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Corporation vs. Corporation
The Federal Arbitration Act (FAA) developed in the commercial
arena to enforce agreements corporations with equal bargaining power.
Since the enactment of the FAA in 1925, national policy and the judicial
system favor enforcement of arbitration agreements because courts are
overburdened and litigation is often expensive and time-consuming. Legislators
did not envision that mandatory arbitration would be used as a tool
to avoid corporate accountability to consumers by binding consumers
to a pre-dispute arbitration requirement before they have an opportunity
to evaluate the advantages and disadvantages of arbitration verses litigation.
Corporation vs. Consumer
A consumer and a business do not have equal bargaining
power and a mandatory arbitration clause is in no way negotiated or
bargained-for. Mandatory Arbitration clauses are hidden in the small
print of many adhesion contracts. Businesses include mandatory arbitration
provisions in contracts because these one-sided agreements will almost
always work to the business's advantage. For example, the clauses often
prohibit class action suits, discourage individual consumer claims due
to the high cost of arbitration, and increase the business's advantage
in multiple suits as repeat players. Proponents of mandatory arbitration
argue these provisions provide one way to address an overburdened court
system. However, a number of arbitration enforceability issues still
end up in court. For example, a party may have to go to court to compel
discovery or enforce a subpoena because an arbitrator has no authority
to do so. It is less likely that the suit will stay out of court because
mandatory arbitration provisions are one-sided and the opposing side/business
often retains its right to sue.
1. ONE-SIDED AGREEMENTS
Consumers do not voluntarily enter into mandatory arbitration
agreements or negotiate their terms. These provisions are imposed on
consumers and are often hidden in the small print of adhesion contracts,
or implemented under a change-in-terms clause. Consumer may not even
be aware that they are subject to the mandatory arbitration provision
until a dispute arises.
2. PROHIBITION OF CLASS ACTIONS
Class actions are a tool to strengthen consumer's bargaining
power against a corporation because an individual consumer may not have
the time or resources to bring an action against fraudulent practices
alone. Class actions also magnify the potential damages that a corporation
is required to pay. Many mandatory arbitration provisions expressly
prohibit class action suits. For example, the third page of a six-page
Initial Disclosure Statement sent with a credit card application included
the following provision:
Arbitration: The Card Agreement that you will receive
with your card if you are approved for credit provides that disputes
are subject to binding arbitration. Arbitration replaces the right
to go to court, including the right to a jury and the right to participate
in a class action or similar proceeding. Please read the "Arbitration"
section of the Card Agreement carefully (emphasis added)
3. SUBSTANTIAL UPFRONT COSTS
According to a recent report by Public Citizen (www.citizen.org),
the consumer/plaintiff's arbitration costs are almost always higher
than initiating a lawsuit, especially if the issue could have been tried
in small claims court. The report also found that arbitrators tend to
"split the difference," meaning, an arbitration award may be much lower
than what a judge or jury might award.
RESULT: Consumers are precluded from seeking
a remedy against the business because the upfront cost of the arbitration
process is too expensive, or consumers abandon the action due to unforeseen
costs.
4. BUSINESS DEREGULATION AND LACK OF PUBLIC RECORD
Businesses are immunized from liability because consumers
are deterred from bringing claims to arbitration due to the high costs.
In addition, written opinions of arbitration proceedings are rare so
arbitrators and businesses are insulated from public scrutiny. Most
clauses require that the arbitration proceedings be kept confidential.
As a result, no precedent is established, but businesses have an advantage
as repeat players to anticipate how certain issues will be decided as
they strategize in future claims.
5. LIMITED JUDICIAL REVIEW
Decisions may only be overturned if there is an applicable
contract defense, or "manifest disregard" of the law. This is a difficult
standard to meet where there is no written opinion of the arbitration
proceedings.
To vacate a decision, a party must show:
The validity of a mandatory arbitration provision is based on contract law, and the strongest arguments against these provisions are contractual ones, such as that the agreement is unconscionable, but a court will not assume that an agreement is unenforceable just because the consumer did not read the contract. Many courts have ruled that the consumer agreed to
the provision by signing the contract, even if it is buried in the fine
print! In addition, courts assume voluntary consent when a consumer
is free to shop around for better terms. As more and more companies
include mandatory arbitration clauses in contracts, it more difficult
for consumers to negotiate around them or to find alternatives.
The result of consumer action in the courts has been
split. For example, in Hill v. Gateway 2000 Inc. (1997) the District
Court found that a mandatory arbitration clause shipped to the consumer
with a computer was unenforceable because the consumer did not have
adequate notice. However, the Seventh Circuit Court of Appeals (in Illinois)
reversed this decision. The Court determined that consumers are bound
to such agreements under the Federal Arbitration Act, and that the contract
does not have to be read by the consumer to be effective.
Some organizations are beginning to address consumer
concerns. For example, recently the American Arbitration Association
(AAA) implemented a cap to consumers' arbitration costs at $375, requiring
businesses to pay the rest. In addition, the AAA will no longer enforce
pre-dispute arbitration clauses in health insurance contracts. Reforms
have not gone far enough! The cap does not apply to cases over $75,000,
and many predatory lending and home construction claims exceed this
amount. Furthermore, businesses can easily switch from using the AAA
to other arbitration providers.
Consumer action and revised legislation are the key
to protecting citizens' substantive rights to engage the judicial system
and ensure the effectiveness of consumer protection laws.
When entering into any agreement, especially one that
may eliminate a right to go to court, it is important for consumers
to be aware of their right to negotiate contract terms before entering
into an agreement.
Read the contract thoroughly
Do not feel pressure to sign an agreement at the site
of a purchase. Instead, take time to look over the contract by bringing
it home to review each of the terms thoroughly. In addition, take time
to review "stuffers" such as a "change-in-terms" notice sent with bills
and statements through the mail. Be wary that these notices may affect
the status of your account through continued use of the service.
Do not hesitate to negotiate terms
Even though an adhesion contract is presented as a completed
form on a "take it or leave it" basis, do not hesitate to negotiate
terms. If there is a provision that you do not agree with cross it off
and initial next to the change. If the seller does not agree to the
change, you can take your business elsewhere.
Keep a copy of all agreements
Copies of contracts are extremely important if revisions
have been made to an adhesion contract. Be sure to keep a signed/initialed
copy for your records should a dispute arise.
As more and more businesses include mandatory arbitration
clauses in their adhesion contracts, it is increasingly difficult for
consumers to avoid them. The increased use of mandatory arbitration
and adhesion contracts may lead courts to realize that these agreements
are not voluntarily entered into, but are imposed upon consumers. Therefore,
it is important to take action and change the existing national policy
that favors an over-broad interpretation regarding the validity of mandatory
arbitration clauses. Consumer Credit Fair Dispute Resolution Act of
2001 S. 192; suggested amendment to Title IX Introduced in Senate January
25, 2001
CONSUMER CREDIT CONTRACTS -
(1) IN GENERAL - A written provision in any consumer
credit contract to settle by arbitration either a controversy arising
out of the contract, or the refusal to perform the whole or any part
thereof shall not be valid or enforceable.
(2) LIMITATION - Nothing in this section shall prohibit
the enforcement of any written agreement to settle by arbitration a
controversy arising out of a consumer credit contract, if such written
agreement has been entered into by the parties to the consumer credit
contract after the controversy has arisen.
LEGISLATIVE REFORM -
State power to regulate arbitration is generally pre-empted
by the Federal Arbitration Act. However, some states have prohibited
arbitration clauses in insurance policies, and others have considered
legislation to regulate arbitrators and to make arbitration more fair
to consumers. These issues are addressed at the state level under a
model bill called the Revised Uniform Arbitration Act.
The Illinois Uniform Arbitration Act (710 ILCS 5/1)
includes an exception to arbitration provisions in agreements between
a patient and hospital regarding claims arising out of (1) injuries
alleged to have been received by a patient, or (2) death of a patient
- subject to the Health Care Arbitration Act (710 ILCS 15/1). The Health
Care Arbitration Act states that an arbitration agreement is "not a
condition to the rendering of health care services" and "may not limit,
impair, or waive any substantive rights or defenses of any party"(710
ILCS 15/8).
The Health Care Arbitration Act addresses just a few
of the concerns associated with mandatory arbitration. The Revised Uniform
Arbitration Act would address additional concerns regarding the consumer's
substantive right to access the court system, and as well as lending,
construction, goods and services, and other consumer agreements.
http://www.citizen.org/congress/civ just/arbitration
Hill v. Gateway 2000 Inc., 105 F.3d 1147 (7th Cir. 1997).
Ting v. AT&T, 182 F.Supp.2d 902 (N.D.Cal. 2002).
Shelly Smith, Comment, Mandatory Arbitration Clauses
in Consumer Contracts: Consumer Protection and the Circumvention of
the Judicial System, 50 DePaul L. Rev. 1191 (2001).
John Vail, Defeating Mandatory Arbitration Clauses,
36-JAN Trial 70 (2000).
David G. Wirtes, Jr., Suggestions for Defeating Arbitration,
24 Am. J. Trial Advoc. 111 (2000).
Arbitration is a process in which parties submit
their disputes for resolution by one or more impartial third parties
(arbitrators), instead of to the judicial system.
Mandatory arbitration clause is a pre-dispute
provision included in contractual agreements. Mandatory arbitration
clauses require consumers to waive their right to go to court, and force
consumers to submit claims to arbitration. NOTE: A mandatory pre-dispute
arbitration clause is distinct from post-dispute arbitration agreements.
In post-dispute arbitration agreements, the party has the opportunity
to weigh the benefits of arbitration verses court litigation to determine
which method is better for the particular situation.
Binding arbitration does not allow parties the
right to a subsequent trial. However, parties may still be required
to go to court if, for example, the opposing party fails to comply with
the arbitrator's decision.
Non-binding arbitration allows parties to bring
a lawsuit if they are not happy with the arbitrator's decision.
Adhesion Contract is a form contract offered
on a non-negotiated ("take it or leave it") basis, thereby giving a
business the upper hand in bargaining power. These contracts are common
to everyday transactions including credit card, cell phone, or long
distance agreements, car leases/loans, apartment leases, and often include
a mandatory arbitration clause
Change-in-terms clause is a provision in the
original agreement between the parties, giving one party the unilateral
right to modify the agreement after it has been entered into.
For example: By your continued use of the Company's
service following receipt of notice of such changes or modifications,
you will be deemed to have accepted and agreed to them.
"Stuffers" are often used to notify consumers
of a change-in-terms modification and are sent after the execution of
the original contract; this notice is often "stuffed" into the envelope
along with a bill, statement, or other general information.
Repeat Players are parties (generally businesses)
who are likely to hire arbitrators in the future. Because of their prior
experience and knowledge within the arbitration system, these parties
have a distinct advantage over an individual consumer bringing an arbitration
action for the first time.
NO PART OF THIS PAMPHLET SHOULD BE CONSIDERED LEGAL
ADVISE. |
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