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In The Dark: Deceiving Consumers

Many people don't know that they are subject to forced arbitration clauses—for products they buy every day, workplace disputes, and more. And the hidden nature of this system extends to the proceedings themselves, with the process and outcome kept secret from the general public.

As more consumer advocates shine a light on the dangers of forced arbitration, the backlash against these clauses grows stronger every day.

David Ratcliff January 2017

Although more than a half billion forced arbitration provisions appear in contracts and agreements—from nursing home admissions to credit cards—most Americans have long been in the dark.1 In 2015, the Consumer Financial Protection Bureau (CFPB) released a comprehensive study that showed how pervasive forced arbitration has become and how little the public knew about the practice.

Seventy-nine percent of consumers whose credit card companies required arbitration didn’t know whether a forced arbitration provision was in the enrollment agreement.2 Fewer still realized they had been stripped of their constitutional right to a jury trial—those who had heard of arbitration thought it referred to a negotiated outcome like mediation, rather than a binding decision.3

But more people are becoming aware of the dangers of forced arbitration, thanks to high-profile cases, consumer advocates, and a growing body of research. Consumer groups and trial attorneys are working against forced arbitration every day.

In July, AAJ released Forced Arbitration: How Corporations Use the Fine Print to Bully Americans, a research report that highlights the prevalence of and problems with forced arbitration.4

What’s clear is that forced arbitration puts consumers at a huge disadvantage. According to the CFPB, consumers were successful only 20 percent of the time in forced arbitration, and the few consumers who “won” received an average of only 12 cents for every dollar they claimed.5 In stark contrast, winning corporations received 98 cents for every dollar they claimed.6

Part of this imbalance can be attributed to the “repeat player problem.” Consumers usually have no experience navigating the mechanics of arbitration, while corporations tend to be frequent users. Arbitrators often favor the corporations that comprise their repeat client base. The CFPB found that corporate repeat players make up 89 percent of the parties in arbitration filings.7 Consumers are 79 percent less likely to be successful against one of these repeat players compared to a company with little or no arbitration history.8

The more Americans learn about forced arbitration, the more they disapprove. About half of all consumers approved of the supposed goals of forced arbitration—such as being less costly than court or streamlining the justice system.9 But once its components—such as no appeal process and consumers paying fees even when they prevail—were explained, 88 percent disapproved of arbitration.10

But it’s not easy to escape the clutches of forced arbitration. For example, only 27 percent of credit card agreements include some kind of arbitration opt-out provision, and only one in 1,000 consumers use opt-out provisions in any type of contract.11 Most consumers do not realize they have the option, do not know how it works, or are unaware they have entered into a contract in the first place.

But consumer advocates are finally seeing progress. Forced arbitration agreements are also coming under increased scrutiny by federal agencies, including the Centers for Medicare and Medicaid Services and the U.S. Department of Education.

Media outlets also are taking notice and bringing attention to a practice that has swept injustices under the rug. Now that forced arbitration is under the spotlight, this rigged system is surviving on borrowed time.


Daniel Ratcliff is a researcher for AAJ Public Affairs. He can be reached at david.ratcliff@justice.org


Notes

  1. Jean R. Sternlight, Mandatory Binding Arbitration Clauses Prevent Consumers From Presenting Procedurally Difficult Claims, 42 Sw. L. Rev. 87, 98 (2013), www.swlaw.edu/pdfs/lr/42_1sternlight.pdf.
  2. Consumer Fin. Prot. Bureau (CFPB), Arbitration Study: Section 3: What Do Consumers Understand About Dispute Resolution Systems?, at 22 (Mar. 2015), files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf.
  3. Id. at 21.
  4. Am. Ass’n for Justice, Forced Arbitration: How Corporations Use the Fine Print to Bully Americans (July 2016), www.takejusticeback.com/sites/default/files/Forced_Arbitration_AAJ_2016.pdf.
  5. CFPB, Arbitration Study: Section 5: What Types of Claims Are Brought in Arbitration and How Are They Resolved?, at 13.
  6. Id. at 14.
  7. Id. at 59 fig. 14.
  8. David Horton & Andrea Cann Chandra¬sekher, After the Revolution: An Empirical Study of Consumer Arbitration, 104 Georgetown L.J. 58, 111 (2015), papers.ssrn.com/sol3/papers.cfm?abstract_id=2614773.
  9. The Pew Charitable Trusts, Banking on Arbitration: Big Banks, Consumers, and Checking Account Dispute Resolution 11 (2012), www.pewtrusts.org/en/research-and-analysis/reports/0001/01/01/banking-on-arbitration.
  10. Id. at 10.
  11. CFPB, Arbitration Study: Section 2: How Prevalent Are Pre-dispute Arbitration Clauses and What Are Their Main Features?, at 31; Jeff Sovern et al., “Whimsy Little Contracts” With Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, 75 Md. L. Rev. 1, 80 (2015), papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432.