The issue, according to an exhaustive investigation published by the New York Times on Halloween Day, is the widespread adoption of arbitration clauses in everything from credit card contracts with banks to mobile phone contracts. Such clauses effectively take away a consumer’s right to sue.
In sum, if a consumer either agrees directly to limit a potential dispute to binding arbitration only or signs a document - such as a contract - that allows for the other party to invoke arbitration to settle a dispute if they so choose, it prevents the consumer from taking the matter to court.
This also includes class actions - for many consumers, the only affordable way they have in pursuing an alleged injustice. While consumers may not have the resources to fight consumer or financial fraud on their own, they have historically been able to join class-action lawsuits as a participant over an issue or injustice that involves other consumers similarly affected numbering in the hundreds or thousands. Any settlement forthcoming is then split amongst the class members. The class-action lawsuit is and has been historically the only realistic access many consumers have to the justice system.
That’s all changing now, with the widespread adoption by more and more companies, corporations and service providers of binding arbitration to settle disputes. And everybody is getting into the act: consumer contracts with Amazon, Netflix, Travelocity, eBay and DirecTV now contain arbitration clauses. The New York Times (10/31/15) notes that even Ashley Madison, the online site for adulterers that’s been in the news since the summer over data breaches, requires that clients agree to arbitration clauses.
In other words, if you have a beef with your mobile phone provider or bank over a fee - and provided you agreed to binding arbitration when you signed a contract you probably never read in the first place - you have no choice but to take the service provider on, yourself. You can’t join a class action. You’re on your own. And if fighting the fee is going to be too costly or expensive for you to do on your own, you will do what most consumers facing the same problem are now doing…
You pay the fee and walk away. The service provider or bank - whatever it is - wins.
Binding arbitration is circumventing the class-action lawsuit
In truth, they win several times over, given the fact there are thousands or even hundreds of thousands of people potentially having the same problem and potentially interested in joining a class-action lawsuit. But with increasing frequency, that’s not going to happen by virtue of an agreement that effectively bans class-action lawsuits and restricts a consumer’s options to binding arbitration.
Were a class action to be attempted, it would be tossed out. That’s happening as well.
The New York Times recounts the story of Patricia Greenville, a resident of South Carolina who took exception to a $600 cancellation fee levied by AT&T. Greenville initiated a class action against AT&T and was amongst more than 900 class members in three states who had the same problem. But because they had all signed binding arbitration agreements - or had failed to opt out - the lawsuit was dismissed.
Greenville had little choice but to grudgingly pay the $600 cancellation fee, because attempting to fight AT&T through arbitration would have cost her much more in legal fees and other costs.
$35,000 to fight a $125 charge
Those costs are best demonstrated by the story of Daniel Dempsey of Tucson, Arizona. Three years ago he began an arbitration process with Citibank over a late fee on his credit card about which he didn’t agree, and which he claims ruined his credit score. He vows to keep going until the matter is resolved to his satisfaction and he is awarded damages.
The disputed charge is $125. To date, in three years Dempsey has spent $35,000 fighting a company for whom he used to work at one time as an employee. Dempsey is fighting to restore his credit rating and thus his financial dignity, on principle.
Most consumers would not be in a position to undertake such a fight, and instead just walk away. The New York Times suggests in most cases, that’s exactly what happens.
“This is among the most profound shifts in our legal history.” - William G. Young
Pundits suggest this widespread adoption of the binding arbitration clause and the resulting ban on class-action litigation is one of the most pervasive affronts to consumer protection law in recent memory. Consumers - even if they are aware of the clauses entrenched in the contracts they are signing - are often not able to obtain the service without agreeing.
“This is among the most profound shifts in our legal history,” William G. Young, a federal judge in Boston who was appointed by President Ronald Reagan, said in an interview with The New York Times.
“Ominously, business has a good chance of opting out of the legal system altogether and misbehaving without reproach.”
While corporations are undoubtedly happy with the emerging status quo, officials in the law enforcement community and consumer advocates alike lament the loss of litigation as an essential tool for revealing patterns of corporate abuse. Last year, according to the New York Times, no fewer than 16 attorneys general at the state level issued a letter to the Consumer Financial Protection Bureau warning against “unlawful business practices” that could flourish with the proliferation of class-action bans.
The banking industry is one sector that relies heavily on fees. Playing fast and loose with the order of transactions in an effort to increase overdraft fees have pushed many a bank into court in the recent past. In 2009, what the New York Times described as a “particularly bruising” set of lawsuits involved about a dozen banks taken to court by their customers over an accounting practice that unfairly inflated the fees they charged to consumers, or so it was alleged. The cases settled for more than $1 billion in damages.
Would that happen now?
A “get-out-of-jail-card” for corporations
It should be noted that seven of the banks involved in the 2009 lawsuits have since added arbitration clauses to consumer and client contracts. If banking customers were to have a beef with their bank as to overdraft charges or various other fees - even if there are others across the country like them - they no longer have the opportunity to initiate or join a class action. Instead, they’d have to take things up with the bank on their own.
Chances are they won’t. That’s what the data suggests - data about which those very banks, corporations and service providers are also well advised.
According to the Federal Deposit Insurance Corporation, the three largest banks in the United States - JPMorgan Chase, Bank of America and Wells Fargo - earned in excess of $1 billion dollars in overdraft fees in the first three months of this year.
Meanwhile, as corporations and service providers continue to be increasingly shielded from litigation, the horror stories of those victimized by the move to arbitration are becoming legion.
A story of two class actions, and how binding arbitration killed one of them
A bread truck driver from Rohnert Park, California, borrowed almost $56,000 from Key Bank to learn to fly helicopters. Key Bank is one of the two “preferred” lenders recommended by Silver State Helicopters, a for-profit school based at one time in Oakland.
As the story goes, halfway through the training, Silver State Helicopters went bankrupt quite suddenly. Matt Kilgore never got his degree, but was still saddled with $56,000 in loans. Both lenders demanded the loans of 2,700 students, including Kilgore, be repaid. Kilgore joined a class action to fight the repayment demand, given the bankruptcy and the degree he would never have the chance to earn or use.
Those students having obtained funding from Student Loan Xpress, the other preferred lender, had their loans forgiven as the result of a settlement tied to the successful conclusion of a court case, as Student Loan Xpresss did not have binding arbitration clauses in place.
But Key Bank did, and does. That class-action lawsuit was tossed, and Kilgore - like so many others - is on his own. His loan has now ballooned to $110,000 with interest according to the New York Times, money he has not been in a position to repay. His credit in tatters, Kilgore is unable to buy a house for his wife and two daughters.
And it’s not just banks and service providers that are jumping on the class-action ban-wagon. Employers in the retail and service sector such as Macy’s, Kmart and Sears are including language in employment and service contracts that require agreement to binding arbitration, the New York Times reports. In many cases, if the prospective employee does not agree to the arbitration clause, the job offer is withdrawn.
Civil rights experts remain concerned that discriminatory labor practices will go unchecked, in tandem with the dispperance of class actions.
The landscape is changing. Many are saying, it is not for the better…