Michael J. Hanby II

Published May 2022

The romantic getaway with my wife had to be perfect. Couples with young children understand what a rare gift a weekend away can be.  The Airbnb I reserved was gorgeous.  Thanks to OpenTable, our dinner reservation at a coveted Michelin star restaurant I found on Google was secured.  Fortunately, the restaurant accepted American Express because if I am paying premium prices, I might as well earn some air miles at the same time.  The Uber got us there on time, but not before we used our AT&T unlimited plan to tell the kids goodnight.  My bouillabaisse was delicious, and dessert was decadent.  Far less appetizing were the forced arbitration clauses buried in the user agreements utilized by many of these companies which forever bar the door to the courthouse for consumers.

Most people have no idea that by simply downloading an app, or by checking a box agreeing to a company’s terms of service, they are sacrificing their right to sue that company in court regardless of its misconduct.  Such agreements are couched in hard to understand legalize and are often buried in the fine print.  Because it is common for forced arbitration clauses to be required in agreeing to even the most basic and fundamental services that consumers depend on, there is often no real choice but to agree. By depriving people of their access to the court system, forced arbitration clauses result in the silencing of consumers and shield large corporations from accountability.

Not only are consumers negatively impacted by forced arbitration clauses, but employees are often forced to give up their rights as well.  Consider an employee who was laid off during the pandemic and later offered a job from a major corporation.

A common condition of employment is that the employee agrees, in advance, to give up their constitutional right to seek redress in the courts. The person needing a job is faced with a Hobson’s choice of giving up their right to go to court in order to accept a job that will provide for their family.

A recent study found that eighty-one companies in the Fortune 100 use arbitration agreements to force their customers to give up their right to go to court.¹ The consequence of this is staggering as it is estimated that up to 75% of American households are subject to arbitration agreements.² The widespread use of inserting arbitration agreements in consumer contracts has only accelerated during the COVID-19 pandemic.³

While the use of forced arbitration clauses has become commonplace, there are rising movements against the continued use of such tactics. On the legislative side, a rare glimpse of bipartisanship offers the promise of protecting consumer rights.  Employee and consumer activism is also having a tangible impact on corporations’ willingness to use forced arbitration.  Whether this consumer lead pushback will lead to meaningful change in the way companies behave is yet to be seen but there is no doubt that the rights of Idaho’s citizens hang in the balance.

Forced arbitration defined

Broadly speaking, forced arbitration clauses require legal disputes to be heard and resolved by private third-party neutrals, instead of a judge or jury.⁴ The decisions are binding and there is no path for appeal.⁵ Also, the results of the arbitration are not accessible to the public in the way court decisions are available.⁶ Forced arbitration agreements are often broad and become effective before a dispute between the parties has even arisen.

The use of forced arbitration agreements has become widespread as they are found in almost every type of consumer contract such as mortgage applications, car loans, credit card contracts, nursing home facilities, and television cable contracts, just to name a few.⁷  Employers also often require employees to submit to such terms before accepting employment.  In fact, it is estimated that 60 million American workers are subject to mandatory arbitration.⁸

Congress enacted The Federal Arbitration Act (“FAA”) in 1925.⁹  Section 2 of The FAA states: “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”¹⁰

Courts began to recognize and acknowledge that the FAA “declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.”¹¹  The scope of the applicability of the FAA was in question until 1995 when the United States Supreme Court found that The FAA’s “control over interstate commerce reaches not only the actual physical interstate shipment of goods but also contracts relating to interstate commerce.”¹² Subsequently, the Supreme Court concluded that employers could subject employees to forced arbitration agreements as well.¹³

Soon after these decisions, forced arbitration provisions started to become more common, both in consumer contracts and employment agreements.  By 2018, it was estimated that there were at least 826,537,000 consumer arbitration agreements in place.¹⁴  These numbers demonstrate that the ability of consumers and employees to access the judicial system has been significantly impacted.

The Promise v. The Reality

Business groups and other advocates of forced arbitration argue that taking disputes out of the over-crowded court system, where disputes often take years, is a far more efficient way to resolve claims.¹⁵  In addition to quicker resolutions, proponents argue that arbitration is fair to both parties because the dispute is resolved by a neutral third-party.¹⁶ Arbitration fees are often paid by the company which, proponents say, results in a less expensive alternative for the claimant than going to court.¹⁷ Critics dispute the accuracy of these claims.

Consumer advocates have raised serious concerns with the fairness of the arbitration process itself.  When the Consumer Financial Protection Bureau studied the issue in 2015, it found that consumers were only successful in about 20% of the time.¹⁸  The numbers in employment related claims are even worse.  According to a recent study conducted by the American Association for Justice (“AAJ”), employees obtained monetary awards only 1.6 percent of the time in 2020.¹⁹  AAJ further found that on average, 382 consumers win a monetary award per year—less than the number of people struck by lightning each year in the United States.²⁰

While the data concerning the success rates of claimants whose claims are resolved through forced arbitration may be somewhat in dispute, many other critiques of forced arbitration must be acknowledged.

An in-depth analysis conducted by the New York Times in 2015 found that many of the largest corporations face very few arbitration claims.²¹ Verizon, for example, faced a mere 65 consumer arbitrations between 2010 and 2014, despite having a customer base exceeding 125 million subscribers.²²  The result is clear. Forced arbitration agreements dissuade almost all consumers from ever filing a claim. The corporation wins before the game even starts.

The stakes are high

The legitimacy of the American justice system is directly tied to its accessibility by the public. As Fifth Circuit Judge Don R. Willett eloquently penned: “The Constitution’s first three words make clear that ultimate sovereignty is wielded not by government but by the governed. And because “We the People” are not meant to be bystanders, the default expectation is transparency—that what happens in the halls of government happens in public view.  Americans cannot keep a watchful eye, either in capitols or in courthouses, if they are wearing blindfolds.”²³

Secrecy and opacity are intentionally built into the system of arbitration. The American Arbitration Association (“AAA”) and JAMS (formerly, “Judicial Arbitration and Mediation Services”), the two largest arbitration providers in the country, provide only limited information regarding their proceedings.²⁴  The lack of transparency is the most significant threat posed by forced arbitration to our system of justice. By choice and design, the rulings made by arbitrators are private. They cannot act as precedent nor are they capable of being compiled in way that would demonstrate pattern or practice of the company. By keeping not only the outcomes but their transgressions secret, corporations escape accountability while endangering the legitimacy of the justice system.

Forced arbitration clauses further restrict access to the courts because they often contain restrictions on class action lawsuits. As stated by the New York Times in its 2015 investigation, “Once blocked from going to court as a group, most people dropped their claims entirely.”²⁵ This works to benefit only the corporation and allows it to side-step an effective tool that keeps powerful companies in check.

As the data above demonstrates, the use of forced arbitration is on the rise. Because such clauses have become routine, consumers must sacrifice their access to the court system to use even the most basic and common products and services.  The consequence is that consumers and employees are left with no meaningful choice when ‘agreeing’ to forced arbitration. Due to the low participation and meager success rates, the end result is that corporations often escape responsibly and accountability.

A potential way forward

While forced arbitration clauses have largely withstood scrutiny in the courts, recent action from legislators and consumers may forecast a change.  The first major breakthrough in this arena can be traced to the progress made by the #metoo movement in recent years. 

Senator Kirsten Gillibrand (D-NY) and Senator Lindsey Graham (R-SC) cosponsored a bill that would end forced arbitration in sexual assault and sexual harassment claims.²⁶  The bill was championed by former Fox News anchor, Gretchen Carlson, who had sued her former employer Roger Ailes after she refused his sexual advances.²⁷

The historic level of vitriol between the country’s two major political parties provided little hope that bipartisanship would advance the rights of consumers in such a tangible way.  On February 7, 2022, H.R. 4445 passed the House.²⁸  The yeas were 335 and the nays were 97.²⁹  In the end, 113 republicans and 222 democrats voted to support the bill.³⁰  Idaho’s representatives split their vote with Representative Russ Fulcher voting ‘nay’ and Representative Mike Simpson voting ‘yea.’³¹

With its fate uncertain, the bill went in front of the Senate on February 10, 2022.³²  It passed without amendment by voice vote, the result of which was a unanimous vote, with no recorded dissenters.³³  After this exceedingly rare show of bi-partisan support, President Biden signed the bill into law on March 3, 2022.³⁴ At the signing ceremony, the President remarked: “Between half and three-quarters of all women report that they have faced some form of sexual harassment in the workplace, and too often they’re denied a voice and a fair chance to do anything about it. Today, we send a clear and strong message that we stand with you for safety, dignity and for justice.”³⁵

The future

While the passage of H.R. 4445 was a significant and historic step, the narrowness of the bill demonstrates that there is more that can be done to protect the rights of consumers and workers.  In February 2021, Rep. Hank Johnson (D-GA-4) introduced H.R. 963 (“the FAIR Act”) into the House.³⁶ The FAIR act would prohibit pre-dispute arbitration agreements from being enforceable in employment, consumer, antitrust, and civil rights disputes.³⁷  What remains to be seen is whether the same level of bi-partisan support can be leveraged to pass this broader and more expansive bill that would protect the rights of consumers and workers in an even more momentous way.

The future of forced arbitration in this country is at a crossroads. While corporations wield immense power in deciding whether to include forced arbitration clauses in their consumer and employment contracts, they are starting to face push back from lawmakers and activists alike.  One road leads down the familiar path of allowing large corporations to hide their misconduct in the shadows and to evade responsibility.  The other would offer greater protection to consumers and employees by reviving our justice system’s promise of openness, transparency, and accountability.  Continued activism and bipartisanship may just pave the way.

BIO: Michael Hanby graduated cum laude from Boise State University and received his J.D. from the University of Idaho College of Law. While in law school, he served as Fall Edition Editor of the Idaho Law Review and participated in the Semester in Practice program where he interned for the Honorable Larry M. Boyle, U.S. District Court. Michael’s legal practice focuses on representing plaintiffs in personal injury cases, medical malpractice claims, automobile and trucking accidents and wrongful death cases. He also handles insurance disputes, bad faith insurance claims, and insurance agent errors and omissions. Michael proudly serves on the board of the Idaho Trial Lawyers Associa­tion and is a member of American Association of Justice.

Michael Hanby graduated cum laude from Boise State University and received his J.D. from the University of Idaho College of Law. While in law school, he served as Fall Edition Editor of the Idaho Law Review and participated in the Semester in Practice program where he interned for the Honorable Larry M. Boyle, U.S. District Court. Michael’s legal practice focuses on representing plaintiffs in personal injury cases, medical malpractice claims, automobile and trucking accidents and wrongful death cases. He also handles insurance disputes, bad faith insurance claims, and insurance agent errors and omissions. Michael proudly serves on the board of the Idaho Trial Lawyers Associa­tion and is a member of American Association of Justice.

Endnotes

1. Imre Stephen Szalai, The Prevalence of Consumer Arbitration Agreements by America’s Top Companies, 52 UC Davis L. Rev. 233, 234 (2019).

2. Id.

3. American Association for Justice, Forced Arbitration During a Pandemic: Corporations Double Down (Oct. 2021).

4. Consumer Financial Protection Bureau (CFPB), Arbitration Study (March 2015), https://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf

5. Id.

6. Id.

7. Abha Bhattarai, As closed-door arbitration soared last year, workers won cases against employers just 1.6 percent of the time, The Washington Post (Oct. 27, 2021).

8. Alexander J.S. Colvin, The Growing Use of Mandatory Arbitration, Economic Policy Institute (April 6, 2018).

9. 9 U.S.C ⸹ 2.

10. Id.

11. Southland Corp. v. Keating, 465 U.S. 1, 10 (1984).

12. Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 274 (1995).

13. Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 109 (2001).

14. Imre Stephen Szalai, The Prevalence of Consumer Arbitration Agreements by America’s Top Companies, 52 UC Davis L. Rev. 233, 234 (2019).

15. U.S. Chamber Letter on the “Forced Arbitration Injustice Repeal (FAIR) Act,” (October 27, 2021), https://www.uschamber.com/assets/documents/211027_H.R.963_FAIR-Act_House-Judiciary.pdf.

16. U.S. Chamber Institute for Legal Reform, Fairer, Faster, Better: An Empirical Assessment of Employment Arbitration (May, 2019).

17. Id.

18. Consumer Financial Protection Bureau (CFPB), Arbitration Study (March 2015), https://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf

19. American Association for Justice, The Truth About Forced Arbitration, September 2019, https://www.justice.org/resources/research/the-truth-about-forced-arbitration.

20. Id.

21. Jessica Silver-Greenberg & Robert Begeloff, Arbitration Everywhere, Stacking the Deck of Justice, N.Y. Times, October 31, 2015.

22. Id.

23. Binh Hoa Le v. Exeter Finance Corp., 990 F.3d 410, 417 (2021) (internal citation omitted).

24. American Association for Justice, The Truth About Forced Arbitration, September 2019, https://www.justice.org/resources/research/the-truth-about-forced-arbitration.

25. Jessica Silver-Greenberg & Robert Begeloff, Arbitration Everywhere, Stacking the Deck of Justice, N.Y. Times, October 31, 2015.

26. David Dayden, Chamber of Commerce Tries to Silence Sexual Harassment Victims, The American Prospect (Nov. 15, 2021).  

27. Id.

28. https://www.congress.gov/bill/117th-congress/house-bill/4445/actions

29. Id.

30. https://clerk.house.gov/Votes/202233

31. Id.

32. https://www.congress.gov/bill/117th-congress/house-bill/4445/actions

33. Id.

34. https://www.washingtonpost.com/politics/2022/03/03/biden-signs-new-law-ending-forced-arbitration-sex-assault-harassment/

35. Id.

36. https://www.congress.gov/bill/117th-congress/house-bill/963

37. Id.