« What? (Puerto Rico Edition) | Main | Wholesale Reform of Indian Insolvency Law »

Dear NY Times: Thank You For Letting Me Sue Only 500 Miles From My Home

posted by Mark Weidemaier

So the New York Times has just finished a three-part series on arbitration. For such lengthy coverage, the Times reveals almost nothing that will be new to those who have been following debates over the use of pre-dispute arbitration agreements. But if you haven't been following the issue, the Times series is a good place to start. It highlights some pressing recent issues, such as the use of arbitration to eliminate class action liability, while also touching on issues that often escape attention, such as judicial enforcement of contracts requiring religious arbitration.

Discussions about arbitration can be frustrating. For one thing, it is hard to have them without sending (often unintended) ideological signals. Those who highlight flaws in anti-arbitration arguments--even if simultaneously supporting greater regulation--are often characterized as "defenders" of "forced arbitration," as if the only valid choice is to justify or oppose (rather than investigate) the practice. Meanwhile, lawyers for large business interests have the irritating habit of presenting themselves as defenders of the common good, rather than as zealous advocates for corporate clients. 

The attention on arbitration also seems a bit disproportionate, given the nearly-infinite ways that businesses use contracts to extract hidden value from employees and customers: incomprehensible warranty disclaimers, clauses limiting liability for damages, clauses requiring claimants to bring claims in remote and therefore expensive places, etc. Even if competition results in somewhat lower prices, that's cold comfort for those on whom the costs fall most heavily. For all its high-mindedness, the NY Times is no different. Have a legal claim arising out of Times digital products? The Times graciously lets you file a lawsuit, but you'll have to go to New York to do it, wherever you happen to live.*

I assume the NYT timed the series roughly to coincide with the Consumer Financial Protection Bureau's anticipated decision to regulate the use of arbitration clauses in consumer financial contracts. One likely regulation would ban the use of class action waivers. For better or worse, private individual and class action lawsuits have come to occupy a significant place in the U.S. regulatory system. Yet the Supreme Court has gradually interpreted the Federal Arbitration Act to let businesses decide whether they want to participate in this system; many have opted out. This is an extraordinarily consequential development, and political actors should assume responsibility for deciding whether to embrace or reject it. So whatever the CFPB ultimately does, the decision will be noteworthy, and welcome, as one of the too-rare moments when politically-accountable actors finally take responsibility for deciding the limits of arbitration. 

*Well, probably. The Terms of Service say that "any action to enforce these terms shall" be brought in New York City.  This is terrible, awful, no good, very bad drafting. The intent of the clause is apparently to channel all litigation to New York, whether brought by or against subscribers. But the clause is most plausibly read only to apply to breach of contract claims (i.e., those to "enforce" the Terms of Service), and this is just a subset of potential claims.


Super post. I found myself confused at the end of the three lengthy articles as to whether the NYT reporters thought we (the customers) were being hoodwinked into agreeing to this provisions for $ 0 or whether they thought we were getting some small amount (but not enough), or whether they just thought as a matter of policy (and justice, fairness, public policy and all that other stuff) that arbitration clauses (and class action waivers) were just bad.

The most interesting part of the post though was the question of whether the NYT reporters think that this is something special about arbitration or whether they would extend their logic to all the other terms that we (well, most of us) regularly agree to without attempting to renegotiate (or even reading). Arbitration clauses, in many of these contracts, such as the NYTimes one that sends us to argue in NY City, are often going to be the least of our worries.

I find myself wondering whether you would argue that the proposed regulation preventing class-actions bans would fix most of the issues regarding these clauses. From what I understood, the NYT presented some fairly convincing (anecdotal) evidence that there is a major problem regarding the 'neutrality' of those heading arbitration proceedings. I find it extremely difficult to accept the legitimacy of these proceedings when it seems there is not even a pretense of providing just outcomes.

I wonder if these arbitration clauses can be considered unconscionable in certain circumstances as it prevents the individual from addressing their grievances in a forum where they could have a greater impact (aka within a class-action law suit as opposed to arbitration).

In practicality most individuals do not realize they have bargaining power within the contracts, if they have it at all, since the companies are usually much larger and more complex. Possible competition in the market does not help either as similar companies have similar clauses thereby removing that limiting factor on the corporation.

Obviously, as you note, corporations have found a myriad of ways to "extract hidden value" from the individual. Armed with this knowledge, is it possible for the layperson (or young inexperienced first year law student) to do anything to mitigate these concessions when signing/ agreeing to these contracts is unavoidable?

Christopher & DCLS: As a practical matter, the CFPB's biggest issue relates to class actions, as individual consumers tend not to file claims in arbitration or in court. And while there are lots of cases in which consumers are defendants in debt collection cases, and there have been some horror stories about these disputes in arbitration, the picture isn't much brighter in court. So addressing the enforceability of class action waivers is the most significant, though not the only, issue. With regard to bias, the NYT article highlights some true horror stories, although these sound so extreme to me that I suspect (and certainly hope) they are rare. Certainly the reporters made no effort to be neutral, and the kinds of arbitrator behavior they describe (e.g., heading off to lunch with one party's lawyer) violate rules of arbitrator ethics and also the rules of most reputable arbitration providers. Technically, an arbitrator's award can be vacated for bias; likewise, an arbitration clause that calls for a clearly biased arbitrator need not be enforced, both on unconscionability grounds and because such a process arguably does not count as "arbitration" in the first place. But this assumes that the individual and their lawyer has the resources to fight these battles.

Rachel: Probably not that much, although comparison shopping will sometimes reveal differences in the terms offered by different merchants. The fact that there is no negotiation, and often little market choice, is why many people think that contract law is not the right vehicle for policing standardized consumer and employment contracts.

"take it or leave it"

Do you think the CFPB's forthcoming decision will spark a trend of greater regulation in the use of arbitration clauses generally? Or do you think we are too far along the path of using arbitration clauses--especially on consumer and employer contracts--to turn back now? (Or is it impossible to tell at this point?)

As I read through the three part series, I started by thinking 'this is a legitimate problem' and I only became more skeptical from there. The articles seemed to lack any real discussion of the benefits of arbitration, not just for parties involved but also for the state/society, and also how often these mightmarish cases come up. By the third part, it just felt a bit like Chicken Little.

My question for Prof. Weidemaier, is there empirical evidence on how often arbitration between a corporation and a consumer produces these seemingly egregious miscarriages of justice?

Also found it amusing that apparently the plaintiff's attorney in the Italian Colors case has recently been given a bit of scolding by the courts in another case he brought against a credit card company. (http://www.forbes.com/sites/danielfisher/2015/11/01/new-york-times-expose-of-arbitration-clauses-leaves-lawyers-in-the-shadows/).

I also found the NYT articles to be inherently biased against arbitration without any real evidence besides anecdotal stories featuring sympathetic plaintiffs. However, I was taken aback by the third installment of the article regarding forced religious arbitration. I was especially surprised by the case of the family forced into religious arbitration when it was the son who had signed the contract with the arbitration clause, and not the family.

Could you expand a little bit on why the family had no recourse outside of the religious arbitration when they were not parties to the contract themselves? Also do you see the characterization of the courts by the NYT as favorable to continuing to allow these religious arbitration as accurate? I wonder if it is as equally blown out of proportion as the other two installments.

I keep thinking the issues of class action lawsuits and binding arbitration are getting conflated in the NYT piece... it seems like a clause banning a class action suits wouldn't do the individual as much harm as a clause about binding arbitration. It is much easier for me to pass on a class action suit - the plaintiff lawyers don't get the big paycheck, the plaintiffs can't get the small one, and bad corporate behavior potentially goes unpunished. However, if you are bound to arbitration - especially religious arbitration - you're blocked from justice as an individual in many more ways that hit closer to home. Your arbitrator could be buddy-buddy with your opponent, the rules of evidence sound like the wild west, and there's no recourse for when things go wrong. More concerning, you often don't have a choice as a consumer but to agree to these clause.

There is evidence about outcomes in arbitration, although it is mixed, and interpretation is difficult. Among other reasons, selection effects make it hard to know whether cases in arbitration differ in important ways from cases in litigation. And of course there are some extreme examples of judicial misconduct, too. But the examples of arbitration misconduct given by the NYT are clearly problematic, and would be intensely frustrating if not traumatic for the people involved. And there is a *lot* of research to indicate that people care quite deeply about fair process.

What are your thoughts on some of the defenses for forced arbitration? At what point should we as a society actually begin to care about the efficiency arguments? It seems like a lot of mudslinging goes into these pieces as they tell emotional one sided stories and ignore the benefits the system actually gets from forced arbitration. Do you think there are actually credible arguments to allow forced arbitration or should we be focusing more on individual rights over the efficiency of the system?

If you had the final say in the forthcoming CFBP decision, how would you decide the issue? (your discussion of the articles didn't send a strong enough ideological signal for me to figure it out-- good job!)

I am the short of person who is okay, for the most part, with allowing the terms of the contract to be binding, however unfair the terms seem to be, based on the fact that both sides agreed* to the terms and had some sort of power in the negotiations (namely for the individual to walk away from the contract). But in some of the cases highlighted by the Times, the individual for practical reasons does not have the option to walk away. This is seen with AT&T, Time Warner, and even the American Express case. Things like phone, internet, and acceptance of credit cards seem not to be luxuries anymore but utilities that happen make up a large portions of their markets. I think that for corporations that are situated in a monopoly or oligopoly, whether a de jure monopoly or a monopoly created by the FTC's inability to do there job, should have their contracts found unconscionable when they put in these sorts of arbitration clauses. It just seems absolutely ridiculous and undemocratic to have people coerced into signing contracts out of necessity and forced to fund their own arbitration in front of an arbitrator who is in bed with the corporation who issued the contract. But hey, God Bless America.

Building on Rebecca's question: If we are too far along on the path to arbitration ubiquity, what regulations would you recommend we put on arbitration clauses, or the way that arbitration is done in general? I think secularizing dispute resolution would be a good place to start, but I'm sure you have a number of ideas!

As you, Professor Weidemaier, and other commentators have pointed out, the NYT series does point out a troubling trend in denying individuals their "day in court". All three articles present compelling stories as to why the shift towards arbitration has been especially bad for ordinary citizens seeking justice. By extension, the articles imply that these individuals deserve a jury trial or at least to see a sitting judge. The authors suggest that juries and judges would be more likely to see the injustice in these horror stories, and that there are procedural safeguards to ensure that bias and conflicts of interest do not figure prominently in either jury or bench trials. However, the judges and juries are not exempt from the same kind of bias described in many of the cited cases of arbitration. While there are procedural safeguards in place, we can all list off cases that have seen a court room that in our opinion, were decided in an unjust manner. Further, although the legal costs cited by the NYT series seem unfair, the costs of a full jury trial would be much higher. In addition to your concern that the NYT series has not addressed other ways that corporations take advantage of "the little guy", the authors seem to laud the jury trial without acknowledging that there is inherent unfairness there as well.

The spokeswoman for American Express, quoted in the first article, mentioned that regulators have imposed significant remediations and fines on the company to address violations. How realistic is this view? Do you envision a method by which government regulators can investigate, hold companies accountable, and effectively compensate victims? Would this tend to reduce dramatic payouts for plaintiffs' attorneys and decrease litigation costs, or instead result in a similarly inefficient system?

If arbitration is ineffective because consumers won't bring low value claims, and class action suits favor plaintiff lawyers, leaving consumers with small damage rewards anyways, at what point do we look to an alternative to these methods to protect consumers and keep corporate behavior in check? The articles don't really seem to address how effective class actions actually are at regulating corporate behavior anyway, so it seems like the focus should shift from class action bans to finding an actually effective means for keeping corporate behavior in check on a micro level if the concern is consumer protection.

J: I'd be fine with the CFPB banning the use of class action waivers. That's my preferred outcome. If there are problems associated with class actions, the sensible thing to do is to address those problems directly, rather than to let businesses contract out of class action liability. As a regulatory device, litigation works by creating sanctions for misconduct, and sanctions don't work too well when they are optional. And current law is especially perverse, because it essentially lets businesses opt out of class action liability only by agreeing to arbitrate. That's nonsensical and bad for arbitration to boot.

Other commenters: These are good questions, and too many to answer individually (even if I had answers). Leaving aside issues associated with the class action, it seems to me that one of two things should happen: (1) Judges and regulators should insist that arbitration allow individuals to vindicate rights at some minimally adequate level or (2) we should frankly acknowledge that substantive rights are waivable and allow them to be expressly waived. But as the Supreme Court has interpreted the FAA, neither of these options obtains. Instead, unscrupulous businesses have reason to favor arbitration over litigation, because arbitration offers a practical (*not* a legal) way to obtain a waiver of substantive rights. This is the worst possible outcome. Not all businesses that use arbitration are unscrupulous, and there is no reason to think arbitration cannot adequately vindicate rights.

From a damage standpoint: neither class actions or arbitration adequately compensate a large amount of consumers for damages from small claims. Arbitration at least may be more effective in giving a small amount of consumers more complete compensation for large damages.
From a deterrence standpoint: Class actions hurt corporations - if the majority of class action claims have merit (do they?), then they would discourage corporations from being bad actors. Arbitration probably doesn't have a great deterrent effect, especially if the effects are wide spread and relatively low-burden on individual consumers.
So, what is the virtue in class action suits and what is the virtue in arbitration?
Which of these goals do we value more?

Professor Weidemaier, I wanted to ask your opinion about how the confidentiality of arbitration would affect the use of previous arbitration awards in determinations of awards, but after a quick Google search, I see you’ve already addressed the issue of precedent and arbitration at length in at least two law journal articles. (I look forward to reading them when I am not reading for Contracts.) In Part II of the NYT series, Silver-Greenberg and Corkery write, “little is known about arbitration because the proceedings are confidential and the federal government does not require cases to be reported. The secretive nature of the process makes it difficult to ascertain how fairly the proceedings are conducted.” To what extent did confidentiality affect your study of arbitration’s use of precedent and the ability of the process to establish its own precedents? Do you think the NYT accurately characterizes the difficulties in identifying the inner workings of arbitration?

After reading the NYT articles my main problem with the arbitration system in practice today is that it seems to give many Americans little or no choice but to sign away their due process rights, or be forced to forgo some of the most fundamental societal activities such as having a job or going to school. Wouldn't a relatively simple remedy be to outlaw (not enforce) arbitration provisions enacted before the claim or issue was raised? In this system when an individual had an issue with a corporation it could choose to partake in the arbitration system or take its issue to court. Wouldn't this be a more fundamentally fair way to allow parties seeking to relief to decide what characteristics of a forum are important them (expediency of decision, general fairness, discovery procedures, likelihood of recovery...etc) and make a rationale decision? It seems like even many of the pro-arbitration persons interviewed in the NYT articles would prefer arbitration not be forced. Am I missing the benefits of forced arbitration that make it a preferable system for society at large?

If arbiters have an economic incentive to be biased towards repeat customers, does that not make the arbitration system inherently biased towards those who will use the arbiter in the future? One way to correct for such bias would be to disallow arbiters to be chosen wholly or in significant part by those who are repeat customers when litigating against non-repeat customers or customers who repeat significantly less with the arbiter. If we are forcing one party to not chose an arbiter, then have we created a system where the parties do not chose the arbiter like the current judicial system? It appears that without excessive and strict regulation and enforcement, the arbitration system cannot make unbiased decisions when it judges between parties who have unequal abilities to give future business to the arbiters. This assumes arbiters will always act in their best economic interest.
Since arbitration often occurs with strangers and the effects are often secret, there is little if any social cost felt by arbiters who are biased. Therefore, we rely on the internal mechanisms of morality of arbiters and our own legal system to overturn biased rulings. Depending on your worldview morality can be a weak or strong incentive. However, overturning an arbitration in court is as mentioned previously multiple issues.

In talking about arbitration clauses in general, I wonder if there are some mediums in which they do significant good. For example, some of the most villified users of arbitration clauses are hospitals--and yet, it seems as though an arbitration clause is an added layer of protection against malpractice suits that, it could at least be argued, deter doctors from taking risks inherent to good practice of medicine. In some situations, such as the hospital example, aren't arbitration clauses the industry's response to predatory plaintiffs? Or at least, isn't it just as plausible that this clause is often inserted to protect the industry from overzealous consumers as it is to allow the industry to take advantage of them?

The UCC says its unconscionability provisions are based on the principle of preventing oppression and surprise. I think there is clearly room for debate on whether arbitration clauses are substantively oppressive. But is it possible to make a strong argument based on them being a surprise with today's contracts?

Some of the people in the NYT articles mentioned how surprised they were to discover that they had agreed to an arbitration clause. But at least from my own experience with credit card companies, arbitration clauses are stated pretty openly, not any less visible than the rest of the terms in the agreement.

Don't we want to encourage people to read the contracts that they sign? Judge Easterbrook, in ruling in favor of Gateway and its arbitration clause, noted that consumers who choose not to read the terms of a contract voluntarily assume the risks that they entail.

Making the argument that an arbitration clause is substantively unconscionable because of disparity in bargaining power, absence of meaningful choice, etc. is one thing, but I think it is a weaker argument to claim that the clause should be voided because they were surprised by it after having had the chance to read the terms before agreeing.

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.