Are Arbitration Clauses Evil?  Part 2

In part 1 of this three-part blog we talked about what arbitration clauses look like and how they work. In this part, we’ll talk about why they’re controversial.

So what’s wrong with arbitration?

On their face, arbitration clauses don’t seem so bad. What’s not to like about staying out of court?

One problem – at least from the consumer perspective – is that arbitration clauses discourage consumers from bringing class actions.

According to the New York Times,

Corporations said that class actions were not needed because arbitration enabled individuals to resolve their grievances easily. But court and arbitration records show the opposite has happened: Once blocked from going to court as a group, most people dropped their claims entirely.

Class Actions

A class action is a lawsuit filed by a person, or a small group of people, on behalf of a much larger group of people who feel they’ve been wronged in some way.

Perhaps the most famous class action was dramatized in the movie Erin Brockovich.  Erin, played by Julia Roberts, was a paralegal at a law firm that sued the utility company PG&E on behalf of residents of a California town who claimed PG&E had contaminated their drinking water. The case eventually settled for $333 million.

Class actions are seen as a way to discourage big companies from hurting consumers. Most consumers won’t bother to sue to recover small amounts of money for products that don’t work or services they were charged for but never ordered. But when millions of consumers are affected, lawyers are willing to take such cases on a contingency basis – only getting paid when they win damages or (more likely) negotiate a settlement.

Which side are you on?

Whether an arbitration clause is a good thing or a bad thing depends in part on which side you’re on.

If you’re a consumer, or run a small business, getting goods or services from a bigger company, you might not be so happy about the big company’s arbitration clause, for the reasons discussed above. However, there might not be much you can do about it.

When you’re dealing with big companies – banks, credit card companies, telephone companies, etc. – their contracts are usually on a “take it or leave it” basis. You can’t just strike out the arbitration clause.

That doesn’t necessarily mean that you’re stuck. Recognizing that arbitration clauses can be problematic for consumers and small businesses, courts in some states have refused to enforce them. This issue is now before the US Supreme Court.

However, if you’re the one imposing an arbitration clause on your own customers, your perspective may be different.

In part 3, we’ll talk about the advantages and disadvantages of putting arbitration clauses in your own contracts.

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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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