It seems to follow you nearly everywhere you go. Whether it’s banking, student loans, credit card, cell phone or online entertainment agreements, each has essentially the same controversial contract provision: mandatory binding arbitration. The Consumer Financial Protection Bureau is currently studying the effects of this type of contract provision and has the authority under the Dodd-Frank Act to ban them in consumer contracts. After the CFPB is done with its study, it should protect consumers by prohibiting mandatory binding arbitration in all consumer contracts.
What is mandatory binding arbitration? Usually when a person is injured or has a contract dispute with another person or entity, he or she sues in a public court of law. In mandatory binding arbitration, a person must instead sue in what is essentially a private court (arbitration). The differences between public courts of law and arbitration are not trivial. In fact, arbitration is a forum with an inherent bias towards wealthy corporations against the interests of ordinary consumers seeking legal redress.
In a court of law, the judge and jury make legal and factual findings; in arbitration, the arbitrator is the person making factual and legal determinations. Whereas a judge is an impartial public official, arbitrators are private attorneys who have no formal ties to the political process, either through elections or an appointment process. Instead of being impartial, arbitrators may have a financial incentive to rule in favor of corporations. One pertinent example is when the Minnesota attorney general filed suit against the National Arbitration Forum in 2009. According to the lawsuit, the NAF “works alongside creditors behind the scenes—against the interests of consumers—to convince creditors to place mandatory pre-dispute arbitration clauses in their customer agreements” in order “that creditors will file arbitration claims against consumers [with the NAF], thereby generating revenue for [the NAF].”
Even when arbitrators don’t have a direct financial incentive to rule in favor of wealthy corporations, the arbitration process is still fundamentally unfair to the average consumer. According to the Center for Justice and Democracy at New York Law School, regular rules of evidence and procedure do not necessarily apply to arbitration. Instead, “[t]here is limited discovery, making it much more difficult for individuals to have access to important documents that may help their claim.” In addition, “arbitration costs must generally be split between the injured victim and the [corporation], including the arbitrator’s fees, which can range between $200 and thousands of dollars per hour.” It cannot be seriously stated that arbitration is a fair process for adjudicating legal claims.
To make matters worse, there is almost never adequate judicial review of an arbitrator’s decision when the arbitrator misapplies the law or incorrectly interprets a contract. This was made apparent by F. Paul Bland, Jr.’s prepared testimony to Congress in 2007. According to Bland’s testimony, multiple federal courts have ruled even if an arbitrator’s interpretations were “silly” or “wacky,” a federal court would not review the merits of the arbitrator’s decision.
There is a new hope for consumers, though, because of the newly created Consumer Financial Protection Bureau. The idea for a consumer protection agency isn’t exactly new. In fact, consumer advocate Ralph Nader advocated for the creation of this type of agency during the 1970s. Of course, it’s pretty evident Nader’s efforts for the creation of this agency failed due to Republican opposition in Congress. Even today, the Republican Party opposes a consumer protection agency. As Sen. Lindsey Graham, R-S.C., stated in 2011, “[The CFPB] is something out of the Stalinist era.”
The CFPB has the authority under the Dodd-Frank Act to study and prohibit mandatory binding arbitration clauses in consumer contracts if doing so would serve the public interest and protect consumers. Although the CFPB is currently studying the effects of mandatory binding arbitration in consumer contracts, the evidence clearly shows these arbitration clauses are inherently anti-consumer and against the public interest. When it concludes its study, the CFPB must protect the ordinary American consumer by prohibiting mandatory binding arbitration clauses in all consumer contracts. Only then will consumers have access to a fair and impartial process that promotes justice and liberty for all.
Aaron Loudenslager ([email protected]) is a first year law student.