Mandatory binding arbitration sucks, but most of us have agreed to it in numerous consumer contracts, especially with banks, credit card companies, payday lenders, etc. What mandatory binding arbitration means is that if you try to sue your credit card company for, say, reordering transactions to maximize overdraft fees, the company can pull you out of court and force you into private arbitration with no option to certify a class action.
The Servicemembers Civil Relief Act suspends judicial and administrative actions against service members while they are in active service so they can devote their attention to their duties. But there is a big, gaping loophole: mandatory binding arbitration. ((Then there are the companies that apparently just ignore the SCRA when it is convenient to do so. Like Santander, which recently paid $9.35 million to settle with the Justice Department over claims it repossessed active-duty service members’ cars without getting a court order first.))
PayPal is the latest to join a growing list of companies (including eBay) who want to keep consumers out of courts and class actions. You can opt out of mandatory binding arbitration, at least, but you’ll be stuck with the class action ban either way. Opting out is not easy. Here’s what you have to do:
You can choose to reject this Agreement to Arbitrate (“opt out”) by mailing us a written opt-out notice (“Opt-Out Notice”). For new PayPal users, the Opt-Out Notice must be postmarked no later than 30 Days after the date you accept the User Agreement for the first time. If you are already a current PayPal user and previously accepted the User Agreement prior to the introduction of this Agreement to Arbitrate, the Opt-Out Notice must be postmarked no later than December 1, 2012. You must mail the Opt-Out Notice to PayPal, Inc., Attn: Litigation Department, 2211 North First Street, San Jose, CA 95131.
The new bill requires the CFPB to study arbitration in financial products and services, and report back to Congress. Based on the findings of its report, the CFPB may restrict the use of arbitration or ban it outright in financial products and services. We’ll hope for the latter.
If you take a bad thing—debt collection—and subtract fairness, it gets worse. The FTC sounded off on the problems with combining debt collection and forced arbitration. In fact, the FTC recommending banning arbitration on the mandatory binding arbitration of debt collection disputes:
Such a ban should remain in place until the arbitration process can be shown to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek. Once these conditions have been met, Congress could lift the ban itself, or it could delegate that authority to the Federal Trade Commission or another appropriate consumer financial protection agency or bureau established in the future.
Arbitration is unfair to consumers. This is manifestly obvious to nearly everyone but the arbitration industry and the U.S. Supreme Court.
In Rent-A-Center v. Jackson, The U.S. Supreme Court just ruled that arbitrators have the right to decide whether arbitration is fair or not. That is like asking a bully whether you deserve to get your ass kicked.
Justice Stevens, as the voice of reason for the minority, wondered why the arbitration clause in a contract would remain valid even when the rest of the agreement is not.
The ball is now in Congress’s court. The Federal Arbitration Act is flawed, and the U.S. Supreme Court just made it worse.
Dennis Kucinich and his House Domestic Policy Subcommittee just released a report on arbitration abuse in the National Arbitration Forum (PDF). In the report, the subcommittee stated that “[c]onsumer arbitration lacks the safeguards that have been designed into our judicial system by our Constitution, by state and federal statutes, and by centuries of judicial decisions” and provided a chart purporting to show those safeguards.
But the chart is almost completely wrong.
While NAF’s exit from consumer arbitration is welcome, and I am thrilled that pre-dispute, mandatory arbitration in consumer contracts may be facing extinction, Kucinich is fooling himself if he thinks consumers will get a fairer hearing in the courts. In part, court rules ensure consumers will not get that hearing in the first place. Also, most state courts are simply too under-funded, under-staffed, and overworked to do anything but rubber stamp collection lawsuits.
Here is what consumers can expect to find in the court system, contrary to what the report states:
Following on the heels of National Arbitration Forum’s agreement to stop handling consumer debt arbitrations, AAA said they will also bow out “until new guidelines are established” (possibly an allusion to the industry’s call for minimum standards in lieu of banning mandatory, pre-dispute, binding arbitration). Now that the two biggest players in consumer debt arbitration are out of the picture, it very well may be the case that most mandatory arbitration clauses in consumer contracts are effectively unenforceable, since many will have specified either NAF or AAA as the forum of choice.
With NAF and AAA out of the way, the only nationwide arbitration forum left is JAMS. Let’s hope they follow suit.
In case you missed it, NPR has a really great story on why we need arbitration reform.
The piece starts out with the story of Jamie Leigh Jones a 20-year-old Halliburton/KBR employee in 2005, who was in Iraq for only four days before she was brutally gang raped by fellow employees. No criminal action was ever taken against the rapist who continued to work for Haliburton, so she is trying to sue in civil court. Haliburton/KBR are arguing that she cannot sue; instead, she must arbitrate.
The article also hit many of the points that Sam, I, and others have raised over and over about the biases against consumers in the arbitration system. While I think arbitration may have it place in busines-to-business transactions, where there is some equality in negotiating power, it has no place in consumer transactions.