By Fayth Frederic
Increasingly widespread use of arbitration agreements in consumer contracts have effectively “locked” consumers out of courts. Arbitration agreements, found in almost all pre-printed consumer contracts, require consumers to resolve disputes that arise through binding arbitration, rather than in court. By way of simply tapping “I agree”, consumers can waive the constitutional right to “seek and obtain a fair, impartial resolution to legal disputes” from courts.[1]
Arbitration is a legal proceeding, governed by an agreement between the parties, where a dispute is resolved by a neutral third-party through a binding decision.[2] In the United States, arbitration is governed by Federal Arbitration Act, 9 U.S.C. §§ 1-16 (“FAA”), which allows courts to verify or vacate arbitral decisions in very limited situations.[3] Though it was initially intended to be a procedural statute governing agreements between commercial parties with equal bargaining power[4], the Supreme Court has redefined the FAA as a substantive statute applicable to state, federal, and consumer contracts. [5] Further, the Court has established that the FAA preempts state law, preventing states from enacting statutes that restrict or ban the use of forced arbitration agreements.[6] The Court’s expansive interpretations have created a Pandora’s box of diminished individual rights, including significantly reducing access to courts and jury trials and favoring strong economic interests at the expense of consumers.
Forced arbitration agreements infringe on the consumers right to sue by explicitly denying the consumer the right to bring disputes to court and failing to afford due process protections. A fundamental principle of the U.S. justice system is the right to trial by jury.[7] Forced arbitration agreements circumvent these constitutional rights in favor of private proceedings, where there is no obligation for arbitrators to apply the federal or state law as a court would. Rather, arbitrators have discretion, based on expertise and knowledge, to resolve the dispute without the constraints of substantive law. The ability to sidestep substantive law presents an incentive for companies to use forced arbitration clauses to avoid punishment and accountability for violating federal or state law. Further, the procedural safeguards found in court proceedings are not applicable in arbitration. For example, arbitrators are not obliged to follow any proscribed rules of evidence.[8] Additionally, arbitral decisions do not require legal reasoning and are rarely subject to judicial review.[9] Consumers are forced to succumb to “privatized, invisible, and often inferior forum”, where they cannot rely on enforcement of the law or due process protections to ensure a fair and just resolution. [10]
Consumers are often coerced into waiving their constitutional right to sue due to uneven bargaining power and lack of knowledge. A study conducted by the Consumer Financial Protection Bureau found that “more than 75 percent of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers.”.[11] The Court has held that there is no special notice requirement for forced arbitration clauses to be enforceable.[12] Given the prevalence of forced arbitration clauses, consumers typically do not have the luxury of avoiding these clauses by contracting with other companies. In either case, a consumer is either unwillingly or unknowingly forgoing the right to bring a dispute to court. The predatory nature of forced arbitration clauses is further exacerbated by their rampant use against low-income consumers. For example, almost all private student loans and financial aid agreements include forced arbitration agreements.[13] Further, low-income consumers are less likely to hire an attorney to review everyday contracts, especially for necessities like financial services. This is particularly problematic as consumers are significantly less likely to win in arbitration disputes.[14] When consumers do win, they receive significantly lower awards than businesses.[15] Consumers, especially those from low-income communities, are often unaware that they waive their rights to sue in court. In the rare case that consumers are aware, they often do not have a choose to forgo the waiver because the good or service is a necessity or there are no other “no forced arbitration” options available.
Failure to reasonably restrict the use of forced arbitration clauses subjects consumers to private proceedings immune from substantive law and procedural due process protections, often without their consent or knowledge. Though arbitration offers low-cost and relatively quick dispute resolution, unfettered use of forced arbitration clauses is unjust, particularly against low-income communities. Consumer advocates, labor organizations, civil rights groups, and news outlets have highlighted the injustices of forced arbitration clauses, and policymakers and federal agencies have taken notice.[16] Introduced by the Senate Judiciary committee, the Forced Arbitration Injustice Repeal Act (“FAIR”) proposes to “prohibit predispute arbitration agreements that force arbitration of future employment, consumer, antitrust, or civil rights disputes.”[17] Restrictions on the use of forced arbitration clauses, like FAIR, are necessary to restore consumer rights and hold businesses accountable. Legislators are now tasked with combatting the privatization of justice in the face of widespread use of forced arbitration agreements against consumers.
[1] Ilan Fuchs, Ph.D., Access to Justice Requires Changes from the Legal System, American Public University, (Oct. 23, 2023), https://www.apu.apus.edu/area-of-study/security-and-global-studies/resources/access-to-justice-requires-changes-from-the-legal-system/
[2] See Imre S. Szalai, The Prevalence of Consumer Arbitration Agreements by America’s Top Companies, 52 UC Davis L. REV. 233, 235 (2019).
[3] 9 U.S.C. § 2 (2018)
[4] Arbitration of Interstate Commercial Disputes: Hearing of S. 1005 and H.R. 646 Before the J. Comm. of Subcomms. on the Judiciary, 68th Cong. 16, 38 (1924) (“The statute as drawn establishes a procedure in the Federal courts for the enforcement of arbitration agreements. . . . . . . It is no infringement upon the right of each State to decide for itself what contracts shall or shall not exist under its laws.”)
[5] See Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983); Southland Corp. v. Keating, 465 U.S. 1, 12 (1984)
[6] See AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).
[7] U.S. Const. amend. XI – XII. (The Sixth Amendment grants trial by jury in criminal cases, while the Seventh Amendment grants right to a jury trial in federal civil cases where the value in controversy exceeds $20.)
[8] Katherine V.W. Stone & Alexander J.S. Colvin, The Arbitration Epidemic, ECONOMIC POLICY INSTITUTE, Dec. 2015.
[9] See id.
[10] See id.
[11] See Consumer Financial Protection Bureau, Arbitration Study (2015), https://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/ [hereinafter, CFPB Study]
[12] Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010)
[13] See CFPB Study. (“In the private student loan market, 86 percent of the largest lenders include arbitration clauses in their contracts.”)
[14] American Association for Justice, Forced Arbitration: How Corporations Use the Fine Print to Bully Americans 6 (2016), https://dx.doi.org/10.2139/ssrn.2864036. (“Consumers win in arbitration just 20 percent of the time.”)
[15] See Id. at 6-7. (“Consumers who won received an average of only 12 cents for every dollar they claimed. In stark contrast, winning corporations received 98 cents per dollar.”
[16] See id. at 5.
[17] See S. 1376, 118th Cong. § 2 (2023)
