Features

June/July/August 2014 Thrown Out of Court

How corporations became people you can't sue.

By Lina Khan

Groups like Public Citizen and Public Justice point out, however, that many of these studies cherry-pick data or offer up misleading analyses (a charge that the authors of these studies wage right back at them). A 2007 report by Public Citizen, for example, reviewed data from one of the big arbitrator companies and found that arbitrators ruled against consumers 94 percent of the time. In 2008 it also reviewed the Chamber’s study to reveal how the underlying data actually showed that individuals generally win fewer times and receive less money in arbitration than in court. A recent study by Mark Gough, a PhD candidate at the Industrial Labor Relations School at Cornell University, focused on employee-employer disputes and documented the same trend: arbitration decreases the odds of an employee win by 59 percent, and decreases the amount awarded by 35 percent. For employees, “[o]utcomes in arbitration are starkly inferior to outcomes in litigation,” Gough concluded.

James Baker, a partner at Baker & McKenzie who specializes in defending employers against suits over pension plans, agrees. “There’s no question that [arbitration] favors the company’s interest over employees,” said Baker, adding that he sees fewer class-action cases filed in the wake of the Concepcion and Italian Colors decisions.

Bear in mind that all these studies on the outcomes of arbitration must either draw from small sample sizes or depend on the big arbitrators—like the American Arbitration Association and the Judicial Arbitration and Mediation Services—to voluntarily share data. No public body tracks even the number of arbitration claims filed. In 2002 California enacted legislation requiring arbitration companies to publish basic data on the consumer arbitrations they administer. A state compliance review last year found that as of December 2013, only eight of the twenty-five private arbitration companies in California posted any of the required information at all.

Graph 3: Total Civil Cases Commenced in U.S. District Courts Per 10,000 Americans

Credit: United States Courts

Critics also point out that assessing arbitration based on the outcomes of cases is misleading because it overlooks all the cases that arbitration may suppress. Studies have found that a tiny fraction of the population actually chooses to arbitrate. Last December the Consumer Financial Protection Bureau released the preliminary results of its study on the use of arbitration clauses in credit cards, checking accounts, and pre-paid cards. It found that between 2010 and 2012, out of 80 million American cardholders, only 1,033 consumers arbitrated with companies—or less than 0.001 percent. It’s the same picture across industries: between 2003 and 2007, only 170 of AT&T’s 70 million customers filed an arbitration claim, or 0.0002 percent.

Consider, too, how the incentives on an arbitrator differ from those on judges. Judges are paid from public taxes; arbitrators are paid by whoever is retaining them. Sometimes both parties split the cost equally; often companies will offer to cover the entire thing. Either way, critics say the chance of repeat business can give arbitrators an incentive to rule in a company’s favor.

In 2009, the National Arbitration Forum, the largest administrator of credit card and consumer collections arbitrations in the country at the time, was found to be persuading companies to insert arbitration clauses in contracts and then settling on itself to arbitrate them—in other words, peddling the very organizations whose actions it would later judge. Similarly, in cases where there is a dispute over whether a contract requires arbitration, the courts have ruled that arbitration companies themselves should decide whether or not they get the business.

Arbitrators are also unlike judges in that they don’t have to follow legal precedent, they’re not bound by the same rules of evidence as courts, and—in some states—they don’t have to be lawyers at all. “Arbitrators are much less demanding in the evidence they require,” said Allan King, a partner at Littler Mendelson with extensive experience defending companies against class-action suits.

Still, courts now give great deference to whatever arbitrators decide. In one Seventh Circuit case, the court said it would uphold the arbitrator’s decision if his interpretation of a contract were “incorrect or even wacky.” Only if an arbitrator shows “manifest disregard” for the law can the decision be overturned.

The greatest damage here isn’t to us as individuals. “Mandatory arbitration is a basic threat to our democracy,” says Deepak Gupta, who argued the 2011 AT&T case before the Supreme Court. “This isn’t about us all getting our $30 checks when a company has ripped us off. It’s about laws that Congress passes being enforceable. The Supreme Court is allowing corporations to overturn law made by people we elect.”

Diverting all cases to arbitration also promotes a culture of impunity, enabling wrongdoers to more easily continue their wrongdoing. And when the threat of litigation is strong, it discourages corporations from engaging in misconduct in the first place. By contrast, says Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group, “[t]he use of forced arbitration clauses has essentially immunized corporate America from any responsibility for its actions.” In the same way that the Justice Department’s decision to fine banks rather than prosecute executives encourages financial institutions to build in penalties as a cost of business, arbitration incentivizes companies to write down settlement awards as a routine cost, while perpetuating harms at large.

Public officials say they cannot fill the void created by the drop-off in private suits. “We cannot bring every case. No state has ever had or will have enough resources to supplant the role that private-action attorneys have,” said Brauch from the Iowa attorney general’s office. The proliferation of binding arbitration means that “state laws are basically being gutted,” he said.

By enabling companies to keep their wrongdoing secret, arbitration chokes off information vital to the public. Consider the long course of anti-tobacco company litigation and how it ultimately affected policy. Individual plaintiffs filed over 800 suits against tobacco companies between 1954 and 1994, bringing reams of internal documents into the public domain. Although the companies overwhelmingly prevailed in the private actions, the information the suits unsealed eventually emboldened forty-six states to file their own cases, culminating in a $206 billion settlement that also imposed sweeping changes across the industry.

If people harmed by tobacco companies had been forced to arbitrate their cases, there’s a good chance the public today wouldn’t know how tobacco companies maneuvered to make cigarettes more addictive and to hide their lethal health effects. More recently, details on how Bank of America, JP Morgan, and other financial institutions wrongfully seized people’s homes in the wake of the subprime mortgage bust also emerged out of a case brought by a private lawyer.

What will become of all this depends on whether Congress chooses to act. Last year Minnesota Senator Al Franken and Georgia Representative Hank Johnson reintroduced the Arbitration Fairness Act, which would prohibit mandatory arbitration in employment, consumer, civil rights, and antitrust disputes. Lawmakers have been floating a version of the bill for seven years. Even its supporters admit that—given the level of opposition from the Chamber of Commerce and other business interests—it is unlikely to pass anytime soon.

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

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