Mandatory Binding Arbitration Still Sucks

BusinessWeek has published a pretty substantial cover story on arbitration, and why it disadvantages consumers. Consumerist readers will be familiar with many of the story’s criticisms: one study finds 99.8% of arbitration cases are decided in the corporation’s favor, some arbitration firms market themselves to companies as a sympathetic and partial judge, the arbitration process is intentionally structured to handicap consumers, and more.

Although there aren’t any revelations in the article, it’s still nice to see a story critical of arbitration run in a business publication. The volume of the article—BusinessWeek interviews numerous former arbitrators who became disillusioned with the process—makes a pretty compelling case that arbitration is broken, although it doesn’t mention any solutions, like passing the Arbitration Fairness Act.

Banks Vs. Consumers (Guess Who Wins) [BusinessWeek]
(Photo: Getty)

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  1. Rippleeffect says:

    A year later and I’ve yet to hear back about my arbitration case against my auto insurance company.

  2. Roycester says:
  3. ARP says:

    Arbitration is a useful tool when there are two persons, companies, etc. of relatively equal power and financial status. Companies use it all the time as a cheap alternative to full-blown litigation. But companies have co-opted those talking points to convince (force) consumers to accept it in not-so-equal situations as well. The problem is that the public immediately has a reaction to “trial lawyers” because of our current politics. Don’t get me wrong, there are some sleazy trial lawyers out there with frivolous claims, but the solution isn’t banning litigation (forcing arbitration), its coming up with penalties for those who do have frivolous claims or instituting the “loser pays” model of some European countries.

  4. Southern says:

    If you make Arbitration *FAIR*, then the companies will just stop using it and change their contracts to something else that’s more in their favor..

  5. cyclade says:

    Couple of quibbles here. First, measuring “rates of success” of arbitration claims is a useless metric. I may believe that I’ve been wronged, but if there’s no actual legal basis (as opposed to some “sense of justice”) to support my theories of both liability and actual damages, then I’m going to lose – regardless of whether my claim is adjudicated in court or in an arbitration setting. Counting up the “losses” doesn’t address what proportion – if any – of those claims were based on actual, recoverable claims. There may be an overwhelming number of losses for consumers because their claims are simply legally meritless under the applicable law. We can’t know, and therefore looking at the 99.8% figure is utterly useless.

    Second, traditional litigation isn’t more “little guy” friendly at all. The rules of civil procedure, evidence, and trial practice are complicated — sufficiently so that many lawyers don’t really understand them all. Those rules can also be counterintuitively unfair in the interest of even application. The rules can be full of traps for the unwary that are no less (or more) punitive than the rules in arbitration. Even if you were to compare arbitration to Small Claims courts that tend to greatly relax the rules, there aren’t juries hearing those cases – so you wind up in more or less the same place as having the claim heard by an arbitrator. Furthermore, court dockets are backed up, and it could be literally years before your claims are heard on their merits.

  6. axiomatic says:

    They forgot about Texas.

    In Texas there is:
    A. Your day in court.
    B. Mandatory Binding Arbitration
    C. Vigilante Justice!

    I assure you that allowing the customer to have their day in court is the right thing to do… or else you get option C.

    (chuckle)

  7. Alex Chasick says:

    @cyclade: I have some quibbles with your quibbles. Even if we don’t know how many of the claims that were arbitrated were meritorious, I don’t think 99.8% is an utterly useless figure, because it is such a lopsided figure that it almost guarantees that some valid consumer complaints are being unfairly decided. Especially considering the other factors that suggest that arbitration favors companies, having only 2 out of every 1,000 cases go for the consumer implies that something is wrong.

    Second, traditional litigation certainly IS little guy friendly. Civ pro, crim pro, yes all of that is hard, but plaintiffs get lawyers to help them with that stuff. The procedural limitations of arbitration-limited discovery, confidentiality, and inability to appeal-all hurt the consumer who can’t get access to company documents that show a defect was known about or records from other disputes that show it’s a widespread problem, or is part of the 99.8% whose case was decided in five minutes with limited evidence and can’t appeal because the courts “have a liberal policy favoring arbitration.” Small claims court is cheaper than arbitration, and as we’ve written about a few times, it’s usually the company that can’t be bothered to show up, allowing the consumer to get a default judgment. Finally, although backed up dockets are a problem, I think most people would agree that they’d rather wait a while and have their case fairly decided than have it quickly shoved through an unfair arbitration process (especially considering the chances that their claim will be decided in their favor).

  8. SkokieGuy says:

    @cyclade: Yes you’re right on the percentage, it means nothing.

    Similarly, if 99.8% of arrested and convicted criminals are African-American, it doesn’t mean the police and courts are racist, as we don’t know if maybe they are committing 90% of all crimes.

    If a promising new medical procedure cures 99.8% of people it is performed on, that doesn’t mean it actually works, after all these people might have become well without treatment.

    What a load of crap! While we will never know the true percentage of cases that would be found in the consumer’s favor, if tried in a court of law, this doesn’t automatically mean that there is no evidence of unfairness.

    The evidence of unfairness is overwhelming.

    The inequality between the two disputing parties is overwhelming.

    To argue this is not a broken system is laughable.

    The ‘fix’ isn’t automatically more lawyers and more courts. The fix could include stronger consumer protection laws, revisions to small claims court, loser pays provisions and more.

    In addition the consumer’s inability to obtain alternative products and services NOT containing binding arbitration is a huge factor.

  9. cyclade says:

    @Alex Chasick: Alex, I hear you. Compelling as the numbers may be, I still disagree with your conclusion on the statistics point in the absence of clearer data (which we probably can’t ever get). We simply cannot determine with any certainty whether the cases are getting bounced on deliberate or callously indifferent mis-application of the merits by “unfair” arbitrators as opposed to legitimate “procedural” reasons – statutes of limitations, inadequate evidence, lack of actual economic damages, etc.

    As for your second point (in which you make some very fair criticisms with respect to appeals and discovery – the problem is the tradeoff of speed and certainty over thoroughness inherent in the process), I can’t imagine that someone with legitimate claims would consult a lawyer only if they were going to court – and would wander into the arbitration alone or unprepared. And I also can’t imagine a lawyer telling a client, “this is covered by an arbitration clause, so I’m not able to help you.” Arbitration is an adjudicatory process that for virtually all practical purposes looks an awful lot like “going to court” – and someone with a claim should consult counsel regardless of the forum. As for the problems with widespread product defects or corporate misconduct, don’t forget the power of state Attorneys General to investigate and remedy situations that are reported to them. They can be incredibly responsive to consumer-reported problems, particularly those circumstances in which there are repeated reports against a particular party.

  10. cyclade says:

    @SkokieGuy: Yikes. I’m afraid I’m coming across here as some sort of pro-corporate troll as opposed to the jaded, anti-futile-litigation type that I am. Statistical analysis techniques tell us exactly what you argue here SkokieGuy – that yes, absent controlling for other variables, you cannot tell what is going on with apparent success rates from given medical procedure, racial disparities in arrest patterns, etc. After all, drinking water can’t be said to cure cancer because 100% of cancer survivors drank water during their treatment. (Maybe an economist here can back me up on this…)

    My position really is thus: when it comes to dispute resolution, your options suck both in arbitration and in court. Your options in court may be especially bad in jurisdictions where judges are elected and rely on corporate donations to run for office. As long as the “big guys” have the top lawyers, money, and have time on their side – the deck is seriously stacked against anyone seeking redress through some sort of judicial or quasi-judicial process. Going to court is no picnic, and should not be seen as a panacea.

    You’re more likely to get “success” by writing The Consumerist, your local TV station/newspaper, calling your state AG, doing an awesome executive email carpet bomb, etc. because what these guys fear more than anything else is bad publicity.

    We really are on the same page. Regardless, I think I’m going to go take a walk outside now. ;-)

  11. Orv says:

    @ARP: My problem with “loser pays” is I think it would very effectively discourage any lawsuits against large corporations. Would you really want to sue, say, Microsoft, if you might wind up paying the tab for their entire huge legal team? Even if you thought you had a good case, you probably wouldn’t want to risk it.

    @cyclade: I actually disagree that small claims court is basically the same thing as arbitration, for two reasons. First, in most states you can appeal a small claims court decision to a higher court. Secondly, unlike an arbitrator, a small claims court judge is not having his/her salary paid by one of the litigants.

  12. S3CT says:

    Even if a company receives an award against a consumer; it still needs to go through the courts to be official. This is when a consumer needs to fight the award – in court when they try to get the award turned into a judgment.

  13. mythago says:

    And I also can’t imagine a lawyer telling a client, “this is covered by an arbitration clause, so I’m not able to help you.”

    Why can’t you imagine it? A lawyer would have to try to get a court to rule that the mandatory arbitration clause is unenforceable. Otherwise, the plaintiff blows through legal fees to find out that he has to go and pay for arbitration anyway.

    There’s a reason that the Chamber of Commerce and its puppets like mandatory arbitration – and it’s not because arbitration is fairer or cheaper. It’s because arbitration is far more corporate-friendly, and it’s easier to hide damaging information that might be made public at trial.

    As to whether the statistics mean anything, how would you feel about your chances at trial if, just before it started, your lawyer turned to you and said “By the way, in this judge’s courtroom, the other side wins 99.8% of the time”?

  14. Alex Chasick says:

    @cyclade:

    You’re more likely to get “success” by writing The Consumerist, your local TV station/newspaper, calling your state AG, doing an awesome executive email carpet bomb, etc. because what these guys fear more than anything else is bad publicity.

    I absolutely agree with this. I definitely don’t think litigation is, or should be, the best or first option an aggrieved consumer considers, especially for a lot of the complaints we write about. I just don’t like when an arbitration clause prevents litigation from being an option at all. As for massive product defect cases, I think class litigation IS a great option, and one of the worst casualties of some arbitration clauses; but the state attorney general is also a great resource, as are the courts that rule class action bans unconscionable.

  15. JiminyChristmas says:

    @cyclade:

    Even if you were to compare arbitration to Small Claims courts that tend to greatly relax the rules, there aren’t juries hearing those cases – so you wind up in more or less the same place as having the claim heard by an arbitrator.

    One important caveat: In small claims court, the ‘arbitrator’ is an impartial public servant. In arbitration, the arbitrator(s) present themselves as impartial but are effectively sitting in judgment of their own customers.

  16. Squeegoth says:

    Can’t you sue the arbitrators for something? Even if you can’t sue the company, can’t we as the consumer put the burden on the arbitration companies for providing an ADVERTISED PARTIAL arbitration process? Wouldn’t the existence of these companies get under the nails of real judges? Wouldn’t making them legally liable for ensuring fairness maybe clean up the process a bit? Can they be sued for malpractice?

  17. u1itn0w2day says:

    I’d say go to the regulatory agency in charge of the product in questions.With most retailers and even credit cards alot of issues are covered by the Federal Trade Commission or FTC.Or as some pointed out go to the local chamber of commerce or better business bureau.

    Problem these companies might cry foul saying it didn’t even go to arbritration yet-delay tactic.Most companies want as little as possible on record which arbritration might do.

  18. azntg says:

    Seriously, I hope that mandatory binding arbitration between a customer and a large corporation becomes banned permanently.

    Too bad that’s not going to happen anytime soon. Corporations and the lobbyists run this country. *sigh*

    As it has been said before, while it does help in trimming down those “frivolous” suits, it is also helpful in stifling legit suits. Any truthful voice being summarily shut out is always worrisome.

    @axiomatic: Damnit, I’m gonna move to Texas!

  19. Snarkysnake says:

    “Senator McCain , Senator Obama, I have just one question that I would like to ask you.”

    ” Mandatory arbitration strips consumers of one of their constitutional rights that one of you will take an oth to defend next January.” “Businesses use this process to deny their customers a day in court in front of a truly impartial judge in favor of a conflicted process that is almost totally controlled by one of the parties”

    ” Would you be in favor of ,and have your adminstration work toward, reform that would make arbitration voluntary and reverse the process that currently assures a favorable outcome for the party that hires the arbitrator “?

  20. libertylove says:

    Here is my problem with NAF: MBNA 2004 = $3,7000 (i owe and was making payments) 2007 NAF for MBNA = $27,000 – I was not served but they have a POS in the file that says they served someone else at my house. Yeah right. I live alone and anyone I know would have given me a court documents. Now I may have to quit my job because they had that arbitration confirmed in court – i opposed it and lost – and now it is a judgment against me. They will file a writ of execution against my wages (since i don’t have any assets) and collect 25% of my wages until satisfied.