Features

June/July/August 2014 Thrown Out of Court

How corporations became people you can't sue.

By Lina Khan

Immediately, law firms around the country blasted out advisories to their corporate clients: Time to rewrite your contracts. The law firm Baker & McKenzie called it a “sea change,” comparing it to the “disruptive innovations from chemical photography to digital photography, from personal computers to smart phones and from snail mail to email,” and noting that if employers drafted the right language, “[e]mployment class action suits are no longer necessary.”

Schnader Harrison Segal & Lewis put it most succinctly: “For practical purposes the ‘effective vindication’ doctrine is a dead letter.” Courts no longer cared whether the fine print blocked individuals from claiming their statutory rights. Now, companies would be foolish not to adopt this innovative clause.


Credit: Getty Images

So corporations have taken heed, quietly folding these new terms into what are often “take-it-or-leave-it” agreements based on pure market power—realizing the exact scenario Congress feared ninety years ago. “These terms get foisted on us,” said Pamela Gilbert, partner at Cune Gilbert & LaDuca and consumer rights advocate. “They’re not really ‘contracts’ at all.”

Stories documenting Americans’ fabled zeal for lawsuits are legion. There’s the one about the old lady who sued McDonald’s over a cup of coffee that was too hot, or about the guy who took Anheuser-Busch to court because his six-pack failed to deliver visions of beautiful women clad in bikinis on a balmy beach.

Yet while anecdotes about frivolous litigation have risen to the rank of cliché, the number of lawsuits brought by Americans has actually been falling for decades. The latest data shows that, on a per capita basis, the total number of cases commenced in U.S. district courts fell by 11 percent between 1996 and 2013, personal injury cases by 58 percent, and civil rights cases by 29 percent. At the state level, the number of tort cases filed per capita between 2001 and 2010 dropped by 23 percent in Texas district courts, by 29 percent in California superior courts, and by 30 percent in New York supreme and county courts.

It is still too early to quantify the fallout since the Supreme Court’s latest decisions. But anecdotes capture many instances in which companies have taken advantage of the rulings to thwart suits. In 2011, for example, students won a $40 million settlement by filing actions against the Career Education Corporation (CEC), owner of for-profit culinary schools. According to students, the CEC misrepresented its degree and deceived the students into taking on crippling debt. Since then, the CEC has added a binding arbitration clause and class-action ban in its contract. An attorney who represented students in one of the earlier cases says he will no longer bring suits for similarly situated students, as the CEC’s new clause is effectively impossible to overcome.

Julie Strandlie, legislative and public policy director of the National Employment Lawyers Association, says that the organization now regularly sees employees forced into arbitration on matters spanning alleged wage theft, discrimination, and unlawful termination. “These terms are slipped into contracts between parties of unequal bargaining power, they force people to give up their rights to get or to keep a job,” she said.

Consumer and employee advocates note that arbitration can be a fair and speedy alternative to courts, especially when tight budgets have slashed judiciary funds and shuttered courtrooms in places like California, which has closed 51 courthouses and 205 courtrooms since 2008. If individuals stand to gain from arbitration, though, critics note, they will readily sign up. “Nobody is against alternative mechanisms to resolve disputes—just those that are unknowingly and involuntarily forced on us,” says Gilbert.

If the only way businesses can get individuals to arbitrate is by imposing it on them, it seems clear who’s reaping the gains. “The whole notion of mandatory arbitration clauses is designed to disenfranchise consumers and citizens through language that nobody reads,” says Bill Brauch, director of the consumer protection division at the Iowa attorney general’s office.

Graph 1: Civil Rights Cases Commenced in U.S. District Courts Per 10,000 Americans

Credit: United States Courts


When coupled with class-action bans, binding arbitration can wipe out private cases entirely. Experts say that this could become more common in the realm of antitrust, where the cost of bringing a case is usually far beyond the reach of any single individual or small business. So learned Alan Carlson, the plaintiff in the 2013 landmark American Express v. Italian Colors case. The owner of an Italian family restaurant, Carlson charged that American Express was abusing its market power by forcing him and other business owners to accept new cards with much higher rates. But when the Supreme Court denied Carlson the right to join with other small businesses in bringing an antitrust suit, it effectively prevented him and everyone else affected from pursing any recourse at all.

Because antitrust cases today require extensive economic analysis, bringing such a case would cost anywhere from $200,000 to $1 million in fees, while the highest judgment any individual might win would be around $40,000. Even if he’d been able to scrounge up the money somehow, “no attorney would take the case because it made no economic sense,” Carlson says. “The bully is holding all the cards.

Bert Foer, president of the American Antitrust Institute, says that many sound antitrust cases no longer get heard, by a judge or an arbitrator, because of class-action bans. “The American Express decision cuts back the quantity of antitrust cases that can be brought [by private parties],” he says. “It takes away citizens’ rights.”

In a fiery dissent in the American Express case, Justice Elena Kagan honed in on how the same muscle that empowers a company to impose a monopolistic scheme also enables it to force its customers into signing away their right to sue or engage in collective action. The Court’s decision means that a “monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse,” she wrote. The Court’s answer, according to Kagan? “Too darn bad.”

Countering these stories are studies purporting to show that compelling consumers and employers into arbitration actually works in their interests. One by an attorney at the National Arbitration Forum claims that consumers prevail in 61 percent of the arbitrations they initiate. Another funded by the U.S. Chamber Institute for Legal Reform surveyed empirical research to conclude that individuals achieve “superior” results in arbitration compared to courts.

Graph 2: Personal Injury Cases Commenced in U.S. District Courts Per 10,000 Americans

Credit: United States Courts

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

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