Most consumers don't realize the rights they surrender by signing everyday contracts. MSNBC.com's Bob Sullivan reports. Produced by NBC's Andy Gross, with help from Patrick Longstreth in graphics and editor John Peris.
If I told you there was a courtroom in America where consumers lose lawsuits to businesses 94 percent of the time, and there is no chance to appeal, you'd probably never want to go there.
But here's the problem: You don't have a choice, thanks to small print.
While you may have never heard of binding mandatory arbitration, it is part of nearly every significant transaction you engage in now. It's also become a controversial battleground over consumer protection in America, and on Thursday Congress held hearings debating legislation that would largely nullify many arbitration agreements. The hearing came on the heels of a new report that claims to offer a first-ever glimpse into a world that some say has turned Americans' Constitutional rights on their head.
You might call it the ultimate fine print. It's in virtually every consumer contract in America. It substantially alters the most basic consumer rights. Yet, virtually no one knows about it.
Pull out you cell phone agreement, your credit card terms and conditions, the paperwork from your last automobile purchase. Then grab a magnifying glass, read carefully, and you will eventually come upon what's called the "binding mandatory arbitration clause." By entering into the contract, you agree to waive your right to a standard courtroom trial should you want to sue the company. And should the company sue you, you agree to abide by rulings made by arbitration boards, and to waive most of your rights to appeal.
Binding mandatory arbitration clauses crept into consumer contracts during the late 1990s and are now standard practice. They arrived in the name of efficiency and tort reform. With federal courts overwhelmed, and justice crawling along at a snail's pace, companies seized on a 1925 law permitting "alternative dispute resolution" between two parties that agree to it. Alternate routes can take many forms: online dispute resolution, or voluntary mediation, for example. But binding mandatory arbitration, where parties are forced to appear before a panel of paid referees whose rulings are absolute and final, quickly became the companies' choice.
Arbitration forums vary greatly from traditional courtroom settings. The hearings are informal, and often virtual, decided essentially through an exchange of letters. Unlike a public courtroom, the proceedings are private; even the eventual rulings are not disclosed to the public. For years consumer advocates have alleged that arbitration boards have largely served as rubber-stamp courts that do companies' bidding, but they had little evidence to support the claim.
California law provided study data
Now, they think they have some. A California law passed in 2002 required arbitration firms that do business in the state to publish court results on their Web site. One of the three main arbitration forums, the National Arbitration Forum, began posting records soon after. Consumer advocacy group Public Citizen recently downloaded the reports -- 34,000 cases adjudicated between January 2003 and March 2007 -- sorted the data, and analyzed the results. While limited to California cases, the report offers one of the first glimpses of the real-life consequences of arbitration clauses.
Here are some highlights:
• Businesses initiate the legal actions in the National Arbitration Forum nearly all the time. Of the 34,000 cases filed, only 118 were filed by consumers.
• In the 19,300 cases that were decided during the time period, consumers prevailed only 4 percent of the time, while businesses won 94 percent of the time. Winners were not listed in the remaining 2 percent.
• About 99 percent of the cases filed by businesses were collection cases; and a majority involved credit card firms trying to recover bad debts.
• A small number of arbitrators decide nearly all the cases. The study found that 28 arbitrators handled nearly 9 out of every 10 cases.
• Public Citizen found one arbitrator had ruled 1,292 times during the span -- and only 21 times for the consumer. On one particularly busy day, he ruled on 68 cases -- all in favor of companies. The arbitrator did not respond to an e-mail request for an interview.
Laura MacCleery, who helped author the Public Citizen's report, describes arbitration boards as "collection mills."
"Our problem with arbitration is not only that the outcomes are grotesquely unfair but there's no remedy when a mistake is made," MacCleery said.
A spokeswoman for the National Arbitration Forum wrote in an e-mail exchange that the Public Citizen analysis "is misleading." Since most cases are uncontested collection cases, it's no surprise that businesses win most of the time, she said.
"Evaluating arbitration outcomes is only meaningful in comparison with court outcomes of similar cases. ... Public Citizen's findings, placed in their appropriate context, establish that arbitration provides the same substantive outcome as court," said spokeswoman Christina Doucet. "Virtually all of the cases in the arbitration data were collection matters, and the fact is that consumers rarely respond to collection claims filed in arbitration or in court. Research shows that lenders prevail 96-99% of the time in consumer collections cases in court."
Companies prefer quick arbitration results for obvious reasons; traditional court proceedings can drag on for months, even years, giving debtors a chance to hide almost indefinitely from their bills. Courtroom trials also expose companies to huge, and sometimes unnecessary, legal bills. But MacCleery says that swift justice isn't necessarily good justice.
"What's so hard about going through due process?" said MacCleery. "That's a Constitutional right."
Proposal would invalidate many clauses
Earlier this year, two Senate Democrats introduced the Arbitration Fairness Act of 2007. If passed, the law would make many arbitration clauses unenforceable.
"Arbitration can be a fair and efficient way to handle disputes, but only when it is entered into knowingly and voluntarily by both parties," Sen. Russ Feingold (D.-Wis.) said in July when introducing the bill. "People from all walks of life ... often find themselves strong-armed into mandatory arbitration agreements. We need to make sure that all Americans can still have their day in court."
Similar legislation introduced in the House of Representatives earlier this year was debated Thursday by the House Judiciary Committee.
Richard Naimark, senior vice president of the American Arbitration Association – another main arbitrating board – conceded in his testimony that arbitration isn't perfect.
"It could use some fixing, some balancing," he said. Still, he said dismantling the system wouldn't give consumers more access to justice. Most consumers can't afford legal representation, and only 2 percent of cases ever get before a judge.
"The idea of getting 'my day in court' is a myth for most mere mortals," he said.
Still, mandatory arbitration is a fundamental attack on consumer rights, said consumer advocate Paul Bland in an interview on Wednesday. Bland, who works at Washington D.C.-based Public Justice, often files lawsuits that attempt to void arbitration clauses. He calls the current system a "protection racket" for corporations that dissuade consumers from filing their own claims against companies. Many class action cases are prohibited by the clauses, for example.
Another issue he has with arbitration agreements are the "loser pays" rules that are often implemented, he said. When "loser pays" rules are in effect, consumers who might want to file a case against their cell phone or credit card companies must take on the financial risk of paying arbitration costs and opposing attorney fees, which often far exceed the value of the case. In contrast, traditional consumer protection cases filed under federal or state law provide "one-way" legal fee provisions -- if the company loses, it pays the consumer's legal fees, but if the company wins, consumers only pay for their own legal representation, unless the lawsuit is deemed frivolous. The provision is included to give private individuals a level playing field in what could easily be a David-vs.-Goliath battle of legal fees.
But in arbitration, Bland said, consumers risk having to pay for all of Goliath's lawyers.
"For most people, that's a deal breaker," Bland said. The fact that only 118 arbitration cases were with the National Arbitration Forum filed by California consumers from 2003-2007 proves this point, he said.
Bland concedes that federal courts are so crowded that companies trying to get justice in certain kinds of cases, including big-ticket debtor cases, can face huge delays. And he agrees that arbitration has a place in the legal landscape. Much of his objection revolves around the stealthy way that mandatory arbitration clauses have been slipped into consumer agreements, quietly changing basic rights to public courtrooms, he said.
"Most consumers don't even know what 'arbitration' is," he said.
Other consumer advocates complain chiefly about companies' insistence that arbitration be mandatory, rather than voluntary.
"If arbitration were in any way beneficial to consumers, it could be made an option and consumers would choose it," said Richard Alderman, Director of the Consumer Law Center at the University of Houston, in the Public Justice report.
RED TAPE WRESTLING TIPS
For now, fighting arbitration clauses is a tough nut. The best most consumers can do is write to companies and complain, and write to their congressional representatives and support laws that change arbitration rules. But here are a few other tips.
• Support companies that don't require arbitration. The AARP offers credit cards that don't include mandatory arbitration provisions, as do some credit unions and smaller banks.
• Try to strike arbitration clauses from new contracts. A cell phone sales clerk or auto dealership may not object to you crossing out the provision. Of course, any retailer can simply refuse to let you make the purchase then.
• Paul Bland recommends to clients facing an arbitration case that they decline a hearing by mail, often called a "desk arbitration," and request an in-person hearing instead. That may seem time consuming, but it will prevent companies from hand-selecting their favorite arbitrators, as it forces arbitrators who live near the consumer to be involved, giving consumers a better chance at a fair "trial."
• Some firms are now offering "opt-out" provisions, though many opt-out windows close 30 days after a contract is signed. Exercise that option when you can. Also, you can send a letter to firms where an arbitration clause is already in force saying you no longer agree to it. The letter may or may not get you out of your contractual agreement, but it may help in a future litigation if you attempt to get the arbitration clause struck.