Stories from the NFCCA Newsletter, the “Northwood News”

Northwood News ♦ February 2020

Forced Arbitration Bad for Consumers, Employees

By Richard Renner

Congress passed the Federal Arbitration Act (FAA) in 1926 to permit companies to agree to a way to resolve disputes that would be cheaper, quicker, and lessen the ever-crowded dockets of state and local courts.  Through an arbitration agreement, the parties agree that, if a dispute arises between them, neither of them will go to court.  Instead, they will request appointment of an arbitrator who will hear from both sides and then make a decision.  The parties typically agree that there will be no appeals.  Whatever the arbitrator decides will be the final resolution of their dispute.

Arbitration can be “pre-dispute” or “post-dispute.”  With post-dispute arbitration, the parties agree to the arbitration process after their dispute has arisen.  Pre-dispute arbitration means the parties agreed to arbitration before either of them knew that there would be any dispute between them.

Since 1926, we have had the Civil Rights Movement, an environmental movement, and a consumer protection movement.  There are a lot more laws now that protect our rights as employees and consumers.  This means that there are more ways in which companies can be liable to their employees and customers.

To reduce the risk of liability, many companies have started to require that all their employees agree to arbitrate any disputes.  These agreements are then contained in the stack of documents that new employees have to sign.  Current employees are sometimes told that they must sign the arbitration agreement or be fired.  American employers now require 36 million employees to agree to forced arbitration of any disputes.

These companies often expand their arbitration agreements to their customers as well.  Many on-line services now include somewhere in their “terms of use” a requirement that any disputes must be resolved through the arbitration program picked by the company.

When big companies require that employees and consumers agree to arbitration as a condition of having a job or receiving goods and services, this “ pre-dispute” arbitration becomes “forced arbitration.”  The parties are not in the equal bargaining position imagined by our legislators when they enacted the FAA in 1926.

Companies abuse the FAA by making the arbitration agreement one-sided.  Not only does the company pick the arbitrator, or the arbitration program, but they specify that no class-actions are allowed, hearings must be held in a particular city, deadlines for filing can be shorter, evidence and results are kept secret, and fees of the arbitrator can be foisted onto the employee or consumer who dares to request arbitration.

In a series of court cases, the Supreme Court has made clear that companies can get away with using forced arbitration to protect themselves from liability.  The FAA preempts state laws so that states cannot protect their citizens from forced arbitration.  In one case, the court held that even an employee who refused to sign the arbitration agreement was still forced to use arbitration just because she continued to work for the company after she knew the company policy was to arbitrate all disputes.

When the arbitrator knows that the company used forced arbitration, and the arbitrator’s future employment depends on staying in the company’s good graces, companies tend to win almost all cases that go to arbitration.  Many egregious cases of sexual harassment, race discrimination, and consumer exploitation have been thwarted when companies force them to the arbitrator of their choice.  No court system would allow the richer party to pick the judge of their choice, but that is a fair description of forced arbitration.

The Economic Policy Institute found that, with forced arbitration, companies win 79 percent of the time, compared to 64 percent of the time in court.  When workers or consumers do win in arbitration, they receive much less.  The median jury award in federal court is $176,000, while the median arbitration award to a successful claimant is $37,000.

Forced arbitration is different than labor-management arbitration.  Union contracts typically provide for final and binding arbitration of grievances.  For decades, labor arbitrators have known that they have to keep both bosses and unions happy with their decisions to keep getting work.  As a result, decisions tend to look for ways to split the difference, or explain why a particular decision is for one side and not the other.  Each side tends to win about half of their cases.  Post-dispute arbitration also removes the incentive for an arbitrator to favor one side.

On 20 September 2019, the House of Representatives passed the Forced Arbitration Injustice Repeal Act of 2019, also known as the FAIR Act, by a vote of 225 to 186.  If passed by the Senate and signed by the President, it would prohibit an arbitration agreement from being valid if it requires forced arbitration of an employment, consumer, or civil rights claim against a corporation.  It is now stuck in the Senate Committee on the Judiciary.

When we have a Senate and President who care about fairness to workers and consumers, the FAIR Act will become law and we will again enjoy our Constitutional right to a trial by jury.  In the meantime, we can refuse to do business with companies and websites that require arbitration.  Check out the “terms of use” and provide feedback so that companies know they are losing business by forcing arbitration.

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[Richard Renner, formerly the Legal Director of the National Whistleblowers Center, lives on Loxford Terrace.]   ■

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