In 2007, Antonio Jackson, an African American worker at the Rent-a-Center store in Washoe County, Nevada, concluded that he had been repeatedly denied promotion to sales manager because of his race. He complained to his store manager, the corporate office, and the human-resource department, all to no avail. Instead he was suspended, then transferred to a less desirable location, and ultimately fired. Jackson sued for race discrimination, only to be told by his employer that he had forfeited his rights to appeal his case when he took the job.
Rent-a-Center required all employees to agree to compulsory arbitration. The waiver covered the right to sue not just for civil-rights violations but also for violations of other hard-won employee rights such as a minimum wage, overtime pay, rest breaks, parental leave, and disability rights as well as protection from workplace sex discrimination and sexual harassment.
Astonishingly, in 2010, the Supreme Court agreed with Rent-a-Center, holding that Jackson's discrimination charge had to be resolved by arbitration -- in a process created by the employer with no appeal to the courts. The Roberts Court's recent arbitration rulings have only intensified a trend that dates back more than two decades, as the high court has chipped away at these and other legal rights, permitting ever broader use of compulsory arbitration.
Arbitration has become a stealth counterrevolution, denying rights for which consumers, workers, civil-rights advocates, feminists, and their legislative allies have fought for a century. More and more employers are demanding arbitration clauses as a condition of employment. Today, an estimated one out of three nonunion workers is covered by such "agreements," and that share is increasing. Compulsory arbitration has also become standard in consumer transactions, so consumers are also denied the right to sue for fraud, unsafe products, or misleading warranties. Hospitals routinely put arbitration clauses in medical consent forms. Homeowner associations and condominiums put them in their standard covenants. Banks routinely put them in account and credit-card agreements.
A survey by the consumer-advocacy organization Public Citizen showed that 75 percent of major companies across several industries use mandatory binding arbitration. One study of the most prominent firms in the telecommunications, credit, and financial -- service industries found that these businesses routinely insert arbitration clauses into their employment contracts (92.9 percent) and contracts with consumers (76.9 percent), but tellingly, these corporations rarely use them in their own commercial agreements (6.1 percent). Presumably, corporate vendors or purchasers have more bargaining power and sophistication than isolated workers and consumers and know not to sign away their legal rights. When corporations feel abused, they want recourse to the courts.
My own survey found that arbitration was mandatory in the service agreements of all four of the largest cell-phone companies, five out of eight of the largest cable companies, six out of nine of the major credit-card companies, and two out of four of the largest national retail banks. So arbitration has largely displaced the civil-justice system for most disputes between ordinary people and corporations.
Judge-made changes in arbitration law since the 1980s have made arbitration nearly impossible to avoid and made arbitrators' decisions invulnerable to appeal. A pending Supreme Court case, AT&T Mobility LLC v. Concepcion, could well exacerbate that trend. The issue involves AT&T's imposition of compulsory arbitration and a ban on consumer class-action lawsuits in cell-phone contracts.
A California couple, Vincent and Liza Concepcion got a "free" phone as part of their two-year cell-phone plan, but AT&T charged them $30.22 in sales tax, which is not supposed to apply when the product is advertised as free. The sum was not huge, but the Concepcions felt cheated. They sued the company on behalf of themselves and all other AT&T customers who had been similarly defrauded. However, AT&T's cell-phone contract contained an arbitration clause that prohibited class actions. AT&T demanded that the Concepcions use their arbitration process rather than the courts and proceed on an individual basis.
Because it would not be worthwhile to bring a case for $30.22, the arbitration clause would, as a practical matter, deny the Concepcions any relief and, more important, eliminate a class action that might punish AT&T for its pattern of fraudulent behavior. Though the amount at stake in this case is fairly trivial, the principle is not. If the Supreme Court finds for AT&T, compulsory arbitration would preclude class actions to address a broad range of consumer abuses.
To its defenders, arbitration has a nice constructive ring. It simplifies the process of dispute resolution, reduces legal fees, and promises swifter justice. This can be the case when arbitration is voluntary and consensual. But as arbitration is increasingly used against workers and consumers, the deck is stacked entirely on the side of the corporation. These tribunals are unilaterally crafted by corporations that pick the decision-makers, write the rules, and immunize the outcomes from judicial review. The presence of an arbitration clause in a contract does not provide an additional mechanism for resolving potential disputes; it provides the only mechanism. Under the Federal Arbitration Act, any dispute covered by a written arbitration agreement cannot be brought to a court; it must be decided by an arbitrator whose decision is final.
Seemingly, arbitration is cheaper, but corporations structure the process so that cost is a deterrent. In a lawsuit, an attorney may take the case on a contingency basis, so that the plaintiff has no up-front costs. But in arbitration, plaintiffs must bear significant out-of-pocket fees that can deter individuals from bringing claims. A forthcoming study by Michelle Eviston and Richard Bales of Northern Kentucky University found that under the rules of the American Arbitration Association, "a consumer alleging multiple consumer protection law violations requesting $300,000 in actual damages would have to pay a $2,800 filing fee and a $1,250 case service fee ... [as well as] half of the arbitrator's fees. ... In addition, the consumer would also have to pay for some other expenses, including but not limited to the arbitrator's travel costs, hearing room rental, witnesses' travel costs, and attorney's fees." These costs are beyond the ability of many workers and consumers, and they almost always exceed the costs of bringing a lawsuit on a contingent-fee basis.
Unlike the civil-justice system, arbitration is not transparent. Typically, confidentiality is required, and the outcomes are seldom published. But available data suggests that in employment cases, employers usually win and that when workers win, their damage recoveries are lower than in court cases. Professor Alex Colvin of Cornell University examined completed employment arbitration cases in California -- one of the few states where arbitration data are public. He reports that the employee win rate of 21.4 percent was significantly lower than in employment litigation trials. He also found that in cases where employees prevailed, the median award amount was $36,500, and the average was $109,858, both substantially lower than award amounts reported in employment litigation. A study of securities arbitrations between 1992 and 1996 found that in arbitration, plaintiffs won considerably smaller awards than in comparable court proceedings.
Compulsory arbitration clauses that include a ban on class-action lawsuits deny consumers one of the most potent remedies to deter or punish corporate misconduct. Today, most credit-card companies, banks, telecommunication companies, and other large providers include in their arbitration clauses a provision that individuals waive their right to bring a class action, either in a court or an arbitration proceeding.
Corporations want to prevent class actions in order to escape liability in cases where the company has cheated thousands of individuals but where each consumer's claim is too small to justify bringing individually. Such claims, if consolidated, can cost corporations many millions of dollars through a class action, but most would not even get to court if they had to be brought on an individual basis. For example, Verizon Wireless was recently sued for charging millions of customers for cell-phone Internet usage that they did not order. The case was settled last October for more than $50 million, yet each consumer will get, on average, a rebate of between $2 and $6.
One commentator has termed the typical combination of an arbitration clause with a class-action ban "do-it-yourself tort reform," a reference to corporate America's long-standing crusade to make it harder for consumers and workers to have their day in court. With such a clause, companies get a twofer. They both avoid high-stakes class actions and keep individual actions in a forum that they can control. In my survey, all of the arbitration clauses in telecom and credit-card contracts included an explicit waiver of the consumers' right to bring a class action in a court or in arbitration.
The changes in the Supreme Court's interpretation of the Federal Arbitration Act in the 1980s were the hidden revolution of the Reagan Court. Previously, the FAA, enacted in 1925, had been interpreted as a narrow statute that applied only to contractual disputes between businesses that were brought in federal court and involved issues of federal law. However, in the mid-1980s, the Supreme Court held that the FAA applied in state courts as well as federal courts and that it also applied to statutory as well as contractual claims. Since then, courts have permitted mandatory arbitration, under the FAA, in cases involving unlawful employment practices such as race discrimination, age discrimination, denials of rest breaks, minimum-wage claims, overtime violations, and unpaid-wage claims.
Until last year, consumers and workers have at times been able to resist unfair and one-sided arbitration agreements by claiming that a particular arbitration clause was unconscionable -- -meaning that it had been imposed coercively, deceptively, or was grossly one-sided in its process. However, in June 2010, the Supreme Court all but eliminated the ability of consumers to challenge unconscionable arbitration procedures. In the Rent-a-Center case, Antonio Jackson argued that the arbitration agreement he had been forced to sign as a condition of getting his job was unconscionable because it imposed excessive costs on him and because it did not permit him to conduct the discovery he would need to establish his claim of discrimination. The U.S. Circuit Court of Appeals held that the question of whether the agreement was unconscionable should be decided by a court, not an arbitrator. But the Supreme Court reversed the lower court, holding that the allegation of unconscionability itself must be decided by an arbitrator!
In the current case before the high court, AT&T Mobility LLC v. Concepcion, more than two dozen amicus briefs have been filed, with support for AT&T coming from such powerful business groups as the U.S. Chamber of Commerce, the American Bankers Association, the Financial Services Roundtable, the Consumer Bankers Association, DirecTV, Comcast, Dell, and CTIA (the wireless-communications industry trade group). Friendly briefs were also filed by numerous conservative think tanks, including the Pacific Legal Foundation, the Center for Class Action Fairness, and the New England Legal Foundation. The amici, together with AT&T, are urging the Supreme Court to clarify, once and for all time, that class-action waivers in arbitration agreements are enforceable.
The AT&T case was argued in the Supreme Court on Nov. 9. At the oral argument, Justice Antonin Scalia indicated some sympathy for the 9th Circuit ruling in favor of Vincent and Lisa Concepcion, based on states' rights. "Are we going to tell the state of California what it has to consider unconscionable?" he asked. Although the decision could conceivably roll back, on states' rights grounds, some of the wide latitude the Court has accorded to arbitration, the Roberts Court shows no sign of reversing its recent pro-arbitration and pro-business rulings. During the oral arguments, most of the justices seemed more concerned about ensuring the enforceability of arbitration agreements than protecting consumers from corporate fraud.
Toward the end of the oral argument, Justice Scalia warned that to uphold the lower court would be to override AT&T's intent, expressed in the contract, to avoid class actions and at the same time, require all suits to go to arbitration. "The question is not whether they are being forced to accept class arbitration," he said. "It's whether they are being coerced into abandoning regular arbitration. That's really the issue." If Scalia manages to convince his colleagues that the issue is whether a state can coerce a corporation to abandon arbitration, then AT&T will probably win.
If the recent past is a guide, the 9th Circuit decision is likely to be reversed, and the high court will permit corporations to impose arbitration clauses that ban class actions on behalf of workers and consumers. If so, corporations will be able to avoid not only litigation but also class actions, hence immunizing themselves from multiple small claims. Such a result will be a major setback for workers' and consumers' rights.
If this is the outcome, there are only two ways to preserve our hard-won consumer- and worker-protection laws. One is through an amendment to the Federal Arbitration Act. In 2009, Rep. Hank Johnson of Georgia proposed the Arbitration Fairness Act which would ban mandatory pre-dispute arbitration for employment, consumer, franchise, and civil-rights claims, preserving access to the courts. But the bill didn't get the attention it deserved, even among Democrats, and now with a Republican majority, reform is virtually dead for the foreseeable future.
The other way to slow the arbitration express is for consumer and worker groups to publicize the names of corporations that demand compulsory arbitration and class-action bans and to call upon the public to stop doing business with them. If Congress won't act, this abuse cries out for collective citizen action.
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