CREDIT: Associated Press
Thanks in part to several recent decisions by the U.S. Supreme Court under Chief Justice John G. Roberts, most consumers are bound to contractual terms that severely restrict avenues for holding corporations accountable. Arbitration clauses, for example, force consumers to enter the private conflict resolution proceedings as an alternative to filing a lawsuit in court. Many arbitration clauses also prohibit “class action” cases, meaning each individual wanting to challenge the same practice must file his or her own separate case even when doing so would be prohibitively expensive.
The Consumer Financial Protection Bureau has a new study out that tells us why these clauses are even worse: Consumers almost never use arbitration. Out of tens of millions of people subject to arbitration clauses in agreements for credit cards, loans, checking accounts, and other financial transactions, only 900 people used arbitration between 2010 and 2012. During that same period, and even with so many contracts prohibiting court challenges, consumers filed more than 3,000 federal court cases on credit card disputes alone, including more than 400 class action lawsuits, each involving potentially millions of consumers, according to CFPB Director Richard Cordray.
“One significant takeaway from these various points is that few consumers use arbitration at all, at least when compared to the number of consumers involved in lawsuits and class actions,” Cordray said in prepared remarks.
Even more relevant to recent Supreme Court precedent, the study found that almost none of these claims were for disputes involving less than $1,000. In one of the greatest Roberts Court blows to consumers, a five-justice majority held that California could not invalidate an arbitration clause as unconscionable, even when the clause prevented AT&T consumers from banding together to challenge a $30 charge. In a subsequent case, economists submitted affidavits asserting the cost of any one person or small business challenging this sort of fee alone exceeds the fee itself, and thus no rational person would pursue this sort of challenge on his or her own. Now, research confirms that most individuals are, in fact, rational.
The take-away is this: If consumers are prohibited by boilerplate contracts from filing their own lawsuit, and even from banding together in arbitration, they will not challenge corporate malfeasance at all, and companies like AT&T can go on bilking each of their customers out of $30, while reaping large profits in the aggregate.
In spite of Supreme Court precedent, there are other avenues for reform. Because the justices are merely interpreting a federal statute, and not the Constitution, Congress has the opportunity to clarify what they mean to say in the Federal Arbitration Act. Pending before Congress is a measure, the Arbitration Fairness Act, that would impose an outright ban on these clauses.
In fact, Congress clarified its position on forced arbitration when it explicitly banned some forms of it in the more recent Dodd-Frank Act, including in residential mortgage loan contracts. The Act also directs the Securities and Exchange Commission and the CFPB to limit or even ban use of the clauses for entities they regulate if, after studying the issue, they find that it is “in the public interest and for the protection of consumers.” But they’ll have to get around the U.S. Chamber of Commerce, which is already exerting its heavy influence on the process, according to the Legal Times.
As CFPB continues to study the issue, a petition for the agency to halt forced arbitration has already garnered 17,500 signatures.