In recent years, a narrow majority of the U.S. Supreme Court has repeatedly sided against consumers’ access to the justice system, concluding that a 90-year-old law gives companies the authority to effectively skirt the legal system by preempting customers’ lawsuits. That’s why some legislators have decided it’s time to change that law.

Back in 1925, Congress passed the Federal Arbitration Act. That law says that, when both parties to a contract agree to settle their disputes in binding arbitration — as opposed to a court of law, neither party can later try to force the other into having that matter settled in the legal system.

A spate of Supreme Court decisions over the last 30 years have resulted in companies increasingly using arbitration, not to quickly settle legal disputes with other companies, but to prevent large numbers of customers from filing potentially damaging class action lawsuits.

Today, Sen. Patrick Leahy from Vermont and Sen. Al Franken from Minnesota announced the Restoring Statutory Rights Act [PDF], states that the 1925 Federal Arbitration Act “did not, and should not have been interpreted to, supplant or nullify the legislatively created rights and remedies which Congress… has granted to the people of the United States for resolving disputes in State and Federal courts.”

It would create an exception in the Arbitration Act for disputes involving individuals and small businesses. The only way individuals would enter into arbitration is if they agreed to do so after the dispute has been filed. That’s very different from the current process, which automatically shunts all customer disputes into binding arbitration.

Our colleague George Slover, senior policy counsel at Consumers Union, says that the bill “restores the Federal Arbitration Act to what Congress intended — arbitration as a way for businesses to decide to handle their business disputes, but not as a way to insulate their misconduct from accountability to consumers.”

The bill also seeks to resurrect the authority of state law precedents in states that had previously held certain types of arbitration clauses as unconscionable.

“Congress must act to stop these abuses,” says Leahy in a statement. “The Restoring Statutory Rights Act will ensure that critical State and Federal laws can actually be effective, by ensuring that citizens cannot be stripped of their ability to enforce their rights using our independent justice system. It will also ensure that when States take action to address forced arbitration, they are not preempted by an over-broad reading of our Federal arbitration laws.”

My, How Times Have Changed

The Arbitration Act was written in 1925, when contractual agreements were primarily made between two businesses. And when two more companies sign contracts, there tends to be a back and forth and a shared understanding of the terms of the eventual agreement.

In the intervening decades, it’s become standard for consumers to be compelled to sign off on lengthy, mouseprint contracts for every phone, cable TV package, bank account, new computer, piece of software, video game console, and just about anything else they could think to buy. And unlike contractual agreements between two businesses, customers generally lack any ability or authority to demand changes in these terms.

Between consolidation in many important industries (telecom and financial, among others) and the increased use of arbitration agreements, consumers have fewer ways to vote with their wallets. If you don’t like the arbitration clause in Company A’s contract, there’s often little point in switching to Company B or C because they probably have an identical clause. And Companies D and E, which didn’t have that clause, no longer exist because they were acquired by the competition.

“Forced arbitration has crept into virtually every sector of Americans’ lives,” reads a letter [PDF] from advocacy group Public Citizen in support of this legislation. “These contractual provisions compel people to give up their ability to enforce their legal rights in court before a dispute has even arisen. Most people do not even realize that forced arbitration clauses are buried in the fine print of contracts for employment, consumer products, financial goods and services, and even student enrollment agreements at for-profit schools.”

This is all a way of saying that it’s doubtful that the drafters of the Arbitration Act presaged a day when an individual customer could not sue their credit card company when it breaks the law.

SCOTUS Rulings Stripped Away Your Rights

In 1984, the Supreme Court made an important ruling in Southland Corp. v Keating — a dispute between 7-Eleven franchisees and their parent company — that, perhaps inadvertently, resulted in setting the groundwork for the anti-consumer practices to come.

In the Southland decision, SCOTUS held that the Arbitration Act didn’t just apply to disputes in federal courts, but also in state courts. Because of that decision, even when customers try to sue a company for violating a state law, the company can compel that customer into binding arbitration.

Dissenting from the majority, Justice Sandra Day O’Connor wrote that the decision in Southland was “unfaithful to congressional intent, unnecessary, and… inexplicable.” She acknowledged that “arbitration is a worthy alternative to litigation” but accused the majority of “judicial revisionism” that “goes too far.”

Is Arbitration Really That Awful?

Maybe you’re asking, why is arbitration so bad? It’s just like going to court, but in an office building, right?

Nope.

While the process may expedite matters and does serve to declutter a clogged legal system, when it comes to consumer disputes, arbitration cases are often limited in scope and damages.

Thus, the company will likely be represented in arbitration by lawyers who are well-versed in the process and the issues involved, while the wronged customer must find an attorney willing to represent them for what is likely to be a meager award, if any. That roadblock alone prevents many harmed consumers from even attempting to go down the arbitration path.

And if there’s a significant legal error in a court case, you can try to appeal to show that the outcome would have been different. Not so in arbitration.

Once again, this involves a curious interpretation of the law by SCOTUS. In the Hall Street Associates v Mattel ruling from 2008, the nation’s highest court held that, even when there is a clear legal error that should have resulted in a different result for the arbitration, the courts can’t get involved.

One At A Time…

Additionally, most arbitration clauses don’t just prevent the customer from suing in court, they also bar the customer from joining together with similarly wronged consumers in a class action. These customers can’t even pursue a joint arbitration action. Each individual must go through the arbitration process on their own.

And since arbitration results are often secretive and create no legal precedent, it’s possible that two different people could get two completely different results even though their claims are identical. Whereas, if those customers had been part of a class action, the outcome of the case would have applied equally to all plaintiffs.

Since 2010, the SCOTUS majority has repeatedly shown its disregard for class actions, ruling against consumers’ access to the legal system in three separate cases.

First, in AT&T Mobility v Concepcion, the court was asked whether a few paragraphs of fine print buried in AT&T’s lengthy customer agreement — a contract that can’t be altered in any way — is sufficient to bar customers from filing joint grievances.

Writing for four dissenting court members, Justice Stephen Breyer explained that allowing a company to require arbitration in order to block class-action suits gives that business the ability to insulate itself “from liability for its own frauds by deliberately cheating large numbers of consumers out of individually small sums of money.”

The “Get Out Of Jail Free” Card

This point was driven home three years later in the American Express v Italian Colors Restaurant ruling.

In that case, a restaurant was seeking to prove that American Express’s business practices violate antitrust laws, but in order to prove that point, the plaintiff would need to spend more money than they could ever hope to receive through individual arbitration with AmEx. Should the restaurant be allowed to sue in court, where the damages could be larger? Or perhaps be permitted to spread out the cost of litigation with other plaintiffs in a class action?

Once again, SCOTUS said no, ruling that the Arbitration Act “does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.”

In writing for the three dissenting court members (Justice Sotomayor recused herself), Justice Elena Kagan summarized the majority’s opinion in three words: “Too darn bad.”

She said the ruling was a “betrayal of our precedents, and of federal statutes like the antitrust laws… The majority disregards our decisions’ central tenet: An arbitration clause may not thwart federal law, irrespective of exactly how it does so.”

A number of consumer advocates argue that, by allowing companies to skirt the legal system by making it too costly for consumers to hold them accountable, they have effectively been given a “get out jail free” card, or a “license to steal,” by the courts.

More recently, in DirecTV v Imburgia, the court once again demonstrated the lack of authority that state courts have in deciding arbitration-related matters.

That case involved a previous version of DirecTV’s arbitration agreement, which said it could be invalidated “if the law of your state” did not permit agreements barring class actions. Since California courts had previously found class-action bans to be unconscionable, various state judges had ruled against DirecTV’s attempts to force customers into arbitration.

But the SCOTUS majority ultimately held that such state-level precedents were “an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” in drafting the Arbitration Act.

Justice Ruth Bader Ginsburg says the SCOTUS majority are misinterpreting the Arbitration Act to “deprive consumers of effective relief against powerful economic entities that write no-class-action arbitration clauses into their form contracts.”

Regulatory Efforts

Last October, the Consumer Financial Protection Bureau began the process of drafting rules that are intended to limit financial institutions’ use of arbitration to ban class actions.

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray at the time. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

The banking industry has been pressuring lawmakers to limit the CFPB’s ability to draft these rules. Last year, as a divided Congress tried to cobble together something resembling an omnibus spending bill, Reps. Steve Womack (AR) and Tom Graves (GA) tried to slap on amendment prohibit the CFPB from using any of its funding to restrict the use of forced arbitration clauses until after the Bureau effectively redid its three-year study on the issue. That effort ultimately failed, though bank-backed lawmakers have said they will continue to fight the CFPB on Capitol Hill.

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