What is arbitration? If I told you there was a courtroom in America where consumers lose lawsuits to businesses 94 percent of the time, and there is no chance to appeal, you’d probably never want to go there. But here’s the problem: You don’t have a choice, thanks to small print.
For decades, banks, financial institutions, and many other industries have been stripping consumers of their right to band together and sue by adding mandatory arbitration clauses in contracts.
Arbitration clauses are typically embedded in the fine print of consumer contracts. Essentially, they require as a condition of doing business that consumers waive their rights to hold the company accountable for fraud and other unlawful practices that harm the consumer.
Instead of their day in court, consumers are forced to argue complaints out of court, in front of an arbitrator selected by the corporate defendant. Not surprisingly, arbitration nearly always results in a decision favorable to the company.
Binding mandatory arbitration is a part of nearly every significant transaction you engage in now. Millions of Americans are bound by at least one mandatory, pre-dispute arbitration clause. Buried in the fine print of a billing insert, employee handbook, health insurance plan, or franchise agreement, these clauses waive one’s right to access the courts, diverting cases to a costly private legal system that favors defendants.
Companies started using forced arbitration about 20 years ago despite public outcry that the clauses were giving companies license to steal. Arbitration clauses are achieving their intended purpose of undermining consumer protection, civil rights, and other laws that level the playing field between big businesses and individuals. The individual is left with no choice but to waive these rights, because arbitration clauses are presented on a take-it-or-leave-it basis.
For a sterling example of the harm arbitration clauses can cause consumers, one need not look much further than Wells Fargo, the San Francisco-based banking giant that defrauded millions of its customers when it opened checking, savings, and credit card accounts in their name and without their authorization, then charged them fees for those bogus accounts.
Customers tried to stop these fraudulent practices and get reimbursements for the fake accounts by filing class actions against the bank in 2014 and again in 2015. But both times Wells Fargo lawyers successfully cited the arbitration clauses in its customer agreements and locked the plaintiffs out of court, all the while claiming that “the use of arbitration is a fair and efficient process that serves the needs of both parties.”
Not only did Wells Fargo use arbitration clauses to bar its customers from justice, it used the clauses to hide its activities from the public eye and perpetuate a number of other alleged schemes that defrauded homeowners, car buyers, veterans, and taxpayers.
In May 2016, the Consumer Financial Protection Bureau (CFPB) published an exhaustive study that determined that exempting banks and other financial institutions from the normal legal system has had far-reaching and extremely harmful consequences for consumers.
The CFPB study, spanning 400 class action lawsuits and several years, provides documented proof that predatory lending, deceptive schemes, and blatant fraud have trapped millions of consumers in insurmountable debt, forced them into bankruptcy, foreclosed on their homes, and repossessed their cars.
On July 10, the CFPB adopted a rule prohibiting financial firms from using mandatory arbitration to bar consumers from court. The rule promised to hold financial institutions like Wells Fargo accountable for fraud and deceit.
Then-CFPB director Richard Cordray said the rule protected “A cherished tenant of our justice system … that no one, no matter how big or how powerful, should escape accountability if they break the law.”
But despite the rule’s popular appeal and widespread support, legislators more beholden to the banks that finance their campaigns than to their ordinary, everyday constituents, destroyed it.
At the end of July 2017, Republican lawmakers in Congress passed a resolution to block the CFPB rule by evoking the Congressional Review Act (CRA), a once-obscure law that gives Congress the authority to kill any rule within 60 days of its issuance. Then, in October, the CFPB rule’s death knell came at the hands of the U.S. Senate, which voted 51 to 50 to repeal the rule banning mandatory arbitration clauses in financial contracts.
Congress very rarely used the CRA since it was enacted in 1996. But the current Congress has used it 14 times to reverse Obama-era legislation. Worse, overturning a rule with the CRA prohibits government agencies from issuing similar rules in the future, effectively placing the health and well-being of all Americans in the hands of a few zealots.
However, where Congress fails the American people, hope remains in individuals and organizations committed to preserving access to justice for everyone.
Now more than ever it’s vital to stand up to legislators and special interests working to obstruct consumer access to the courtroom. Lawyers can play a critical role in preserving justice by becoming active in organizations that are working to ensure anyone harmed by the fraud, misconduct, or negligence of big corporations can access the court system.