In December, 2015, the U.S. Supreme Court issued another in a string of decisions favoring mandatory arbitration agreements in consumer contracts, to the delight of businesses and the detriment of consumers. As a story on ConsumerReports.org explains, in a case involving DirecTV, the Court concluded that the Federal Arbitration Act (FAA) overrides California law holding that mandatory arbitration agreements banning class actions are unconscionable and therefore unenforceable. Because such clauses are enforceable under the FAA and previous Supreme Court case law, California cannot refuse to enforce them under state law. But why is this bad for consumers?

Arbitration is a legal way to resolve disputes

Arbitration has been a legal method for resolving disputes outside the court system since Congress passed the FAA in 1925. The idea behind arbitration, as with other methods of alternative dispute resolution, is to resolve disputes between parties more quickly and cheaply than litigation can. In recent decades, business use of mandatory arbitration clauses has skyrocketed. According to another Consumer Reports.org story, such clauses are now hidden in hundreds of millions of consumer contracts. Businesses using them include Netflix, Amazon, Groupon, and Verizon, as well as banks, financial services, insurance policies and even employment agreements. These clauses force consumers to arbitrate disputes with companies instead of suing them in court. Generally, they are included in the fine print of lengthy contract documents and consumers are not even aware of them.

This situation would not be bad if arbitration were not so detrimental to consumers. Certainly, if consumers were able to recover damages to the same extent in arbitration as they could in litigation, businesses would not be so quick to include arbitration clauses in their documents. The American Bar Journal, citing a report in the New York Times, reports that statistically, arbitration is less likely than litigation to result in any award to consumers. An arbitration critic quoted in the Bar Journal notes that the excessive use of arbitration clauses represents the privatization of our country’s justice system.

Why has the push for arbitration turned out so badly for ordinary consumers?

Consider the following facts:

• arbitration clauses are often hidden in the fine print of lengthy form contracts so that consumers may not even be aware of them, let alone have the opportunity to negotiate their terms;
• arbitration decisions are binding and typically there is no right to appeal;
• arbitration results are sealed, so anyone not a party to the proceeding cannot access them;
• businesses generally choose the arbitrator; and
• arbitration clauses may prohibit class actions.

Class actions are important

Class actions provide a vehicle for many consumers to band together to sue a company for business practices that injure a wide group of people. For example, in the recent Supreme Court case, Consumer Reports explains that the DirecTV customers attempting to sue the company alleged they had been charged illegal cancellation fees of up to $480. That amount of money, while significant to an individual, does not offer enough recovery to fund an individual lawsuit against the company – but if enough consumers join together in a class action suit, the consequences to DirecTV could be significant. Without the threat of a class action, companies may have little incentive to change practices that cause small damage to a lot of customers. Following the Supreme Court case, state laws cannot protect consumers from being forced into arbitration and giving up their rights to join a class action.

Consult a Philadelphia consumer protection attorney

If a company has treated you unfairly or deceived you, it is in your interest to consult a skilled consumer protection attorney as soon as possible. The experienced consumer protection lawyers of The Kim Law Firm, LLC, are committed to standing up for consumers’ rights and best interests and can represent you in a wide variety of matters. Contact The Kim Law Firm for a consultation today.