By Joanne Doroshow and Emily Gottlieb of Impact / CENTER FOR JUSTICE & DEMOCRACY

In October 1995, Saint Clair Adams applies for a sales counselor job at Circuit City in Santa Rosa, California. He was offered a position in the small office/home office department and filled out a work application. As a condition of being hired, Adams had to sign a form agreeing to mandatory arbitration of all employment-related disputes. He signed on the dotted line and began selling computers.

Over the course of his employment, Adams was subjected to repeated harassment based on his sexual orientation, prompting him to sue Circuit City in state court for discrimination and related tort claims. While the 9th Circuit Court of Appeals refused to enforce the arbitration clause and ordered the case to trial, the U.S. Supreme Court reversed, forcing Adams into arbitration and upholding employers’ efforts to compel all workplace disputes into binding arbitration.

Adams objected to being forced in Circuit City’s arbitration process for good reason. The procedure places caps on punitive damages no matter how egregious the misconduct; it obligated employees to pay half the cost of arbitration and vested complete discretion in the arbitrator to decide whether to award attorney’s fees to a prevailing employee, even on statutory discrimination claims; and it did not require the arbitrator to provide findings or reasoning to support the arbitration award.

Mandatory binding arbitration clauses are not unique to employment contracts. Aided by the Circuit City case and other recent Supreme Court decision expanding federal arbitration law, contracts with forced arbitration terms presented on a “take-it-or-leave-it” basis are steadily becoming the norm in agreements between businesses and consumers. According to one recent article, in the last two years al of the top 10 credit card companies, except Chase, have placed mandatory binding arbitration notices in credit card agreements. A survey by First USA, the nation’s second-largest credit card company, showed that it won 99.6 percent of the cases that went all the way to an arbitrator.

Arbitration has many built-in advantages that favor businesses. Bias is an obvious problem. According to a recent San Francisco Chronicle investigative report, “General Electric pays…arbitrator and American Arbitration fees to conduct the hearings. As of Dec. 31 [2000], American Arbitration owned $680,000 in bonds of GE Capital Corporation, a GE subsidiary that accounts for almost half of GE’s sales.”

Arbitration may be on contract with the businesses against which claims are brought. Often the company, not the victim, is allowed to choose the arbitrator. This created inherent bias and self-interest on the part of the arbitrator – the arbitrator is motivated to rule in a way that will attract future company business. Businesses that are frequently before an arbitrator know from experience which arbitrators are likely to rule in their favor.

Arbitration saves neither time nor money for the consumer/employee. There are many reports of arbitration cases taking years. For example, a 1998 Los Angeles Times article described a case where it took nearly two years for a victim to even get to an arbitration hearing after an auto accident.

Moreover, whereas victims who go to court pay little or nothing up front, arbitration costs must generally be split between the injured victim and the insurance company, including the arbitrator’s fees, which can range between $200 and thousands of dollars per hour. The American Arbitration Association, the nation’s largest arbitration firm with more than 140,000 cases each year, charges up-front fees ranging from $500 for claim under $10,000 to more than $7,000 for claim above $1 million.

Such fees can be prohibitively expensive for an injured victim who has suffered financial loss, particularly in personal injury cases. Victims who are in need of medical care, who are disabled or perhaps in pain, who cannot work, whose families are disrupted and who may have major expenses are in a substantially weaker position than their opposing party, the actual perpetrator of the harm or its insurers.

Further, by keeping cases out of court, arbitration clauses eliminate the possibility of consumers banding together to file class action lawsuits. “When consumers are overcharged a modest amount but it affects many people, then a class-action suit is the only way to go against credit card companies in an efficient way,” says Jean Ann Fox of the Consumer Federation of America in a recent article in the San Antonio Express.

While mandatory arbitration is said to be justified on the ground that it is voluntary, this is hardly true. Arbitration clauses are usually outlined in tiny print, buried in documents and paragraphs and written in legalese that is incomprehensible to most people. Moreover, consumers/employees have no ability to chose to go to court and preserve their right to jury trial. If they refuse to accept arbitration, they will not get the job, service or product in question.

Like employees, consumers sign contracts with a forced arbitration clause because they have no idea of the clause’s impact on their substantive rights and remedies, think its terms will never affect them or are unaware that the clause exists until an actual dispute arises.

Alabama attorney Jere Beasley, who has fought mandatory binding arbitration in the states, says, “[P]eople who can’t read or write are being bound by these things.” Beasley’s legal challenges against arbitration in insurance contracts have come from a wide assortment of organizations and individuals, including Mothers Against Drunk Driving (MADD), Alabama Victims of Crime and Leniency, the Alabama Education Association, the AFL-CIO and Democrats for Christian Values.

Actor Christopher Reeve, who has been paralyzed since May 1995 after falling from a horse in a riding accident, filed an amicus brief in support of one of Beasley’s cases. He said in his court pleading, “One of the hardest things I have had to do since my disability is to deal with insurance companies. I found them to be callous and to try to set up any roadblocks they can to keep from paying legitimate claims. … I am totally against binding, mandatory arbitration in insurance policies.” Reform in this area is desperately needed.

Consumer organizations like Public Citizen have advocated certain mandatory principles. They say, “[A]rbitration agreements must be entered into voluntarily after the dispute arises and the consumer, employee — or even the small business owner such as an auto dealer — knows which rights she is waiving, who will arbitrate the dispute, who will bear the costs of arbitration, whether discovery will be allowed, what law will be applied, what information will be public, and whether she will have recourse following the award.”

The arbitration clause itself should be in plain view, explaining in layman’s terms what rights and remedies are being surrendered. There should be a national standard governing the arbitration process, whose rules and procedures are currently dictated by companies. The adoption of these and other reforms will eliminate some of the potential roadblocks workers and consumers face when they seek to hold corporations accountable for injuries they’ve suffered.

Impact – Winter 2002 – Volume 2, Issue 1

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