By David Butler, Consumers Unions
When you apply for a credit card or buy a smart phone, you have to sign a contract with a lot of legal language in tiny type. The contract is a take-it-or-leave-it deal: if you don’t sign it, you don’t get the card or the phone. So you sign it. No harm, no foul, right?
Wrong. Buried in the contract there’s often wording that says you’ve given up your right to take the company to court over any dispute you might have with it. This language is known as a forced arbitration clause. It typically says that you “agree” that a company can insist that any dispute will be settled under the arbitration process.
So what does that really mean? It means, instead of going being able to sue the company and make your case in front of a judge, you have to see an arbitrator, who is often chosen by the company. The company can keep choosing that arbitrator for repeat business, so there’s a huge incentive for the arbitrator to favor the company.
This arbitrator is typically not required to follow established law and procedure. The arbitrator’s decisions cannot be appealed, and are often kept secret. Disputes may be considered by an arbitrator in a city far away from where you live, at a location picked by the company.
Arbitration clauses may also restrict you from joining with other people who have been mistreated in the same way by the same company. The costs for pursuing a claim effectively are typically more than the amount of a single claim, so this restriction on class actions makes it far less likely that consumers will ever pursue claims. And that lets the company off the hook for its wrongdoing.
At Consumers Union, the policy and advocacy arm of Consumer Reports, we think forced arbitration is a process that is stacked against the customer far too often. The good news is that a consumer watchdog in Washington — the Consumer Financial Protection Bureau — is considering rules to stop banks and other lenders from forcing consumers to give up their legal rights and rely on private arbitration.
The CFPB report issued a tough report in March that found these restrictions on your ability to effectively pursue claims results in a windfall to financial service companies worth tens or hundreds of millions of dollars each year. More than 75 percent of consumers surveyed did not even know whether they were subject to a forced arbitration clause in their agreements with their financial service providers. And fewer than 7 percent of those covered by forced arbitration clauses realized that the clauses restricted their ability to sue in court.
In October the CFPB announced it was considering a proposal to prohibit companies from including arbitration clauses that block class action lawsuits in their consumer contracts. The bureau said this would apply to most products and services it oversees, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.
The proposal would not ban arbitration clauses completely, the CFPB says, but the clauses would have to say specifically that they “do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court.” The proposal would also require companies that choose to use arbitration clauses for individual disputes to submit to the CFPB the arbitration claims filed and awards issued, the bureau said.
The CFPB report clearly demonstrates why forced arbitration clauses are unfair to consumers and undermine the rule of law. We are working with the bureau as it moves forward in developing proposed rules, pressing for tough standards to help clean up the system.
Basic legal protections have no meaning if companies can’t be held accountable under the law. Companies may claim that arbitration is somehow better for consumers than going to court. But if that were really true, they wouldn’t need to force consumers to agree to it.