by Economic Policy Institute
Released December 7, 2015
Over the past 25 years, it has become increasingly commonplace for corporations to insert arbitration clauses into contracts with customers and employees. These arbitration clauses are non-negotiable, mandatory conditions for getting a job or purchasing a product or service. Consumers and employees subject to these clauses are required to take their complaints to a private and often inferior forum in which they are less likely to prevail, and if they do, less likely to recover their due. Once a dispute is decided by an arbitrator, there is no effective right of appeal.
In The arbitration epidemic: Mandatory arbitration deprives workers and consumers of their rights, Katherine V.W. Stone and Alexander J.S. Colvin outline the problems posed by mandatory arbitration and explain how, in a series of rulings, the Supreme Court has freed up large corporations to sidestep the legal system through arbitration clauses. Stone and Colvin discuss a number of possibilities to address the spread of mandatory arbitration, including action by Congress and the executive branch.
Employees subject to mandatory arbitration can no longer sue in court for violations of many important employment laws, including rights to minimum wages, overtime pay and family leave, and protections against discrimination. Consumers injured by a product or service, overcharged or charged unnecessary fees, or otherwise harmed give up their right to sue in court. Many contracts also now include class action waiver clauses barring employees and consumers from entering into class-action lawsuits, making legal action too costly and difficult for individuals to pursue.
On average, employees and consumers win less often and receive much lower damages in mandatory arbitration than they do in court. Employers benefit from a “repeat-player advantage,” wherein they win cases more often when they appear before the same arbitrator. Arbitration may not provide parties with the same extent of discovery that a court would, and arbitration clauses can shorten statutes of limitations, alter the burdens of proof, limit the amount of time a party has to present his or her case, or otherwise impose constrictive procedural rules. Arbitrators are often reluctant to award generous damages to prevailing parties, and their awards are not appealable. Because the chances of winning in mandatory arbitration are lower and damage awards are smaller, consumers and employees have difficulty finding lawyers willing to take arbitration cases on a contingency basis. Hence, the arbitration epidemic discourages many consumers and employees from bringing their claims in the first place.
“The rise in arbitration is the hidden revolution of the Reagan court,” said Stone. “In decision after decision, the Court has chipped away at workers’ and consumers’ rights and stacked the deck in favor of big corporations.”
The current arbitration epidemic is a result of judicial developments that began in the 1980s, when the Supreme Court reinterpreted the 1925 Federal Arbitration Act (FAA) to allow more far-reaching arbitration clauses. Between 1985 and 2015, there were more than two dozen Supreme Court decisions in arbitration cases, virtually all of which expanded the scope of the FAA, restricting the ability of states to maintain laws to protect consumers and employees and the ability of individuals to resist costly and unfair mandatory arbitration systems.
“The administration can tinker around the edges when it comes to limiting mandatory arbitration,” said Colvin. “However, the only way to stop the epidemic of mandatory arbitration being imposed on employees and consumers is through legislative action.”
The proposed Arbitration Fairness Act would amend the FAA, effectively eliminate mandatory arbitration in the employment or consumer realms, as well as in antitrust and civil rights cases. President Obama’s Fair Pay and Safe Workplaces Executive Order barred federal contractors from enforcing mandatory arbitration clauses for discrimination and sexual harassment claims. The Consumer Financial Protection Bureau, meanwhile, is considering whether to ban class action waivers in mandatory arbitration in consumer financial contracts.