June/July/August 2014 Thrown Out of Court

How corporations became people you can't sue.

By Lina Khan

Late last year a massive data hack at Target exposed as many as 110 million consumers around the country to identity theft and fraud. As details of its lax computer security oversight came to light, customers whose passwords and credit card numbers had been stolen banded together to file dozens of class-action lawsuits against the mega-chain-store company. A judge presiding over a consolidated suit will now sort out how much damage was done and how much Target may owe the victims of its negligence. As the case proceeds, documents and testimony pertaining to how the breach occurred will become part of the public record.

All this may seem like an archetypical story of our times, combining corporate misconduct, cyber-crime, and high-stakes litigation. But for those who follow the cutting edge of corporate law, a central part of this saga is almost antiquarian: the part where Target must actually face its accusers in court and the public gets to know what went awry and whether justice gets done.

Two recent U.S. Supreme Court rulings—AT&T Mobility v. Concepcion and American Express v. Italian Colors—have deeply undercut these centuries-old public rights, by empowering businesses to avoid any threat of private lawsuits or class actions. The decisions culminate a thirty-year trend during which the judiciary, including initially some prominent liberal jurists, has moved to eliminate courts as a means for ordinary Americans to uphold their rights against companies. The result is a world where corporations can evade accountability and effectively skirt swaths of law, pushing their growing power over their consumers and employees past a tipping point.

To understand this new legal environment, consider, by contrast, what would have happened if Amazon had exposed its 215 million customer accounts to a security breach similar to Target’s. Since Amazon has taken advantage of the Court’s recent decisions, even Amazon users whose bank accounts were wiped clean as a direct result of the hack would not be able to take the company to court. “The lawsuits against Target would almost certainly not be possible against Amazon,” says Paul Bland, executive director of Public Justice. “It’s got its ‘vaccination against legal accountability’ here.”

Following the 2011 and 2013 Supreme Court rulings, dozens of other giant corporations—from Comcast and Wells Fargo to Ticketmaster and Dropbox—have secured the same legal immunity. So have companies ranging from airlines, gyms, payday lenders, and nursing homes, which have quietly rewritten the fine print of their contracts with consumers to include a shield from lawsuits and class actions. Meanwhile, businesses including Goldman Sachs, Northrop Grumman, P. F. Chang’s, and Uber have tucked similar clauses into their contracts with workers.

Hastily clicking through terms of service is now all it can take to surrender your rights to these companies. Once you do, your only path for recourse if you’re harmed by any one of them is “mandatory arbitration,” where the arbitrator is often chosen by the corporation you’re challenging, and any revelations about the company’s wrongdoing tend to be kept secret. Rather than band together under the light of the public courtroom, each individual has to work through the darkness of a private tribunal, alone, where arbitrators can interpret laws however they wish. Certain inalienable rights, the Court has ruled, are actually kind of alienable.

The court decisions that birthed this brave new world coincided with a rising conservative legal movement that advocates judicial restraint and a corporate lobby that has successfully pushed the idea that America is an excessively litigious society in dire need of “tort reform.” The result, lawyers and scholars say, is that thousands of cases that individuals once had a shot of winning can no longer even enter a courtroom, jeopardizing enforcement of laws spanning consumer and employee protection, civil rights, and antitrust.

“Arbitration is being used to keep individuals from having any effective ability to enforce their rights,” says Margaret Moses, a professor at the University of Loyola School of Law. “You’ve completely undercut the law, cut it off at the knees.”

As with many of America’s legal traditions, our right to sue was born of a deep skepticism of concentrated power. Early Americans recognized that their ability to bring civil suits against politically connected wrongdoers would lessen their dependency on often-corrupt government officials. Following ancient British traditions, the Founders also enshrined the right to a jury trial in the Seventh Amendment, while preserving the principle, dating back to the 1267 Statute of Marlborough, that all trials be open to the public. Recognition of these rights reflected a fundamental awareness that laws created in a democratic society would be meaningless unless citizens also ensured their fair enforcement.

In the nineteenth century, Congress further embedded these principles by allowing individual plaintiffs to assume much of the enforcement role played by large regulatory bureaucracies in other industrializing countries. Practices like awarding triple damages to successful plaintiffs in antitrust suits, for example, encouraged private parties to take the lead at a time when “politically powerful institutions [were] able to intimidate and subvert public enforcement,” explains Paul Carrington, professor at Duke University School of Law. “Congress made the assessment that if it wanted the antitrust law enforced, it would have to rely primarily on private lawyers advising and representing the smaller businessmen whom the law was intended to protect.”

None of these principles were disturbed when, in 1925, Congress passed the Federal Arbitration Act, which recognized a limited use of arbitration as a way for businesses to speedily resolve disagreements with each other outside of courts. As corporate transactions had risen dramatically in the early 1900s, so had corporate disputes. Lobbied heavily by New York business interests, lawmakers recognized that freeing judges from resolving procedural skirmishes over contracts could benefit everyone. Some officials were wary that expanded use of arbitration might, as one put it, let “the powerful people … come in and take away the rights of the weaker ones.” But the business lobby assured them that arbitration would only be used between equally sophisticated companies, and only if both parties agreed.

And for many decades to come, arbitration worked as promised. But starting with a series of decisions in the 1980s, unlikely bedfellows on the Supreme Court would steer us down an entirely new path.

Credit: Getty Images

The slow creep began with a 1983 case, Moses H. Cone v. Mercury Construction. Though arbitration wasn’t the central issue at play, the Supreme Court used its opinion to offer a radically novel interpretation of the Federal Arbitration Act. Writing for a 6-3 majority, Justice William Brennan—a leader of the Court’s liberal wing—declared that the FAA reflected a “federal policy favoring arbitration.” The idea that Congress had intended arbitration as preferable to courts rather than just as an alternative hadn’t been aired before. Still, Brennan’s language was clear and decisive—and future judges would lean heavily on it as they razed the walls that had kept arbitration in its place.

Lina Khan is a reporter and policy analyst with the Markets, Enterprise and Resiliency Initiative at the New America Foundation.


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