« 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.

Comments

Everyone is missing the forest for the trees. Taken in isolation, I believe that the class action waiver and arbitration clauses seem reasonable. However, when viewed in the larger context of the erosion of consumer protections, these are some of the most egregious.

Think of all the consumer unfriendly provisions in contracts that are enforced by courts:
~ liability waivers for things like negligence; ~ERISA subrogation clauses that refund employers in full but leave injured claimants often with nothing;
~ body attachments that create de fact debtors prisons on behalf of credit card companies and debt buyers;
~ enforcement of usurious interest rates
~ 2005 amendments to bankruptcy laws that favor creditors...

the list goes on and on. The court system is essentially rules in favor of business every chance it can get, and the benefits of rulings always go one way. The East India Company would be shocked at how easy corporate dominance over subjects has become. No longer is violence and mercenaries forces necessary to achieve its ends when all of the favorable laws are now statutory and judicially sanctioned!

I guess my biggest concern after reading the article was the private nature of the arbitration market. As the NYT pointed out all the economic incentives push the arbitration firms towards favoring the repeat players, and I cannot see how that could change under any system. Even if corporate lawyers weren't allowed to sit in judgment of corporations, any person in that position would feel pressure not to loose business. It seems like the only alternative would be to regulate arbitration to the point that it became quasi-public by somehow reducing the demand to seek out business. Is this one of the reforms under consideration? And if not, are there other reforms being considered that would address this problem?

Took my 3yo to a bounce-house birthday party over the weekend. Before we could walk in we were presented with an ipad that contained a waiver and arbitration agreement that I was supposed to sign in order to get my daughter her bracelet to proceed into the place. Instead of signing with the stylus, I wrote on the signature line, "NO ARBITRATION" and hit Submit. I believe that under basic contract principles, I just rejected the arbitration clause and made a counteroffer, and by giving my daughter her bracelet they accepted my counteroffer. This probably wouldn't have worked on a paper form (the person behind the desk would've immediately spotted it and not let me in) but worked just fine on the ipad where after I hit Submit the form and signature went away and were replaced by a confirmation screen.

It seems like the gradually erosion of consumer's rights to class actions and litigation has turned on two basic assumptions: 1) customers are free to opt out of contracts or renegotiate terms they deem objectionable; and 2) all of these clauses are in plain language that the average consumer could understand if he took the time to read them. While I think the rationale undergirding both assumptions is fraught, it does beg the classic contracts question: shouldn't a capable and un-coerced person be expected to read the terms of his or her contract? And if not, then how can we structure default rules and remedies that reflect that? Clearly, there is a common understanding that no-one reads the form contracts we're all required to sign. The NYTs glosses over this assumption as going without saying.

Section 2-207 of the UCC codifies the assumption that contracts are not read when there is a battle of the forms. Maybe we need to go one step further and develop a new body of default rules governing the typical non-negotiated contracts discussed in the Times expose. It's obviously a dangerous line to tread, and it should be approached with extreme caution. By I think that the law currently does not reflect the pervasive reality as it stands, and that's being exploited by sophisticated parties to the detriment of many.

The comments to this entry are closed.

Contributors

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.

News Feed

Categories

Bankr-L

  • 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 (rlawless@illinois.edu) 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.

OTHER STUFF