There are numerous federal laws that explicitly give wronged consumers the right to file a lawsuit against the company that harmed them, but all those statutory rights are being taken away by companies that insert arbitration clauses into their terms of service.

A new report [PDF] from Public Citizen examines the current state of forced arbitration and how it is increasingly being used to allow companies to skirt or possibly break the law.

For example, the federal Credit Repair Organization Act specifically states that credit/debt repair companies must include statements in their disclosures that state, “You have a right to sue a credit repair organization that violates the Credit Repair Organization Act.”

But in 2012, the U.S. Supreme Court ruled in 2012’s CompuCredit Corp. v. Greenwood that this “right to sue” isn’t really a right to file a lawsuit and have your case heard in a court of law, but merely a statement saying the consumer will have some forum in which to resolve the dispute.

So if a sketchy credit repair company (which is not hard to find) violates the CROA but includes a forced arbitration clause in its contract, your complaint will never be heard in court.

Then there’s the Telephone Consumer Protection Act, which also explicitly grants consumers who allege violations of that law to bring action against the company “in an appropriate court.”

But in Dec. 2013, when a Florida man alleged that Sallie Mae had violated the TCPA, he found that he was stuck having to arbitrate the case because of an arbitration clause in the promissory note he signed. So his case would not be heard in a court of law, but in arbitration.

Other laws that can be skirted in similar ways include the Electronic Funds Transfer Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Servicemembers Civil Relief Act, the Truth-in-Lending Act.

Each of these laws give consumers the statutory right to seek legal redress, but forced arbitration clauses can be used to move any attempt at resolution out of the courtroom and into a private arbitration process that is weighted heavily in favor of the company that wrote the contract.

“As these provisions indicate, proper enforcement of consumer protection laws depends not only on state and federal enforcement but also on consumers’
ability to act on their own, which forced arbitration substantially impairs,” writes Public Citizen in its report.

THE SNAKE BITING ITS OWN TAIL
While some wronged consumers attempt to get around arbitration clauses by claiming they are unconscionable and therefore not legally enforceable, companies merely get around this potential pitfall by including a stipulation in the clause that leaves it up to the arbitrator to determine whether the terms of a contract are fair or not. In 2010, the Supreme Court signed off on such circular clauses in its ruling in Rent-A-Center, West, Inc. v. Jackson.

“With companies’ widespread use of forced arbitration in contracts, our only option as consumers is to challenge the validity of the arbitration clause itself in court,” explained a plaintiff whose case against Citibank was forced into arbitration. “But that option is also gone.”

CAN ANYTHING BE DONE?
A recent preliminary report on forced arbitration from the Consumer Financial Protection Bureau confirmed that an increasing number of banks and credit card companies are using arbitration clauses to avoid litigation and put bans on class actions.

Forced arbitration clauses are now found in everything from wireless contracts to loan agreements to video game consoles. While the CFPB doesn’t have oversight over many of these companies, the Public Citizen report calls on the Bureau to use its authority to create a rule barring these clauses from contracts of those businesses it does oversee — banking, lending, credit, debt collection.

“[T]hese terms allow companies to escape accountability while engaging in illegal and predatory practices that harm the financial marketplace,” concludes the report. “The Bureau can and should act to restore consumers’ legal rights in all financial sectors by issuing a rule that eliminates forced arbitration in their contracts.”

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