Arguing Class Actions is a monthly column by Adam J. Levitt for the National Law Journal.
Reprinted with permission from the October 2, 2023 edition of the National Law Journal. © 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
In the last decade, the U.S. Supreme Court came down with a number of opinions creating law out of whole cloth that when corporations insert mandatory, binding arbitration clauses into any type of consumer agreement—even if a consumer has no power to negotiate and no time to read the agreement—that consumer’s right to a trial by jury evaporates. Some of the same lawyers who worked to create this line of cases from the Supreme Court also have a history of zealous advocacy for the gun lobby. But the hypocrisy is laughable. How can the same people argue that an individual’s Second Amendment right is absolute, while advocating that the Seventh Amendment’s right to a trial by jury—which “shall be preserved” if “the value in controversy exceed[s] twenty dollars”—is waivable by unconscionable agreements?
And the hypocrisy reaches new heights when one recognizes that the entire arbitration gambit has been brought about by an intentionally erroneous misreading and misapplication of the Federal Arbitration Act, which was enacted to enable commercial entities, of relatively equal bargaining power and information, to jointly decide to resolve their differences extra-judicially. That’s a far cry from a large service provider (such as a cable television provider or a cell phone company) forcing consumers to forego their constitutional rights to further tilt the playing field toward those companies and away from equity and justice (and it’s not like consumers even have a choice—arbitration clauses are impossible to avoid). Funny how textualism fades before the altar of economic opportunism and litigation advantage.
Indeed, arbitration clauses, hidden within the depths of everyday contracts, have become the weapon of choice for corporations seeking to evade liability decided by a public trial before one’s peers. These clauses, wielded with alarming frequency, silently dismantle a cornerstone of our justice system and deny ordinary citizens the right to seek redress in a court of law. Worse yet, they make it nearly impossible for individual consumers to seek redress, as the costs of arbitrating individual cases quickly overwhelm any recovery.
Class actions have leveled the playing field for consumers to pursue claims against corporations for years. Most consumers have heard of class actions. But not as many consumers have heard of arbitration. And even fewer consumers (even some attorneys) understand how arbitration—even arbitration to which they “consent” without actually being aware of it—can affect their legal rights and whether they can pursue a class action. In short, arbitration and class actions have been set on a collision course due to corporations’ increasingly inserting arbitration clauses with class action waivers in agreements that are almost never reviewed by consumers (such as terms of use). With the Supreme Court over the past decade interpreting such clauses in an extremely corporate-friendly way, arbitration clauses have proved to be an effective strategy for corporations to avoid class actions.
Whether consumers are aware or not, arbitration clauses are being written into more and more terms of agreements, including those used for employment, mobile apps, insurance, car loans and leases, banking, credit cards, retirement/investment accounts, health care, home-building, nursing facilities, etc. They are also included in most of the numerous agreements that consumers encounter online when engaging with merchants for goods and/or services. Consumers are left with little choice but to click “agree” to such terms in order to continue with their online activities. These clauses are presented in “take-it-or-leave-it” fashion with no chance to opt out (in order to try to opt out, a person must jump through hoops like submitting a written request by a specific and often short deadline). These purportedly arm’s-length agreements cover a broad swath of Americans’ lives.
Most people—again, even attorneys—do not read these often lengthy, boilerplate terms and are therefore unaware that corporations often include clauses that force arbitration of disputes (rather than allowing litigation in court in front of a jury) and waive the right to pursue a class action. In other words, such clauses force onto consumers an individual arbitration that is often confidential without the ability to pursue class action or collective redress for harms similarly suffered by many people. Such terms amount to contracts of adhesion that give individuals little to no choice when it comes to how they can pursue disputes against companies.
Setting aside whether people can be said to consent to arbitration via contractual language that they mostly do not read, does forced arbitration negatively impact consumers? For several reasons, the answer is a clear “yes.”
First, a class action waiver is the poison pill in an arbitration clause that forces consumers to pursue their claims individually, rather than via a class action led by one or several class representatives or in a collective action along with many other people. In other words, by forcing individual arbitration, corporations try to inoculate themselves from the risk of many similar, simultaneous claims against the corporation. As discussed further below, corporations have many structural advantages in arbitration over individuals; therefore, consumers are deprived of a level playing field.
Second, in addition to denying consumers their day in an actual public court with a jury of their peers, arbitration is almost always confidential. Whereas courtrooms are open to the public, and the decisions made there may be used by other people in their own disputes, the confidentiality and lack of transparency in arbitration prevents the creation of a public record for others to use. This also creates inequities, such as a corporation possessing information and know-how from prior arbitrations against consumers that the next individual forced into arbitration is not aware of.
Third, although arbitration is often touted as cheaper than litigation in court, arbitration is not cheap. Parties must pay the arbitrator’s fees (often hourly), which will add up quickly every time the arbitrator must read a submission, participate in a conference with the parties, prepare for the evidentiary hearing, etc. There are also additional fees required by the arbitration administrator, such as the AAA or JAMS. Some corporations have tried to make the class action waiver poison pill more palatable by agreeing to pay for some of the fees, in particular the initial administrative arbitration fees. Nonetheless, when numerous consumers file similar individual arbitration claims (i.e., a mass arbitration), it can have the effect of exposing corporations to significant fees. In response, some corporations ironically and disingenuously have refused to pay the fees they initially agreed to pay and abandoned their own arbitration clauses. At least one federal judge who has encountered such a situation commented, “[t]his hypocrisy will not be blessed.” Such situations demonstrate that even when a corporation has agreed to cover some of the initial arbitration fees, it might later create procedural obstacles that make it harder and more time consuming for individuals to pursue their claims.
Fourth, the finality of arbitration can be a disadvantage for individuals. After the arbitrator issues the arbitral award, the parties can challenge or seek to overturn it in only very limited circumstances, such as a clear error of law or an undisclosed bias on the part of the arbitrator. The options for relief after the award is issued are minimal, unlike in litigation in court where appealing a decision is much easier. If you’re thinking, “well, that could be helpful when the individual wins the arbitration,” see the next point.
Fifth, individuals’ success against corporations in arbitration is extremely low. For example, a recent analysis of arbitration claims at the AAA and JAMS revealed that the number of Americans who won a monetary award in forced arbitration in 2020 was only about 4%, which was below the five-year-average win rate of 5.3%. For comparison, more people climb Mount Everest each year than win their consumer arbitrations. Employees who are forced into arbitration win even fewer arbitrations.
Unfortunately, these downsides to arbitration for individuals have a monumental impact. Today, more than 60 million workers are subject to mandatory arbitration in their employment agreements, not to mention the other numerous forced arbitration contexts mentioned above that all Americans face in almost every corner of their lives. Hundreds of corporations have registered forced arbitration clauses with the AAA since the beginning of the pandemic. Moreover, in a string of decisions including Lamps Plus v. Varela and Epic Systems v. Lewis, the Supreme Court has curtailed individuals’ attempts to pursue class action or collective arbitrations, essentially condoning it only when the arbitration clause clearly provides for class action or collective relief (which corporations are unlikely to write into their terms of use) and also upholding class action waivers in employment-related arbitration agreements.
Faced with such difficulties, what can individuals do in order to pursue class action or collective relief for similar harms caused by corporate actions? As referenced above, they can band together in a mass arbitration, where they would pursue their own individual arbitration claims but in conjunction with many other individual claims against the same defendant. That avenue could be especially fruitful when a corporation has an arbitration clause that agrees to pay some or all of the arbitration fees. And they can attempt to avoid forced arbitration by challenging the enforceability of the corporation’s arbitration clause, particularly on consent grounds. Corporations have been using forced arbitration—with much success—to try to eliminate group actions, especially class actions. Consumers, workers, and their attorneys should be aware of the downsides to forced arbitration and continue to pursue strategies for bringing claims to redress widespread corporate misconduct.
Thank you to DiCello Levitt partners Adam Prom, John Tangren, and Amy Keller, Chicago managing partner, for contributing to this column.
Adam J. Levitt is a founding partner of DiCello Levitt, where he heads the firm’s class action and public client practice groups. He can be reached at [email protected].