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Forced Arbitration Clauses are Limiting the Rights of Consumers

Posted in Attorney Blogs,News on April 15, 2015

Last month, the federal Consumer Financial Protection Bureau (CFPB) issued a finding that consumers across the country are being unjustly limited in their legal options as a direct result of a recent Supreme Court decision.

The issues involved may seem overly technical and legally dense, but they are having real consequences for real people every day. Let’s walk through the issue to try to understand the significance of what’s been happening.

It started back on April 27, 2011, when the Supreme Court issued a ruling that activists at the time warned could deal a serious blow to consumers: that companies may use “forced arbitration clauses” in their service contracts to prohibit consumers from filing or joining a class action lawsuit. These kinds of clauses in contracts are designed to limit the options consumers have to sue when problems arise.

In the AT&T Mobility LLC v. Concepcion ruling, the Court held that the Federal Arbitration Act preempts California’s judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts. This is important because what the California rule was trying to provide was a way for consumers-or, more typically, groups of consumers-to band together in arbitration settings or sue as part of a class action if certain conditions were met.

The basic idea behind the California rule was that since consumers have no real power to negotiate in many contract situations (honestly, how many of us are able to negotiate terms with our credit card companies?), in specific instances, there should be a way for people to have full access to all legal remedies in certain situations regardless of what a contract states.

The result of the 5-4 Concepcion decision, authored by Justice Antonin Scalia, allowed forced arbitration clauses to become prevalent in these kind of take-it-or-leave-it contracts (what lawyers refer to as “adhesion contracts”) for an assortment of consumer products and services we all use everyday: credit cards, cellular phones, car loans, payday loans, checking accounts, student loans and so on.

So now, when a forced arbitration clause is present in a contract, consumers with valid legal claims have no recourse to bring their claims before the courts to expose clear abuse and hold companies accountable for misconduct.

On March 10, 2015, the CFPB issued their finding that highlighted just how prevalent forced arbitration clauses have become.

Specifically, CFPB found service contracts representing 99.9% of the mobile wireless market, 98.5% of the payday loan market, over 82.9% of the prepaid card market, 53% of all credit cards issued and 44.4% of all checking accounts contain a forced arbitration clause.

It is nearly impossible to summarize the CFPB’s 728 page study in just a few paragraphs. However, the following general findings from the study, supported by data contained throughout the study, clearly show the detrimental effect forced arbitration clauses have on American consumers:

  • 75% of consumers surveyed by the study were unaware of whether their credit card contracts included arbitration clauses;
  • Consumers with such clauses in their agreements generally either did not know whether they can sue in court or wrongly believed that they could do so;
  • Consumer beliefs about credit card dispute resolution rights bear little to no relation to the dispute resolution provisions of their credit card contracts; and
  • Most consumers whose agreements contain arbitration clauses wrongly believe that they can participate in class actions.

Bolstering the study’s findings as well as the arguments of consumer rights advocates, CFPB Director, Richard Cordray stated, “[Forced] arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year.” He added, “Now that our study has been completed, we will consider what next steps are appropriate.” Those next steps may prove to be limited.

Forced arbitration benefits companies by severely limiting consumer options for dispute resolution, prohibiting class actions, waiving any appeals process and binding the consumer to an arbiter chosen by the company who, because the company is a “repeat customer”, has a conflicted interest to rule in favor of the company. Scott Maurer, a supervising clinical attorney at the Santa Clara University School of Law, aptly described the deleterious effect forced arbitration clauses have on class actions when he wrote, “… class actions are worth roughly $600 million to consumers per year, yet they are going the way of the dinosaur.”

For the sake of the American consumer, let’s hope he’s wrong.