Author: James Barry, Partner
A large part of my practice involves handling cases for consumers who have been either scammed by a business (whether that be overcharged, lied to about the quality of something they were buying, or lied to in a consumer contract) or who have had their private information lost in a data breach from a company who should have kept that information safe.
When I first review those cases, one of the initial things that must be considered is whether there is an arbitration clause which applies to the dispute.
Arbitration clauses
My experience has been that when I explain to people that there may be an arbitration clause that prevents them from suing a business in court or as a class action, they are shocked. These clauses have become more prevalent, and, as the New York Times has written, they have been used as a way to stack the deck against consumers, to privatize the justice system, by using private lawyers instead of judges to handle claims without the ability to appeal, and to avoid the use of State or Federal Law.
Aside from the concerns about the fairness of arbitration itself, people are often shocked to find out that a business would argue that the consumer agreed to waive such important rights as the right to a jury trial, the right to participate in a class action, or the right to appeal. That’s because, by and large, arbitration agreements are hidden in the fine print of contracts or in the terms and conditions of websites. The Consumer Financial Protection Bureau found, when studying arbitration agreements, that consumers were generally unaware of whether they were subject to an arbitration agreement.
Determining whether an arbitration clause applies to a consumer claim, and if the arbitration clause is enforceable, is often one of the most important steps in advising a potential client as to whether they have a claim or not.
First, a consumer may have an opportunity to opt-out of the arbitration agreement, depending on the terms of the agreement. Second, the arbitration agreement may not apply to the issue which the consumer is having with the business. Finally, if the arbitration agreement is written improperly, it may be possible to argue that the agreement is not enforceable.
However, any argument about the enforcement of an arbitration clause requires an in-depth review of the facts and the law of the claim, and often the question of arbitration takes on a life of its own. For example, I’ve had the opportunity to argue before the New Jersey Supreme Court about whether arbitration clauses were enforceable, without ever getting to the facts of the actual dispute between the parties.
You can watch those arguments below:
Morgan v. Sanford Brown Institute
Kernahan v. Home Warranty Admin of Florida
Individual arbitrations are cheaper for businesses
Clearly, companies are willing to spend significant amounts of money to avoid having a consumer claim heard in court, and particularly to avoid class action cases. Why is that?
Because first, as documented in the NY Times articles linked earlier in this post, individual arbitrations are invariably cheaper for businesses – even if they overcharged hundreds of thousands of customers, only a few will take the time to affirmatively file a claim. Paying those few is much cheaper than having to repay all the customers if a class action is certified.
We know that’s true because, in the few cases where Plaintiff’s lawyers have been able to file mass arbitrations against companies, the companies have largely sought to get out of their own arbitration agreements.
A facet of the American legal system
Forced arbitration in consumer cases is, unfortunately for consumers, a very real facet of the American legal system.
Currently, the FAIR Act, which would bar pre-dispute arbitration in employment, consumer, antitrust or civil rights cases, has passed the House of Representatives but is unlikely to pass the Senate this term.
Until legislation passes, it is important for consumers to read the terms of the agreements they enter into, opt out (if possible) from arbitration agreements, and, if a dispute arises, seek an opinion from a qualified lawyer as to what possible options are available when a dispute happens.
