Since the late 1990s many businesses have imposed pre-dispute mandatory binding arbitration (MBA) clauses in their contracts as a condition of doing business. MBA forces employees, patients, and customers to submit all future disputes to arbitration as a condition of applying for or continuing employment, admission to a nursing or hospital facility, purchasing a cell phone, opening a bank account or credit card, or otherwise doing business. Increasingly these clauses also ban consumers from seeking class actions relief in court, effectively limiting consumers to individual relief through arbitration.
MBA clauses are imposed as a condition of doing business before a dispute has arisen, which makes it difficult for people to evaluate the potential advantages and disadvantages of being able to pursue relief only through arbitration. Even those who know their contract contains an arbitration clause may not understand that they are forfeiting their right to go to court no matter the nature or seriousness of their injury or loss. And even if they do understand this, they typically do not have any ability to negotiate away the arbitration clause.
Businesses typically proclaim that arbitration is less costly and faster than pursuing legal action. But arbitration has many drawbacks for consumers, which is why businesses often require customers to use it rather than simply giving them the option of doing so:
- Arbitration can include high up-front costs that often cannot be recovered.
- Consumers and employees may have to travel to distant locations for arbitration proceedings.
- Arbitrators often limit access to documents and information needed to prove a claim.
- The company that imposed arbitration in the contract may be allowed to choose the arbitrator.
- Arbitrators are not required to follow applicable law or issue written decisions, and the proceedings typically remain secret.
- Grounds for appealing an arbitrator’s decision are extremely limited; even mistakes of law are not appealable.
Arbitration works best when it is voluntary and when the two parties have equal power and both repeatedly use arbitration, for example, in employment disputes involving a union (see this chapter’s section on Voluntary Post-dispute Alternative Dispute Resolution). MBA works much less well when it is imposed on consumers and employees before a dispute arises, because businesses gain expert-level familiarity with the system and can advocate for changes that benefit them.
The US Supreme Court has enforced strictly the terms of MBA agreements, including those that restrict access to the courts by waiving the ability to bring class actions. For example, it in American Express v. Italian Colors Restaurant, it upheld the waiver of class arbitration to vindicate statutory rights. The ruling applies to any type of class action claim a contract may ban, including claims alleging age or race discrimination, unfair and deceptive practices, failure to provide services promised, excessive interest rates or fees, and nursing home provider negligence or abuse. Likewise, in AT&T Mobility LLC v. Concepcion (2011), the Court held that the Federal Arbitration Act (FAA) preempted a state law barring enforcement of a class-action waiver. These increasing restrictions on private enforcement put more pressure on under-resourced public enforcement agencies to enforce laws that protect vitally important civil and legal rights. They also defeat the purpose of the class action mechanism, which was developed to overcome the economic disincentive people have to enforce the law by pursuing private claims.
Recognizing the unfair bargaining position of most consumers, employees, and patients, federal agencies have begun to take steps to limit the use of MBA. In 2016 the Center for Medicare & Medicaid Services (CMS) promulgated a regulation to bar any nursing home that receives federal funding from requiring its residents to sign pre-dispute mandatory binding arbitration agreements, giving residents access to the courts. CMS emphasized that this is intended to protect “the health and safety of residents, particularly during vulnerable and critical times like when moving into a long-term care facility.” Implementation of the rule has been postponed pending resolution of a federal court challenge.
Also in 2016 the Consumer Financial Protection Bureau (CFPB) proposed a rule to prevent financial companies from putting in place MBA clauses that prevent consumers from joining class-action lawsuits. The CFPB said that these provisions are included in consumer contracts in order to “sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers” and that its proposed rule was “designed to protect consumers’ right to pursue justice and relief, and deter companies from violating the law.”
Despite these positive developments on the federal regulatory front, mandatory binding arbitration remains common. According to the CFPB, as of 2015 tens of millions of consumers are subject to pre-dispute MBA, and 85 percent to 100 percent of these arbitration agreements also include bans on class actions. Other consumers are subject to MBA through other consumer products, health care agreements, and employment contracts.
Although prohibiting MBA best protects consumers, given the prevalence of these provisions, more must be done to make arbitration more consumer-friendly. The Financial Industry Regulatory Authority (FINRA), whose securities dispute resolution forum is the largest in the US, has adopted provisions that make its MBA process more consumer-friendly. For example, FINRA’s arbitration forum includes the right to an arbitration panel composed of “public” arbitrators (without extensive securities industry experience), gives consumers the right to bring a class action in court, and provides for arbitration near where the consumer resides.
Pre-dispute Mandatory Binding Arbitration: Policy
Pre-dispute mandatory binding arbitration
Policymakers and the private sector should ensure that consumers and employees have the right to seek redress through the courts for injury or losses.
Policymakers should prohibit the imposition of pre-dispute mandatory binding arbitration provisions in consumer and employee contracts.
Policymakers should prohibit waivers of the right to bring or participate in a class action in consumer and employee contracts.
Policymakers and the private sector should ensure that when mandatory binding arbitration is included in consumer contracts, its shortcomings are mitigated through provisions such as:
- ensuring qualified and independent arbitrators;
- providing a written explanation of decisions;
- prohibiting confidentiality requirements and protective orders that hide the outcome of the arbitration decision or settlement;
- requiring that arbitration proceedings be held reasonably near the location of the consumer or employee;
- requiring businesses or employers to pay the arbitration fees and their attorneys’ fees;
- providing the consumer or employee access to adequate discovery;
- providing simplified procedures for small dollar value cases; and
- expediting proceedings for consumers who are seriously ill.