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NEWSLETTER

“Second-Class Justice”: Mandated Arbitration Denies Choice

 

By Sanford M. Jaffe and Linda Stamato
 
The authors are co-directors of the Center for Negotiation and Conflict Resolution, at Rutgers University. Jaffe worked at the Ford Foundation from 1968 to 1983 and was officer in charge of the Government and Law Project. Stamato was a consultant to Ford. This article is an edited version of one that appeared in the December 2016 issue of Alternatives, the official publication of the International Institute for Conflict Prevention & Resolution. 
 
Wells Fargo customers were blocked from suing the bank over fake accounts.
 
In the early days of the dispute resolution movement—the 1980s and 1990s—the concern was often expressed that we were developing a system of “second-class justice” for those who couldn’t afford the courts. The wealthy, of course, would continue to have access to the “first-class justice” that the public courts provided. 
 
That prediction was a bit off. A shift did occur but it wasn’t what many anticipated. 
 
People chose alternative processes—variations on mediation and third-party decision-making—and the dispute resolution field grew. But the well-heeled and large corporate interests, seeing advantages, seized and invested heavily in it. Courts were no longer the venue for the justice they were seeking. 
 
While corporations were willing, even eager, to use mediation, arbitration and private judging as processes for managing differences, voluntarily, between them, they moved to restrict the choice of dispute resolution within their businesses—that is, with customers, clients, and employees—to mandatory arbitration and, its corollary, prohibition of access to courts for class-action lawsuits. 
 
The second-class justice taking shape now is arbitration with a twist. Allowing no choice—taking place in secret, with limited rights to appeal and, often, with outcomes protected by confidentiality—mandatory arbitration has been having a field day. 
 
It has grown exponentially in the past two decades as the U.S. Supreme Court opened the floodgates with decisions like AT&T Mobility v. Concepcion. That case upheld the enforceability of these clauses, and distorted the intentions of the Federal Arbitration Act of 1925. The effect was to significantly limit rights to class action lawsuits. 
 
It’s a disturbing trend. 
 
And it requires the attention of the dispute resolution profession. As the field of dispute resolution has become more formalized and institutionalized, it has spawned offspring that undermine several of the field’s core principles, not the least of which is choice which fairness requires. 
 
Hijacking a process to accomplish ends that defy core principles certainly ought to raise serious concerns in the profession where, we believe, responsibility rests for articulating and preserving the values and principles that lie at the heart of the movement. 
 
RESULTS IN THE SHADOWS 
 
People don’t seem to know or care about mandatory arbitration until they find they have signed contracts that require them to use it when they have a dispute with their cellphone provider, bank, nursing home, credit card or car rental company, investment broker, medical professional, or the providers of a wide-range of consumer services, including cable companies. 
 
Private parties most often prefer having their cases heard in court, but contractual obligations can, and frequently do, leave consumers with no choice but to arbitrate. They had to agree to that process in order to get hired or make a purchase or enter a surgical facility or a nursing home. 
 
They are prohibited also from any effort to press their claims as a class even though those claims may be too costly or time-consuming to pursue individually. As a result, they have little bargaining power against significant, moneyed interests and repeat players. 
 
Customers who tried to sue Wells Fargo over the fake accounts that were created in their names, for example, were blocked from the courts and forced into arbitration. Wells Fargo customers won’t be able to sue the bank over fake accounts. The Pew Charitable Trusts reported in August…that the use of arbitration clauses has risen to 72 percent from 59 percent at 29 big banks it studied. 
 
Individual claims decided in secret, moreover, rarely right wrongs that affect others. As Jenny Yang, chair of the U.S. Equal Employment Opportunity Commission, noted in an article a year ago that was part of a controversial series on arbitration in The New York Times, the process “allows ‘root causes’ to persist” and it “keeps any discussion of discriminatory practices hidden from other workers ‘who might be experiencing the same thing’.” 
 
The outcome of an age discrimination claim, for example, would have no impact on others similarly situated—or on the community—if it is decided in arbitration. 
 
The Times reported, “Even when plaintiffs prevail in arbitration, patterns of wrongdoing at nursing homes are kept hidden from prospective residents and their families.” 
 
The Economic Policy Institute…reports that, on average, employees and consumers win less often and receive much lower damages in arbitration than they do in court. Even when plaintiffs prevail in arbitration, patterns of wrongdoing are often not disclosed. 
 
The Times series found people forced to arbitrate claims of medical malpractice, sexual harassment, hate crimes, discrimination, theft, fraud, elder abuse and wrongful death. It concluded that we now have an alternative system, a privatizing of the justice system, where “clauses buried in tens of millions of contracts have deprived Americans of one of their most fundamental constitutional rights: their day in court”. 
 
Coupled with bans on class actions—the legal means for citizens to collectively defend their rights—these contract clauses are unfair, even unconscionable. 
 
PUSHING BACK 
 
Since the Supreme Court expanded the scope of the law, some state courts have been pushing back, as have several federal agencies. 
 
In New Jersey, for example, courts have reached decisions that require a strict and narrow standard for the enforceability of mandatory arbitration clauses. Providing a hopeful sign that greater judicial scrutiny may be forthcoming is a string of court cases that have found these clauses unenforceable when they conflict with public policy. 
 
The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act prohibits the use of mandatory arbitration clauses in mortgages. And, after a lengthy study echoing or presaging many of the concerns discussed about arbitration above, the Consumer Financial Protection Bureau (CFPB) has proposed rules that would prohibit these clauses. The CFPB’s jurisdiction includes checking accounts, credit cards and other types of consumer loans, and it targets those that preclude consumers from joining in class-action cases. 
 
Those rules are being vigorously resisted. As are the rules issued in early October by the Baltimore-based Centers for Medicare and Medicaid Services, an agency in the U.S. Department of Health and Human Services, that prohibit requiring assent to mandatory arbitration as a condition for admission to nursing homes. (The final rule was scheduled to go into effect late last month, but a Mississippi federal court issued an injunction against CMMS….) 
 
Still, conflicting rulings by two U.S. Circuit Courts of Appeals underscore the roadblocks ahead. The Seventh U.S. Circuit Court of Appeals struck down an arbitration clause that barred employees from joining as a class to sue the employer, Epic Systems Corp., a Verona, Wis., health care software provider, finding the clause to be in violation of the National Labor Relations Act, which gives workers the right to unionize and engage in collective action. 
 
This decision, viewed as a major move in the opposite direction of where courts had been going after 2011, conflicts with earlier Fifth Circuit decisions. At this writing, four cases from the Seventh, Ninth, Fifth and Second Circuits have been the subject of petitions for certiorari to the U.S. Supreme Court, asking the Court to decide the conflict between the nation’s labor laws’ provision of access to collective action in courts, and deference to the Federal Arbitration Act. The petitions have been filed by plaintiffs in the Second Circuit, employers in the Seventh and Ninth, and by the NLRB in the Fifth Circuit. 
 
Given that similar cases are pending in federal courts across the country, it’s likely that the subject of mandatory arbitration and prohibitions on class actions will come before the U.S. Supreme Court once again. 
 
RESTORING CHOICE, PROTECTING RIGHTS 
 
As a matter of policy and law, it’s vital to recognize that reliance on arbitration can obscure public interests and have the perverse effect of eroding confidence in the U.S. legal system. 
 
Absent public scrutiny, the rigors of the adversary system—in full public view, with review and rights of appeal—the critical development of the common law, and constitutional law, over time, could be impeded. 
 
Public awareness is growing, given the front-page coverage involving celebrities and the shocking stories occurring in institutional settings…but a significant push is needed against the interests that are determined to keep mandatory arbitration the norm. 
 
That push may be coming. The Federal Communications Commission, for example, is closing in on communication companies and their mandatory arbitration of consumer issues. The clauses are in the sights of other federal agencies as well.  
 
New initiatives, moreover, are likely to enhance, not weaken, the case for mandatory arbitration, putting the brakes on what was a momentum to limit or narrow its use. Even federal judges are looking at arbitration as an erosion of their own powers, particularly in matters that hurt consumers. 
 
It appears that the public wants access to the court system, including the right to join and pursue class action lawsuits. Consumers, employees and patients, among others, ought to have the freedom to choose how they pursue a dispute, rather than allowing their employers, banks, hospitals and various service providers to limit their options. 
 
The election of Donald J. Trump as president and the Republicans’ retention of Congressional control reduce the likelihood of further arbitration regulation in Washington. It puts the existence of the Consumer Financial Protection Bureau at risk, and raises questions about the agency’s still pending arbitration-related and class-action waiver regulations. 
 
So if Congress and federal agencies don’t act, then states should fill the void. Contracts that compel arbitration deny citizens their right to a day in court. 
 
PROFESSIONALISM, IN PRACTICE 
 
There is something else at stake: The integrity of dispute resolution processes and the field that advocates for them. 
 
Arbitration has its place in the justice system. That has existed for a long time. Even George Washington had an arbitration clause in his will. It is a tested and valuable process, usually generating quick, efficient resolution of disputes that need immediate resolution. Finality is a virtue. 
 
 In the field of labor relations, arbitration established its usefulness as a necessary step in handling grievances, particularly, after all negotiations and mediation had been tried and the parties were willing to accept a final and binding solution by their arbitrator(s). 
 
In construction, where deadlines weigh heavily on parties, a third-party arbitrator’s expertise can produce a decision all can live with. The key is that arbitration is a choice by parties—an informed, voluntary, choice—as to what process will serve best and when it will be used. Outcomes are acceptable when the process is perceived as fitting and fair. 
 
With mandatory arbitration, the process has been distorted, some say perverted. Stripping away choice has damaged its acceptance. 
 
The wholesale move to mandatory arbitration is a regrettable development in a field that prides itself on choice, on party determination, on procedural justice. “Forced arbitration” may not have originated “in the field,” but it seems to have found a home there. 
 
Rarely seen are misgivings about mandatory arbitration expressed by dispute resolution professionals. But we ought to be heard in the hearings and rule-making processes, and in social and print media, to support the proper use of the processes we have worked to design, develop, apply and evaluate. 
 
We need to bring our scholarship and experience to the public forum, to defend the principles upon which this field is grounded, not the least of which is choice. We need to return to the attitudes and beliefs with which the field started decades ago, to fulfill the promises of the architects of the field. 
 
As mandatory arbitration gains increasing scrutiny, we ought to be front and center advocating for the right use of third-party processes and arguing against their misuse. 
 
We have an opportunity, we believe, that should not go to waste.

 


 

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