Are Arbitration Clauses Evil? Part 1

The New York Times recently ran a three-part series on how arbitration clauses in many contracts “stack the decks” against consumers.

These clauses include language like the following from a contract used by American Express:

You or we may elect to resolve any claim by individual arbitration.

That doesn’t sound so awful – but those dozen words give rise to a host of legal issues.

Resolving Disputes

Legal disputes are resolved in two basic ways: in court and out of court.

Most disputes never get to the point where one side files a formal complaint with a court. The parties are able to work things out on their own, perhaps with the help of lawyers, or they decide it’s not worth the time, stress, and expense to sue.

Even when a complaint is filed, only a tiny percentage of cases go to trial.

For example, one study showed that in Florida in 2010-2011, out of 2.8 million civil cases (not including probate, family law, or traffic cases), only about 1,000 went to a jury trial and another 4,300 were resolved via a trial before a judge without a jury. That’s less than .2% of cases that end up in a trial.

What happens to all the others?

Some settle, some get knocked out via preliminary motions, and some are simply dropped.

Some cases are also resolved, either before or after a complaint is filed, via binding arbitration.

Binding Arbitration

If you’re a fan of the HBO series Silicon Valley you already know what an arbitration looks like. It’s a lot like a court hearing, with the introduction of documents and the testimony of witnesses, but it’s less formal.

In the case of Silicon Valley, both sides wanted to quickly resolve the ownership of the intellectual property at issue — the Pied Piper compression technology. The weaker party – Pied Piper – couldn’t afford to pay big-firm lawyers to fight on its behalf, and had to settle for a disbarred attorney with a rather colorful history.

In Silicon Valley, the parties agreed to arbitrate only after their dispute arose. But people (and companies) can also agree to arbitrate in advance — before they have an active dispute. That’s where arbitration clauses come in.

In part 2 of this blog we’ll be talking about why arbitration clauses are controversial, and in part 3 we’ll talk about the advantages and disadvantages of using them in your own contracts.

How do you check your contract?

Try LawGeex online for fast review of your contract. The LawGeex tool can tell you what’s common, uncommon, and missing in your document and explain confusing legal language.

If you want to understand a contract before you sign it, simply upload it at www.lawgeex.com.

The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice.

 

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