With some research, you can make reasonably intelligent guesses as to who might be sympathetic to the corporate side – the consumer is looking for plaintiffs attorneys (good) or attorneys who’ve represented companies in the industry (bad). You’re relying on the honor system for the other side to disclose any actual bias, but that’s true of court as well.
All in all, I don’t think the privatization of the tribunal is necessarily bad for the consumer – you get a faster process; you get looser, easier to follow rules; and you can bring in more evidence than you could in a court. What’s important is that you aren’t signing a contract that shuttles you into a niche arbitration firm that’s buddy-buddy with the company, and that the company isn’t putting in any extra contractual terms that give them leverage over the selection of the arbitrator.
The Actual Contracts
With all this being said, I was curious what I would find once I dove into the actual contracts. While I probably missed plenty of agreements I’d entered into or acted under and just forgot about, I managed to find 26 contracts that I’d recently agreed to or used in the last month. (SquareSpace, Vanguard, Hotels.com, HRBlock, iTunes, Chase Sapphire, Ticketmaster, PG&E, Kayak.com, Alamo, Hertz, Mint.com, Netflix, Gmail, Credit Karma, PayPal, Lyft, Comcast, Eat24, Twitter, OpenTable, Amazon.com, UPS, AAA, BofA, and United.) Of these 26 agreements, 17 had arbitration clauses. (Note that, generally, the contracts that did not have an arbitration clause had a “forum selection clause” saying that any court case must be brought in a particular location, which can itself be onerous if upheld – no arbitration clauses had such a requirement. It can be tough to enforce those provisions, though.)
Here’s a typical clause, from the agreement I signed with Hotels.com:
Any and all Claims will be resolved by binding arbitration, rather than in court, except you may assert Claims on an individual basis in small claims court if they qualify.
. . .
Arbitrations will be conducted by the American Arbitration Association (AAA) under its rules, including the AAA Consumer Rules. . . . Payment of all filing, administration and arbitrator fees will be governed by the AAA's rules, except as provided in this section. If your total Claims seek less than $10,000, we will reimburse you for filing fees you pay to the AAA and will pay arbitrator’s fees, unless the arbitrator determines your Claims are frivolous. You may choose to have an arbitration conducted by telephone, based on written submissions, or in person in the state where you live or at another mutually agreed location.
To begin an arbitration proceeding, you must send a letter requesting arbitration and describing your Claims to “Expedia Legal: Arbitration Claim Manager,” at Expedia, Inc., 333 108th Ave N.E. Bellevue, WA 98004. If we request arbitration against you, we will give you notice at the email address or street address you have provided. A party requesting arbitration must also provide a copy of the request to the AAA, at Case Filing Services, 1101 Laurel Oak Road, Suite 100, Voorhees, NJ 08043 or online at www.adr.org or at any AAA office.
Any and all proceedings to resolve Claims will be conducted only on an individual basis and not in a class, consolidated or representative action. If for any reason a Claim proceeds in court rather than in arbitration we each waive any right to a jury trial. The Federal Arbitration Act and federal arbitration law apply to this agreement. An arbitration decision may be confirmed by any court with competent jurisdiction.
In the final paragraph, you see the class action waiver. Of the 17 arbitration clauses, 16 included a class action wavier, showing how much the practice has spread. (There was even one contract that did not have an arbitration clause, Credit Karma, that also included a class action waiver. This is a dubious attempt – AT&T v. Concepcion upheld the waivers on the grounds that the Federal Arbitration Act governed arbitrations and superseded state laws prohibiting the waivers, which doesn’t apply if there’s no arbitration clause.)
Beyond the class action waivers, however, I found no real nasty provisions in the contracts I’d agreed to. With one exception, the contract set the arbitration in AAA or JAMS, the big players that are less likely to have a cushy relationship with any given company. The only exception was Vanguard which required an arbitration before FINRA, a private regulator of broker-dealers that provides arbitration services. FINRA has taken a lot of heat for pro-corporate bias. In part because of these complaints, FINRA recently clarified their rules to prohibit class action waivers, which is why Vanguard was also the only company not to include a waiver.
None of the contracts contained provisions that provided the company with any greater right to pick arbitrators.
Another thing I found, as shown in the second paragraph, is that most contracts’ arbitration clauses provided a form of fee shifting for small claims, either agreeing to pay all filing and arbitrator fees for cases under $10,000, or agreeing to cover any costs over and above what the case would have cost to file in court. (As is the standard “American tradition” in court, each party generally carries its own attorneys’ fees.) This is a sop to reasonableness, to better help the companies claim that the class action waivers don’t deter consumers from vindicating their small claims – as long as your claim isn’t frivolous, you can go into arbitration unrepresented and have the company bear the cost. Given the loose nature of arbitration proceedings this actually makes it somewhat feasible for a layperson to bring a claim for a small amount if they’re willing to put in the time – in most cases, they’ll be able to hold all proceedings on the phone and the arbitrator will decided the case on the papers, though obviously that’s a more attractive proposition to a lawyer like me who’s comfortable handling something like this on their own.
All in all, I was surprised to find that the contracts I read did not include any extremely troubling provisions. Aside from the class action waiver, nearly every contract committed disputes to the big players, not a niche shop. They also all left the default arbitrator selection process in the AAA and JAMS rules, which is even between the parties. Most of them covered fees for small claims. If I had a small, typical consumer complaint, I would be fine going into this situation rather than into court.