Fact-checking American Express claims about forced arbitration

March 31, 2015

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A recent article by Orange County Register Watchdog Columnist Teri Sforza explains some of the harm done to consumers and employees from forced arbitration, drawing in part on AFJ’s short documentary Lost in the Fine Print. The film details the story of Alan Carlson, the owner of Italian Colors restaurant in Oakland, California, who tried to challenge American Express’s high “swipe fees” in court. A forced arbitration clause buried in the fine print of American Express’s terms of service kept Alan from being able to vindicate his rights.

Alan Carlson

Marina Hoffmann Norville, a vice president at American Express, told the paper her company recently made changes to its forced arbitration policy to keep customers satisfied.

But how significant are the changes for consumers?

For the past decade, companies have been free to make claims about their arbitration policies with little factual support or scrutiny. There was no way to know what the typical arbitration process looked like, if customers were able to take advantage of seemingly consumer-friendly clauses, and whether consumers were actually winning cases in arbitration. But all that changed earlier this month, when the Consumer Financial Protection Bureau released its comprehensive, in-depth study of forced arbitration. Now, consumers are able to fact-check company claims.

So we decided to fact-check American Express. Is its arbitration clause as consumer-friendly as the company implies?

The answer is a resounding no.

American Express touts its new opt-out policy, which gives customers 45 days from when they first use a new card to opt out of the agreement’s arbitration provision. While “agreeing” to forced arbitration is as easy as swiping your Amex card, opting out is a bit more onerous. To even find the provision, customers have to get to one of the last pages of the cardmember agreement—just past the “governing law” and “assigning the agreement” sections. Customers then have to print, sign, and snail mail a rejection notice to a P.O. box in El Paso.

It’s unsurprising that consumers rarely take advantage of these opt-out provisions. According to the CFPB’s study, though over a quarter of credit card contracts include a similar provision, not a single consumer of the 570 interviewed had opted out. Only three consumers reported being given an opportunity to do so—but those three were mistaken. None of them actually had a contract which would have allowed them to opt out.

We did find one place where American Express is an industry leader: conducting forced arbitration in secret.

 Only two credit card issuers of the 66 examined by the CFPB expressly includes a confidentiality or non-disclosure clause in its forced arbitration provision. American Express, which mandates that “[t]he arbitration will be confidential,” is presumably one of them. These clauses prevent wrongdoing from being exposed and remedied on a large scale. Consumer laws, which protect us all from fraud and discrimination, vindicate critically important societal goals. They should be enforced in the full sunlight of the courtroom—not in a private tribunal that American Express closes off to the public.

The rest of Amex’s arbitration clause is similarly unfriendly to consumers. The company provides a carve-out from forced arbitration for small claims court, as do 99 percent of credit card contracts. But like the opt-out clauses, these provisions rarely help consumers; they are more likely to be used by companies trying to collect debt. In 2012, looking at selected states and large cities, the CFPB was only able to identify—at most—39 small claims cases brought against American Express by a consumer.

Like 40.9 percent of credit card forced arbitration clauses, American Express’s includes a right to appeal an arbitrator’s decision—but only to three more arbitrators. The company is also unusual in that it “will consider in good faith making a temporary advance of your share of any arbitration fees.” Over 40 percent of credit card contracts require the issuer to do so.

If American Express truly wants a consumer-friendly arbitration policy, it should give its customers the right to choose whether or not they arbitrate—not in the form of an arcane opt-out policy, but after a dispute arises. If arbitration is as fair, quick, and affordable as proponents claim, it’s hard to imagine why customers would turn it down.

• Tell the CFPB to prohibit forced arbitration in consumer financial products
• Tell the music streaming service Spotify to stop using forced arbitration

Arbitration Fairness Act would reopen courthouse doors for millions of Americans

AFJ released this statement today on the reintroduction of the Arbitration Fairness Act:

Coast Guard delivers supplies to the
"cruise from hell"

Federal legislation introduced on May 7 to ban the increasingly common practice of forced arbitration “is urgently needed to reopen the courthouse doors to millions of Americans,” according to Alliance for Justice President Nan Aron.

Aron commended Sen. Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.) for reintroducing the Arbitration Fairness Act, which restores Americans’ rights to have their day in court. Those rights have been undermined by the increasing use of forced arbitration and a series of recent Supreme Court decisions, most notably AT&T Mobility v. Concepcion.

“From cell phone purchases to nursing home agreements, to gaining employment, consumers and employees are being forced to accept arbitration clauses – and to potentially cede their civil and labor rights – in every aspect of their lives.

Sen. Al Franken

Rep. Hank Johnson

“For example, anyone who saw the pictures of conditions aboard the Carnival Cruise ship Triumph after it was disabled by a fire knows why it was dubbed ‘the cruise from hell,’” Aron said.  “But those passengers may have a hard time suing.  When they bought their tickets, there was a forced arbitration clause in the fine print.”

Under forced arbitration, consumers who buy defective products or are overcharged for a service are barred from taking their cases to court.  Instead, they must use a private arbitration firm chosen and paid for by the business itself.  Forced arbitration clauses also often ban class-action suits, which allow individuals to band together to bring their common claims.

In addition to Carnival, the photo sharing service Instagram uses forced arbitration – and some fear Instagram’s parent company, Facebook, may be next.  The practice is also spreading to employment contracts, threatening to make it nearly impossible for workers to sue over race, sex or age discrimination.

“Having a dispute settled by arbitration is like playing a baseball game in which the other team hires, fires – and pays – the umpires,” Aron said.  She noted that a study of top arbitrators for one major arbitration firm found that they rule for the corporations that hire them 93.8 percent of the time.

“The forced arbitration system gives corporations a free pass to break the law,” Aron said.  “The Arbitration Fairness Act would revoke that free pass.”

Read more about forced arbitration

● An overview of forced arbitration 
● AFJ’s report Arbitration Activism
● AFJ reports on AT&T Mobility v. Concepcion
● Press release from Rep. Johnson
● Press release from Sen. Franken
● Letter of support from AFJ and more than 40 other organizations

Corporate Court Favors Forced Arbitration. Again.

Yesterday, the Supreme Court handed down its decision (.pdf download) in Marmet Health Care Center v. Brown and a consolidated case, ruling once again that everyday Americans may be barred from court and forced into arbitration by the corporations that have caused their injuries.

In these consolidated cases, three patients died allegedly due to the negligence of their West Virginia nursing homes. Surviving family members patients attempted to bring suit in state court, although the patients had signed contracts with the nursing homes that included forced arbitration provisions. The plaintiffs successfully made the case before the West Virginia Supreme Court that the forced arbitration clauses were both unconscionable under state law and against the public policy of West Virginia.

The U.S. Supreme Court has now stepped in and vacated that decision. The Court, in an unsigned opinion, reiterated its holding from last term’s AT&T Mobility v. Concepcion that “when state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the [Federal Arbitration Act].”

This case serves as yet another example of the Supreme Court’s consistent interpretation of the Federal Arbitration Act (“FAA”) in a manner that favors big business and hurts everyday Americans. As Alliance for Justice has detailed in our report, Arbitration Activism: How the Corporate Court Helps Business Evade Our Civil Justice System, the FAA was meant to place arbitration agreements “on the same footing” as any other contract, and was intended to apply primarily to business contracts between parties of roughly equal bargaining power.

The Supreme Court, however, has applied the FAA to all sorts of employment and consumer contracts, including “adhesion contracts” in which the employee or consumer has no real ability to bargain with the corporate party. By upholding forced arbitration in this context, the Corporate Court is actively erecting barriers to justice for the 99% in order to protect the 1%.

Some in Congress, however, are attempting to tear down some of these barriers. The prevalence of forced arbitration in the nursing home business led a bipartisan group of senators, including Sens. Herb Kohl (D-WI) and Mel Martinez (R-FL) to introduce the Fairness in Nursing Home Arbitration Act in 2009. This bill would eliminate forced predispute arbitration in nursing home contracts, ensuring Americans like the plaintiffs in Marmet get their day in court.

Alliance for Justice supports the Arbitration Fairness Act as introduced by Sen. Al Franken (D-MN), which would ban predispute, forced arbitration in cases involving civil rights, consumer contracts, or employment contracts. AFJ will continue to fight to make sure that arbitration remains a valuable way for parties to settle their disputes in a fair an expeditious fashion, but not as a way for powerful corporations to force consumers and employees from enjoying their ability to enforce their rights in court.

Click here to read more about AFJ’s work on arbitration fairness.

Don't let Microsoft clip our rights

 The computer giant is trying to force us into forced arbitration

Microsoft, the company that gave us Vista, Ctrl-Alt-Delete and Clippy, has something in store for us that’s even worse.  The company has been phasing in forced arbitration clauses in its “services agreement.”

That means if you are harmed by a Microsoft product or service, you can’t stand up for your rights in court.  Instead, you have to take your case to an arbitrator hired by Microsoft.  Arbitrators do not need to be lawyers or follow precedent, yet their word is nearly always final and unappealable.  One study found that such arbitrators rule for the businesses that hire them 94 percent of the time.

Microsoft also won’t let you band together with others the company has wronged and bring a class-action suit – often the only way to stop a corporation from cheating millions of consumers.  The latest version of the services agreement makes this ban even more strict.

One can see why Microsoft might be fond of forced arbitration.  In a 2003 e-mail, company founder Bill Gates used the following terms to describe what it was like to use one of his own products:

 disappointed, backwards, unusable, totally confusing, strange, pathetic, completely odd, weird, scary, crazy, slow, garbage, not usable, crapped up, crap, absolute mess, craziness, terrible.

Microsoft joins a lengthening list of big businesses that are taking away our rights when we’re harmed by their products and services.  Public outrage forced General Mills to back down.  But odds are you’ve clicked through at least one contract with a forced arbitration clause in the fine print. They are showing up everywhere, from credit card contracts to the Instagram terms of use.  And in the case of Microsoft, using one of the affected products means you’ve consented to surrendering your rights.

Perhaps the best indicator of just how bad a deal forced arbitration is for consumers is the sneaky way big businesses force it on us.

Take Microsoft’s latest email announcing the changes.  “Our users' needs are at the center of everything we do,” says the happy little email. “That's why we are updating the Microsoft Services Agreement.”  But there’s no mention of forced arbitration in the email itself.  And there’s no mention of it in the FAQ that supposedly offers the “highlights.”

No, you have to click on the link to the fine print and scroll down to Section 10 before you find out what Microsoft is taking away.  If forced arbitration is so great, why does it have to be forced?  Why not offer it on a voluntary basis?  And why aren’t companies bragging about it instead of tucking it away in those long, long “agreements” that few of us have the time to read?

There is a solution.  The Arbitration Fairness Act would put an end to these outrages.  If you don’t want your rights “clipped” by the company that gave us Clippy – or by all the other corporations on the forced arbitration bandwagon – tell your Members of Congress to pass the Arbitration Fairness Act.

 Read more about forced arbitration

Arbitration: Is It Fair When Forced?

“Arbitration: Is It Fair When Forced?” was the subject of a Senate Judiciary Committee hearing held on Thursday, Oct. 13.

Sen. Al Franken (D-MN), sponsor of the Arbitration Fairness Act (S. 987) focused his questions and comments on the ways in which mandatory arbitration clauses put everyday Americans at a disadvantage in seeking justice against large corporations. Mandatory arbitration clauses, often embedded deep in the fine print of a contract, compel parties to give up their right to sue in court when they have a dispute. Instead of going before a judge and a jury, people who sign those contracts -- such as cell phone or employment contracts -- to appear before privately hired arbitrators... who are often hired by the corporation.

Among witnesses testifying was Dr. Deborah Pierce, a physician specializing in emergency medicine. Dr. Pierce described the forced arbitration process she underwent when she brought a claim against her employer for gender-based employment discrimination. Because an arbitration clause was a mandatory part of her employment contract, Dr. Pierce was barred from bringing her complaint in a court of law; instead, she was forced to take part in an arbitration process that was skewed in favor of her employer, who had a prior relationship with the organization appointing the arbitrator. Dr. Pierce was required to pay over $200,000 in arbitration costs, including half of the $450/hour fee charged by the arbitrator. People of lesser means simply would not have been able to afford to arbitrate their claims at all. When Dr. Pierce lost her case and argued that the arbitrator did not correctly apply the law to her case, the organization supplying the arbitrator responded that it “does not certify or attest to the abilities, competence, or performance of its arbitrators, and that it does not make any ‘warranties about the ability of the arbitrator to weigh facts and law.’”

Witnesses opposing the Arbitration Fairness Act attempted to argue that forced arbitration was beneficial to ordinary people, claiming that without it companies might not be willing to offer services like credit cards at all.

Questioning Victor Schwartz, a lawyer representing the U.S. Chamber of Commerce, Sen. Franken asked whether he thought it was fair to have people sign contracts with hidden mandatory arbitration clauses.  The Chamber lawyer simply replied “fairness is in the eyes of the beholder,” and other witnesses argued that people wishing to avoid mandatory arbitration could simply avoid opening bank accounts, buying mobile phones, or engaging in any activity that involves signing contracts. Under further questioning by Sen. Franken and Sen. Richard Blumenthal (D-CT), they were forced to concede that it was nearly impossible, in the 21st century to avoid the clauses which appear in the vast majority of credit card contracts, car financing arrangements, cell phone contracts, nursing home residency agreements, and in almost every agreement to purchase a good or service online.

Sen. Sheldon Whitehouse (D-RI), pointed out that the right to a court trial was a right held to be essential to the working of our American democracy by the Founders—so much so that a system to provide for courts of law and the right to a trial by jury in certain situations are written into the Constitution.  He described the situation posed by mandatory arbitration clauses as one in which citizens are unknowingly forced to sign away their rights to a fundamental freedom guaranteed in the Constitution, and wondered if the opinions of some of his colleagues about such clauses might be different if, within the fine print of a contract, people were forced to agree to give up their 2nd Amendment right to bear arms.

The Arbitration Fairness Act, introduced by Senator Franken and co-sponsored by Senators Blumenthal, Whitehouse, and others, would amend the Federal Arbitration Act to state that “no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment dispute, consumer dispute, or civil rights dispute.” This act would return arbitration to its original intent under the law—as a process into which parties of equal power and standing could voluntarily choose to enter when a dispute arose and they both wanted to seek an alternative to litigation. Alliance for Justice is one of many organizations that signed a letter to the Senate Judiciary Committee supporting the Arbitration Fairness Act.

To learn more about the dangers of mandatory arbitration and the ways in which recent decisions by the Supreme Court to uphold forced arbitration clauses are benefiting corporations in evading justice when they violate the rights of ordinary people, download Alliance for Justice’s new report, Arbitration Activism: How the Corporate Court Helps Business Evade Our Civil Justice System.

Retailer tries to hold customer’s money hostage to forced arbitration

By Trevor Boeckmann
AFJ Dorot Fellow
As we detail in our short documentary Lost in the Fine Print, forced arbitration clauses have become omnipresent in American society.  They’re used by companies to prevent consumers from having the chance to stand up for their rights in court when they’re harmed.  Yet most of these clauses are buried deep in the fine print of contracts and terms of service.

Now Walmart, already a corporate bad actor in so many ways, has taken this strategy to a whole new level.  They found a way to hold a customer’s money hostage until she agreed to forced arbitration.

KTRK-TV in Houston reports that on Black Friday, local shopper Maria Selva tried to buy a new TV at the big-box retailer. Walmart had sold out of the TV by the time Selva came to purchase it, but employees gave her a coupon, and had her pay in full.

She thought she could just pick up the TV at a later date.  But after she’d already paid, she was given a notice telling her she had to register online.  When she went online, she found that registering the coupon meant agreeing to forced arbitration.  She refused to accept the terms, and contacted Walmart to ask for a refund.

Walmart said no.

Instead, the company told her she would have to agree to forced arbitration, receive the TV, and return the TV.  Only then could she receive a refund.

It wasn’t until KTRK contacted the company that Walmart finally relented and issued a refund.

The consequences of forced arbitration can be great.  In Lost in the Fine Print we document the stories of Nicole Mitchell and Debbie Brenner, victims of discrimination and fraud who were never allowed to defend their rights in court.

Walmart isn’t the only company that has tried to find creative ways to impose forced arbitration.

Take General Mills, for example.  Last spring, we told you about their new arbitration policy, which purported to force consumers into arbitration if they entered a company contest, printed a General Mills coupon, or even “liked” Cheerios on Facebook.

But public pressure forced General Mills to back down.  Now we’re putting the pressure on other companies.  Join our campaign to end forced arbitration and protect everyday Americans.

Watch one consumer’s battle against Walmart and forced arbitration

Consumer Financial Protection Bureau strikes blow against forced arbitration

For many of us it may be the most important contract we ever sign.  It’s the contract that sets the terms for what often is our single largest investment – our home.

Richard Cordray

But what happens if the bank that holds our mortgage tries to cheat?  What if they improperly hide fees, or raise rates or even try to foreclose on the property illegally?  Banks have sought to protect themselves by inserting “forced arbitration” clauses into mortgages and home equity loans.

As we’ve noted previously on this Blog, under forced arbitration, consumers who buy defective products or are overcharged for services are barred from taking their cases to court.  Instead, they must use a private arbitration firm chosen and paid for by the business itself.  These clauses also often ban class actions, which allow individuals to band together to bring their common claims.

Having a dispute settled by arbitration is like playing a baseball game in which the other team hires, fires – and pays – the umpires.  One study of top arbitrators for one major arbitration firm found that they rule for the corporations that hire them 93.8 percent of the time.

One of the reasons we refer to the current Supreme Court majority as “The 1% Court” is its enthusiasm for inflicting forced arbitration on consumers.

But Congress drew the line at home mortgages.  Section 1414 of the Dodd-Frank Wall Street Reform and Consumer Protection Act bans forced arbitration in mortgage disputes.  Regulations implementing the law had to be issued by an agency created by that law – the Consumer Financial Protection Bureau.  Those regulations took effect June 1. Section 1028 of the Act also mandates that the CFPB study and report to Congress on “the use of agreements providing for arbitration . . . in connection with the offering or providing of consumer products or financial services.”

You remember the CFPB.  That’s the agency Republicans hate so much that they’ve vowed to filibuster anyone President Obama nominates to run it unless the President agrees to eviscerate Wall Street reform.  That includes the current agency director, Richard Cordray, named to the position through a recess appointment that was called into question by a ruling of the D.C. Circuit Court of Appeals.

The new forced arbitration regulation makes clear what this fight and the other fights over President Obama’s nominees really are all about.  They're about Republicans who can’t stand Wall Street reform or consumer protection or anything that gives everyday Americans a fighting chance against corporate special interests.

That’s why the fights ahead over Cordray, and President Obama’s nominees to the D.C. Circuit and his  nominees for posts like Secretary of Labor, Environmental Protection Agency Administrator and the National Labor Relations Board, are so important.  That’s why, if Senate Republicans refuse to allow yes-or-no votes on these nominees, the Senate majority needs to revisit reforming Senate rules.

Supreme Court Decision is Further Evidence of a Radical Pro-Corporate Agenda

In one of the most sweeping victories for corporate interests yet handed down by the Corporate Court under Chief Justice John Roberts, the Supreme Court held yesterday in AT&T Mobility v. Concepcion that the Federal Arbitration Act (FAA) preempts states from protecting consumers and employees from unconscionable corporate contract provisions that require them to waive their rights to class-action arbitration or litigation when the corporation engages in widespread wrongdoing. The Court has essentially given companies a “license to steal” from consumers, and a “license to discriminate” against employees, by preventing states from voiding contractual waivers that prevent consumers or employees from banding together to fight wrongdoing in court.

This case arose after AT&T defrauded thousands of customers who signed a two year service contract for “free” phones by charging them as much as $30 in sales tax on the phones. When the Concepcions filed a class action lawsuit to recover on behalf of themselves and all other customers who had been similarly cheated, AT&T claimed that the Concepcions’ only recourse was to pursue individual arbitration because their service agreement contained a mandatory arbitration agreement and a class action waiver clause. In drafting its take-it-or-leave-it service contract, AT&T knew that very few consumers would file arbitration claims to recoup $30 – indeed, between 2003 and 2007, only 180 of its 90 million customers had filed arbitration claims. AT&T also knew that if it could force consumers into case-by-case arbitration, it could reap millions from its “free” phone deal.

The Ninth Circuit struck down this scheme as unconscionable under a rule announced by the California Supreme Court in Discover Bank v. Superior Court:

“[W]hen the [class action] waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then . . . the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ Under these circumstances, such waivers are unconscionable under California law and should not be enforced.”

California’s rule recognized that only class action arbitration and class action lawsuits make the pursuit of small claims worthwhile for claimants and attorneys. Amazingly, the ultra-conservative block on the U.S. Supreme Court struck down this consumer protection rule, thereby reinstating AT&T’s unconscionable contract. This will force the Concepcions and all other consumers to pursue claims individually in arbitration to recoup the wrongfully charged fees. The Court’s decision to overturn the rule demonstrates the degree to which federalism and states’ rights take a back seat when corporate interests are at stake.

Justice Scalia based the Court’s decision on a convoluted reading of Section 2 of the FAA, which states that a contract with an arbitration clause “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Although the California rule applied equally to class action arbitration or litigation waivers, the Court held that it disfavored arbitration agreements, because by disallowing class-action waivers in those agreements, it would force companies into class-wide arbitration where they had committed widespread wrongdoing. Because class-wide arbitration is worse for companies than class-wide litigation, the Court reasoned, the California rule would make it less likely for companies to include forced-arbitration provisions in contracts, which would in turn violate the FAA’s policy against disfavoring arbitration.

The dissenting opinion, authored by Justice Breyer, responded that the FAA only seeks to place contractual arbitration provisions on equal footing with all other contract provisions: “California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the State does not adopt a special rule that disfavors arbitration.” Justice Breyer noted that California applied “the same legal principles to address the unconscionability of class arbitration waivers as it does to address the unconscionability of any other contractual provision.” By treating class action arbitration provisions the same as class action litigation provisions, California did nothing that would justify federal preemption by the FAA. The dissent added that the majority could find no support for its decision in Supreme Court precedent.

AT&T v. Concepcion is a landmark decision because many aspects of Americans’ everyday lives are controlled by contracts that individuals must sign to receive a job, a product, or a service. Employment terms, health care coverage, car loans, insurance plans, credit cards terms, cell phone agreements, and hundreds of other things are governed by contracts, most of which have forced arbitration provisions that require individuals to submit any claims for corporate wrongdoing to an arbitrator selected by the company. These mandatory arbitration clauses often go further and require consumers and employees to agree to bring any claim on an individual basis and give up the right to form a class when the company’s wrongdoing has affected thousands of people. After AT&T, these clauses are likely to appear as a matter of course.

The Supreme Court’s ruling in this case ensures that companies can eliminate the possibility of being sued in a class action lawsuit. Now companies will be able to defraud their customers or mistreat their employees, knowing that they could never be held fully accountable because at most a small subset of injured parties would ever seek to arbitrate their grievances.

To provide a telling example, consider the case of Wal-Mart, which has been sued for widespread discrimination against more than a million of its female employees. If Wal-Mart inserted in all of its employment contracts a mandatory arbitration clause with a class-action waiver, no matter how many women it cheated of pay and promotion opportunities, it could never be held accountable by those employees banding together as a class. As soon as the women employees would have filed a class action, Wal-Mart could have forced employees out of court and into case-by-case arbitration, knowing that only a tiny handful of the women it discriminated against would ever file individual arbitration claims.

This decision should not be allowed to stand. Senators Al Franken (D-MN) and Richard Blumenthal (D-CT), and Representative Hank Johnson (D-GA) intend to introduce the Arbitration Fairness Act next week to undo the Court’s mangled reading of the FAA.

For more information on the case, click here for AFJ’s special report.

Disappearing Cases

Guest post by Paul Bland

This probably won’t shock you: five members of the U.S. Supreme Court really like mandatory arbitration.

Over the last few decades, the most important cases pertaining to arbitration heard by the Court have been decided 5-4 — with the dissenting four dissenting strongly.

“Mandatory arbitration” sounds complex, but it’s straightforward enough: instead of taking a company that has harmed you to court (filing a lawsuit), you are required to pursue your grievance in arbitration.

Straightforward, yes. Harmless, not in the least. Arbitrations take place in front of an arbitrator, not a judge and jury. Arbitration clauses require people to act individually, and prevent them from joining together in a class action.  They are often costly. They happen behind closed doors. And, historically, they favor business interests over individuals.

That is, if they ever get far enough along to be resolved. Many just disappear.

Let me explain.

The REAL danger in Instagram's new Terms of Use: forced arbitration

Perhaps you’ve read about the controversy over new “Terms of Use” from the photo-sharing service Instagram, which now is owned by Facebook.  Under the terms, if you use Instagram it is free to sell your photos, your likeness and pretty much anything else it knows about you to advertisers – without any further consent on your part, and without compensating you.  And if, by some chance, you’re under 18, Instagram assumes that when you click “accept,” at least one parent has read over the terms and agreed to them on your behalf.

The ensuing furor prompted Instagram to issue a statement saying, in effect, well, yes, that’s what we said, but it’s not what we meant. The company then withdrew that particular language.

But, as a Reuters story points out, that’s not even the scariest part of the new Terms of Use.

This is:

EXCEPT IF YOU OPT-OUT AND EXCEPT FOR CERTAIN TYPES OF DISPUTES DESCRIBED IN THE ARBITRATION SECTION BELOW, YOU AGREE THAT DISPUTES BETWEEN YOU AND INSTAGRAM WILL BE RESOLVED BY BINDING, INDIVIDUAL ARBITRATION AND YOU WAIVE YOUR RIGHT TO PARTICIPATE IN A CLASS ACTION LAWSUIT OR CLASS-WIDE ARBITRATION. [Caps and boldface in original].

Once the new terms take effect, existing users will have only 30 days to opt out.  New users will have only 30 days after they join. And if you want to opt out, you’ll have to have to do it by snail mail.  The only other choice: Cancel your Instagram account.  But, according to lawyers who are suing Instagram, if you do that, you lose all rights to photos you've already uploaded.

“A FREE PASS TO BREAK THE LAW”

If these terms take effect as planned on Jan. 16, Instagram will be the latest in a long line of companies to block your fundamental right to justice by forcing you into a system where the deck is stacked against you at every turn.  And if Instagram can get away with it now, will Instagram’s parent company, Facebook, try it next?

As we said in our 2011 report, Arbitration Activism, the arbitration system gives corporations “a free pass to break the law.”  In keeping with its never-ending deference to corporate special interests, the right-wing majority on the U.S. Supreme Court effectively rewrote federal law, issuing decision after decision helping big business make the most of that free pass.

For starters, facing off against a corporation in arbitration is like playing a baseball game in which the other team hires, fires – and pays – the umpires.  So it’s no wonder a study of top arbitrators for one major arbitration firm found that they rule for big business 93.8 percent of the time.  In addition:

● Filing fees often are higher in arbitration; that can discourage individuals from suing, particularly over relatively small dollar amounts.

● Rules of discovery are fashioned by the arbitration firms and, yes, by the big businesses that hire them.

● It’s almost impossible to appeal.

● Proceedings are secret; they don’t even have to produce a transcript.  As we note in Arbitration Activism “corporations can prevent negative publicity, keep their wrongdoing secret, and avoid emboldening other customers and workers from bringing legal action.”

● Perhaps most serious, arbitration clauses, like the one from Instagram, prohibit class-action suits - like the one that's just been filed against Instagram over the new Terms of Use.  When millions of people are cheated out of relatively small amounts per person, each can’t go through a cumbersome arbitration process to get her or his money back.  The only hope for justice – and the only real deterrent to fraud – is a class-action.  But the Supreme Court has upheld the prerogative of big business to deny consumers that right.

And it’s not just consumer issues.  Arbitration, and with it the ban on class-actions, is spreading to employment contracts, threatening to make it nearly impossible for workers to sue over race, sex or age discrimination.

CONGRESS CAN FIX THIS

The Arbitration Fairness Act of 2011 would bar forced arbitration in most civil rights, consumer, and employment discrimination cases.  The bill never got out of committee.  We hope members of the new Congress will try again.

In the meantime, if you use Instagram, be sure to write out that opt-out letter and mail it to Instagram, LLC ATTN: Arbitration Opt-out 1601 Willow Rd. Menlo Park, CA 94025.

CompuCredit v. Greenwood: Does a “Right to Sue” Really Mean a Right to Sue?

This morning, the Supreme Court heard oral arguments in CompuCredit v. Greenwood, a case that will decide whether a federal law requiring that consumers be informed of their “right to sue” voids mandatory arbitration clauses in credit repair contracts.

Plaintiffs in this case are a class of consumers who sued CompuCredit for deceitful marketing tactics under the Credit Repair Organization Act (CROA).  These consumers signed up for credit cards which CompuCredit claimed would help them rebuild their credit. Instead, credit card holders were charged $257 per year in undisclosed fees, plus interest, if the fees were not paid.  The credit card agreement also included a mandatory arbitration clause which the consumers now claim is invalidated by the CROA.

The CROA requires that agreements between credit repair companies and consumers must contain the language: “You have the right to sue a credit repair organization that violates the Credit Repair Organization Act.”  The consumer plaintiffs claim that this language voids the mandatory arbitration clause in CompuCredit’s contracts with them, thus giving them an actual, meaningful “right to sue.” CompuCredit argues that consumers must go to arbitration rather than bringing their lawsuit in court because the CROA requires only disclosure of a right to sue and not an actual right to sue.  Both the federal district court and the Ninth Circuit Court of Appeals ruled in favor of the consumers, holding that the CROA voids the arbitration clause.

The argument today found the justices on both sides of the issue. Justice Ginsberg observed that the statute’s language requiring consumers to be notified of a right to sue must include an actual right to sue, as anyone who read the notice would believe.  Likewise, Justice Kagan observed that the CROA “says you have a right to sue, and you [-- CompuCredits’ counsel --] are asking us essentially to read that language as: You have a right to bring a claim in court, but it's probably going to end up in arbitration because of the nature of your form contract.”  Justice Scalia, on the other hand, was open to CompuCredit’s reading of the “right to sue” language as merely providing notice and not a substantive right because the language creating the requirement was not located in the substantive part of the statute.  

This case comes to the Supreme Court at a time when consumers are increasingly being forced from the courts into mandatory arbitration. The Court’s recent cases involving arbitration agreements have held that they are enforceable under the Federal Arbitration Act. 

Last term in AT&T v. Concepcion, the Court upheld a company’s right to include in its standard contract a waiver of the consumer’s right to sue or participate in a class action.  This was devastating for consumers’ rights because an individual consumer will not have the resources or incentive to take on a corporation when they have been cheated out of a small amount of money and must find strength in numbers to bring such a lawsuit. If consumers are not allowed to band together as a group, corporations will not be held accountable for their deceptive or harmful practices.  One of the few remaining exceptions to the rule in AT&T is where federal law provides an express right to sue.

This Thursday, Senators Al Franken and Richard Blumenthal will lead a Senate Judiciary Committee hearing entitled “Arbitration: Is It Fair When Forced?” to address the problems caused by the Supreme Court’s forced arbitration cases.

AFJ released a special report today highlighting how the Corporate Court has used the arbitration system to help businesses evade justice.

The Disingenuous Defense of Forced Arbitration

Andrew Pincus argued before the Supreme Court that corporations should be able to immunize themselves from class actions...and won.

In AT&T Mobility v. Concepcion, the Court ruled that corporations can impose arbitration processes on aggrieved customers and deny them the ability to bring class actions. Re-writing an 86-year-old federal statute, the five conservative justices ruled that AT&T could advertise “free” cell phones to lure consumers and then charge them a surprise $30 sales tax without being susceptible to suit, thanks to fine print in the “take-it-or-leave-it” contract that AT&T imposes on its customers.

Recently, Pincus has written in the New York Times and the National Law Journal that Concepcion is “transforming the way disputes are resolved throughout the country” – a transformation which is, he suggests, to the benefit of everyone except plaintiffs’ attorneys. Pincus is correct that a transformation is underway (just this week Microsoft announced that it, too, is inserting clauses in its user agreements to force individual arbitration in response to the Concepcion decision), however, the benefits accrue primarily to Pincus’ corporate clients.

Nearly every aspect of Americans’ everyday lives is controlled by “take-it-or-leave-it” or “adhesion” contracts. We sign them to buy products and procure services. As Amalia Kessler, a Stanford Law professor put it recently, in order to avoid such contracts “[y]ou would have to live in a cave somewhere.” And now in the wake of Concepcion, those contracts also serve to surrender our civil rights and protections as consumers.

One Year Later: The Consequences of AT&T Mobility v. Concepcion

Douglas Bellows was illegally harassed by a debt collector, but he will never have his day in court. Lourdes Cruz was charged fees for unwanted services by AT&T, but she will never have her day in court. Mack Green was cheated out of wages and benefits by his employer, but he will never have his day in court. Nor will the numerous other individuals with legitimate claims that Bellows, Cruz, and Green each sought to represent. All thanks to the Supreme Court’s decision AT&T Mobility v. Concepcion, which was issued one year ago today.

On April 27, 2011, the Court’s decision brought one chapter in the Concepcions’ legal saga to an end, but for the millions of Americans who are bound by take-it-or-leave-it contracts with cell phone companies and credit card companies, and with their corporate employers, the profound implications of the decision remained to be seen at that point. Now, a year later, it has become clear that the Court’s decision in Concepcion has had a dramatic effect on everyday Americans’ ability to access justice through the courts.

The Court held in Concepcion that the Federal Arbitration Act (“FAA”)’s favorable treatment of contractual arbitration clauses preempts state laws aimed at protecting consumers and employees from unconscionable class action waivers. As a result, AT&T was able to avoid the legal and financial consequences of defrauding thousands of customers out of $30 for supposedly “free” phones, simply by including a provision in their service contracts that mandated arbitration and forbade class actions. The ruling left customers with no real recourse to recover their money from the company, because no one could reasonably be expected to bring an individual claim to recoup $30.

As feared, the case has had wide-ranging effects on the ability of consumers and employees to vindicate their rights in court and recoup ill-gotten gains from companies. The impact has been felt particularly in the financial services, telecommunications, auto sales, and employment contexts.

For instance, Douglas Bellows filed a class action against Midland Credit Management, a debt collector, alleging the use of harassing and abusive tactics to collect a debt in violation of the Fair Debt Collection Practices Act. After Concepcion, Bellows was forced into individual arbitration based on a clause in his take-it-or-leave-it credit card agreement.

Lourdes Cruz filed a class action against AT&T Wireless for charging $2.99 per month for “roadside assistance service,” although she had never requested or consented to such a service, under Florida’s unfair trade practices law. The Eleventh Circuit held that in light of Concepcion, Florida law was preempted by federal law and Cruz was forced into individual arbitration.

Mack Green and fellow shuttle bus drivers sued SuperShuttle for misclassifying them as franchisees rather than employees, thereby denying them benefits and overtime pay to which they were entitled, while charging them illegal “franchise fees.” After Concepcion, the Eighth Circuit forced the drivers into individual arbitration by upholding the class action waiver and mandatory arbitration clauses in their employment contracts, which the drivers alleged were unconscionable under state law.

These are just a few of the scores of suits (.pdf download) that have been dismissed by the lower courts in the twelve months since Concepcion was decided.

Of course, Concepcion was not written in a vacuum. Over the past several years, the Roberts Court has issued decision after decision forcing litigants into arbitration, in circumstances far afield from what Congress had in mind when it passed the FAA in 1925. The FAA was intended to counteract judicial hostility toward arbitration, by placing arbitration agreements “upon the same footing as other contracts.” The assumption was that the agreements would exist in negotiated contracts between parties with relatively equal bargaining power.

However, beginning in the 1980s and picking up significantly under the leadership of Chief Justice Roberts, the Supreme Court has radically expanded its interpretation of the FAA, applying it to take-it-or-leave-it (or “adhesion”) contracts in the consumer and employment contexts. Furthermore, rather than treating arbitration agreements as no less valid than other contracts, the Court has privileged arbitration agreements as super contracts not susceptible to ordinary contract defenses (such as unconscionability).

Continuing this trend, in January, the Court upheld the arbitration clause that the so-called credit repair company CompuCredit inserted into its take-it-or-leave-it contracts with consumers, thereby preventing consumers from filing a class action lawsuit in court. This decision, Compucredit v. Greenwood, was particularly outrageous because the statute at issue, the Credit Repair Organization Act (“CROA”), specifically requires companies like CompuCredit to inform their customers: “You have a right to sue a credit repair organization that violates the Credit Repair Organization Act.” Nonetheless, the Court found that this provision of the CROA only creates the right to receive the statement, not an underlying right to sue. As Justice Ginsburg wrote in dissent, in a statute designed to prevent credit repair organizations from unfair and deceptive practices, Congress certainly did not intend to allow those organizations to deceive consumers by telling them they had a right that they do not have – i.e., the right to sue.

As others have documented, when individual arbitration is the only path left open to aggrieved consumers and employees, the result is not a whole lot of arbitration – the result is a whole lot of nothing, as few individuals will choose or be able to navigate the unfamiliar terrain of the arbitration system. Meanwhile, corporations are left to operate with impunity, ripping off Americans in ways big and small.

In the end, the losers are the American system of justice and the American people.

Will cruise passengers be victimized again – by forced arbitration

As they suffered in sweltering heat, walked through sewage and defecated in plastic bags, some of the passengers aboard the Carnival Cruise Lines ship Triumph probably were thinking “At least when we finally get home we can sue the b-----ds.”

The Carnival Triumph in happier times
(including working toilets)

Well, they can try – and some already have.  But the U.S. Supreme Court has made it a lot harder than it should be. 

It appears that Carnival is far better prepared to prevent lawsuits than it was to contain the damage aboard the Triumph.  In the fine print that comes with every ticket, there is a clause that bars most lawsuits.  Instead, passengers must go into forced arbitration.  In addition, when passengers buy a ticket for a Carnival Cruise they give up their right to be part of a class-action suit – though again, one law firm is going to try anyway.

As we explained in a previous post to this blog, and in our 2011 report, Arbitration Activism, this means the deck is stacked against the passengers at every turn.  And in keeping with its role as “The 1% Court” the Supreme Court majority has upheld forced arbitration, and the ban on class actions, in one outrageous case after another.

The Carnival Cruise fine print makes exceptions for individual suits in cases of “personal injury, illness or death.”  In one of the suits brought so far, a passenger cites severe dehydration and bruises suffered while on “aggressive food lines.”    

But passengers whose suffering extended only to enduring heat, stench, limited food and no toilets may be out of luck.  As for the validity of any class action, presumably Carnival could appeal all the way to the Supreme Court – and we know what that is likely to mean.

IT’S EVEN WORSE FOR THE CREW

There is another group that endured worse suffering than the passengers.  As Josh Eidelson points out in Salon, even when nothing goes wrong, conditions on cruise ships can be hell for the crew.  And there is almost nothing they can do about it.

Citing the work of Prof. Ross Klein, the author of Paradise Lost at Sea: Rethinking Cruise Vacations, Eidelson writes: 

Carnival is technically registered in Panama, a country whose laws Klein charges “have been changed to satisfy Carnival’s needs and interests. Because Carnival means a fair amount of money to their national treasury.” Effectively, for cruise workers, says Klein, “there aren’t any real labor regulations.” (He noted that one lawsuit that was brought against Carnival in the U.S. ended with a settlement requiring future such disputes be pursued through an arbitration system, effectively requiring potential worker plaintiffs to shell out tens of thousands of dollars in transportation and legal fees.)[Emphasis added.]

Arbitration Contracts and a Different Problem of Bargaining Power

Joe Nocera has a column in the New York Times about the fight to nominate, or for that matter confirm, Elizabeth Warren, or for that matter anyone, to head the new Consumer Financial Protection Bureau, created by last year’s historic Wall Street reform legislation. Senate Minority Leader Mitch McConnell has preemptively threatened to filibuster Warren if she’s nominated by President Obama, and gone further by insisting that significant changes be made to the agency’s structure and powers before any nomination happens. House Oversight and Government Reform Committee Chairman Darrell Issa has poured fuel on the fire with his “round[s] of browbeating” in that committee, subjecting Warren to accusation and embarrassment over what has actually been a quite successful tenure as advisor to the nascent CFPB.

But this story is about more than Capitol Hill power-politicking. Elizabeth Warren and President Obama aren’t even the real victims here. The CFPB was tasked by the Dodd-Frank bill with conducting a study on forced arbitration clauses (“arbitration of any future dispute,” in the statutory language) in consumer financial products and services. Once that study is complete, the agency will have the power to enact regulations consistent with its results. Those results probably won't look good for the financial industry.

Millions of Americans are already subject to forced arbitration contracts, and every day thousands more unwittingly sign, click, or become unilaterally subject to new fine-print terms. The Supreme Court’s decision in AT&T Mobility v. Concepcion will likely increase the pace at which corporations add binding arbitration clauses to their consumer contracts. The CFPB can stop or limit the practice, but only after its study is complete, and only after writing and issuing a regulation. Even then, the Dodd Frank Act builds in a 180 day waiting period after the regulation takes effect (which in itself can be delayed by the administrative process), and only after that will new arbitration contracts be regulated.

Every day that the White House and Senate are delayed from confirming a director to the CFPB pushes back the time when this badly-needed change will come to the financial industry. And that day is already going to be six months too late for many.

Corporations Force Arbitration on Consumers, but Opt Out for Themselves

The New York Times recently published an article on the ramifications of AT&T Mobility v. Concepcion during the one year since the Supreme Court issued its decision. Drawing on a recent report recent report (.pdf download) issued by Public Citizen and the National Association of Consumer Advocates, the article noted that:

since Concepcion, judges had cited the decision at least 76 times as a reason to prevent potential class-action lawsuits from moving ahead. In some of those cases, the judges made clear that they were ruling against the plaintiffs through gritted teeth, explaining that Concepcion basically made it impossible to come to any other decision.

 The article summarized the views of Taylor Lincoln, a co-author of the Public Citizen study:

Many well-known arbitration companies have a pro-business bias, he said, because corporations pay the arbiters. But the real agenda of Concepcion’s champions, he added, is to block collective legal action — the kind that gets a company’s attention by affecting the bottom line. Justice Stephen Breyer echoed that notion in his dissent in the Concepcion case — it split the Supreme Court 5 to 4 — when he quoted from a 2004 decision written by Judge Richard Posner of the United States Court of Appeals for the Seventh Circuit: “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30."

That corporations force arbitration on consumers in order to block collective legal action is unmasked by a recent study that reveals that

Fortune 1,000 corporations are significantly less likely to arbitrate contract disputes today than they were in 1997.  In the 1997 study, 85% of companies reported using arbitration in commercial contract disputes at least once during the prior three years.  In 2011, however, only 60 percent of companies so reported.

The most common reasons given by survey respondents… for not using arbitration included: the difficulty of appeal, the perception that arbitrators tend to compromise, the concern that arbitrators may not follow the law, a lack of confidence in neutrals, and high costs of arbitration.

Thus, while corporations force arbitration on consumers, with the blessing of the Supreme Court’s pro-business majority, they are increasingly hesitant to use arbitration to resolve their disputes with other corporations.

Of course, the concerns about commercial arbitration are all serious concerns for consumer arbitration as well – particularly, the impartiality of arbiters that corporations repeatedly appear before, the higher costs of arbitration, minimal access to evidence, closed-door proceedings, and narrow grounds for judicial review.  AFJ explored many of these problems in our report, Arbitration Activism (.pdf download).

As awareness grows of the harm to consumers forced into arbitration, the federal government has begun to take action. The Consumer Financial Protection Bureau recently issued a Request for Information to assist it in conducting a study of pre-dispute arbitration agreements, as mandated by the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010. The period for public comment ends June 23, 2012.

AFJ: Roberts Court again expands corporate power to deny access to justice

Alliance for Justice President Nan Aron released the following statement today in response to the Supreme Court decision in American Express Co. v. Italian Colors Restaurant:

Today, a majority of the Supreme Court expanded the power of major corporations to deny Americans access to justice.  In upholding American Express’s forced arbitration clause, the Court’s majority has denied small businesses harmed by large corporations’ monopolistic practices the ability to stand up for their rights.  American Express admits this will deny plaintiffs any hope of compensation for valid legal claims, but, as Justice Kagan wrote, the majority says:  “Too darn bad.”

It is the latest in a series of decisions that make it significantly more difficult to hold big businesses accountable for their actions. Congress must act to ensure that the rights our laws secure for all Americans are not subsumed by arbitration clauses and a corporate-friendly Court.

Read more about Forced Arbitration

Read more about the Roberts Court’s bias toward big business 

The Need for the Arbitration Fairness Act

Last month's Supreme Court decision in AT&T Mobility v. Concepcion was a major victory for big corporations facing class-action suits. More than that, it was a staggering blow to consumer, employment, and civil rights. Because of the Corporate Court's decision, corporations now feel free to force individuals into contracts where the individual relinquishes his or her right to pursue justice in the courts.

An editorial in the L.A. Times argues that Congress has an obligation to step in and protect consumers, employees, and anyone who hopes to hold corporations accountable for their misdeeds.

Underlying this legal debate about the interplay of state and federal law is a real-world concern: that consumers not be exploited by vastly more powerful merchants. Class actions allow injured consumers in California and other states who might not bring an action on their own to combine their claims and receive greater damages. (Opponents of class actions say the principal beneficiaries of such lawsuits are lawyers.)

With its narrow reading of the federal arbitration act, the court has put such remedies out of reach for many consumers. Fortunately, Congress can overrule the decision by amending the act to allow states to declare some arbitration agreements unconscionable.

Senators Al Franken (D-MN) and Richard Blumenthal (D-CT), along with Congressman Hank Johnson (D-GA) have introduced the Arbitration Fairness Act, which would eliminate forced arbitration clauses in employment, consumer, and civil rights cases, restoring one of an individual's most powerful tools when squaring off against a corporation in the courtroom.

Click here for the rest of the L.A. Times editorial.

Alliance for Justice presents “Forced Arbitration and the Roberts Court: How Hidden Clauses in Everyday Contracts Can Take Away Your Rights”

On November 10, 2010, Alliance for Justice hosted a panel in San Francisco to discuss the importance and potential ramifications of the U.S. Supreme Court case, AT&T Mobility v. Concepcion.

The panel comprised three distinguished attorneys who practice in the fields of consumer and employee rights: Arthur Bryant of Public Justice, Cliff Palefsky of McGuinn, Hillsman & Palefsky, and James Sturdevant, AFJ board member and Principal of The Sturdevant Law Firm.

This event was held just one day after the Supreme Court heard oral arguments in AT&T v. Concepcion, which may have the effect of severely restricting individuals’ ability to seek justice in the courts by use of class action law suits.

All three panel members emphasized the immensity of what is at stake in this case – the ability of large corporations to effectively shield themselves from liability for their wrongdoings and prevent everyday citizens from grouping together to address these wrongdoings in a class action lawsuit.

The panelists agreed that Tuesday’s oral arguments went better than they had anticipated, but that it is still quite unclear exactly how the Court will decide. Although the panelists expressed a reserved optimism that the Court would decide this case favorably, they maintained that regardless of the Court’s decision in this case, there are a number of other cases the Court will be decide on similarly pivotal issues concerning access to justice. Forced arbitration clauses and restrictions on class action suits are but two examples of ways in which large corporations are skewing justice in their favor.

The event was held in collaboration with National Employment Lawyers Association, The Employee Rights Advocacy Institute for Law & Policy, Public Justice, and the Bay Area Lawyers Chapter of the American Constitution Society.

For more information on the details of this case, AFJ has released this report, and AFJ President Nan Aron has written this article for Change.org.