Having Banned Lawsuits Through Binding Arbitration Clauses, Big Businesses Now Try To Also Ban Class Action Arbitrations

I’ve written before about “binding arbitration” provisions and how unfair they are because they deprive people of their day in court. (See my blog entry here entitled “Forced Arbitration Clauses Should Be Outlawed”).

The New York Times today published a significant article highlighting a new, devious twist on the usual binding arbitration provisions, one now being commonly used by big companies to not only prevent them from being hauled into court, but to prevent class action arbitrations as well.

What is a “Class Action”?

A “class action” is a type of lawsuit where one person sues to obtain compensation not only for themselves, but also on behalf of all other people in a similar situation. Class actions are efficient for both sides to the lawsuit, as well as the court, because they enable the court to resolve many large numbers of claims with just a single trial, instead of having thousands of trials over the same issue. They are a long-used mechanism to seek compensation when many people are in a similar situation.

Class actions are particularly necessary when the loss suffered by each person in the group is small, because no one person would have a sufficient economic incentive to file a lawsuit over the wrong. Suppose, for example, a cellular phone company intentionally and improperly overcharged the credit card of every one of its 40 million customers by $10. That cellular phone company has just wrongfully taken $400 million. But none of those customers is going to file a lawsuit over $10 because it doesn’t make economic sense. If somebody went to a lawyer and said they wanted the lawyer to file an individual lawsuit against that phone company over the $10 charge, the lawyer would tell them that the court charge just to file the lawsuit alone will be several hundred dollars, not to mention all the other expenses involved, including the lawyer’s time.

So the law allows a person who has been wronged to file a class action, suing the company on behalf of both themselves and all of the other “similarly situated” people seeking justice. While most lawyers would never consider filing a lawsuit seeking $10 in compensation, they sure would consider representing a class where the dispute is over $400 million.

The efficiency of class actions in holding wrongdoers accountable is exactly why big businesses don’t like them. Businesses use a “divide and conquer” type of strategy, routinely attacking class actions by claiming that there is insufficient similarity between the class members’ claims, and that the lawsuit therefore is not a proper class action.

Arbitration Provisions and Class Actions

The New York Times article, which can be found here, concerns the recent trend where big businesses bury in the fine print of their contracts provisions which not only prevent lawsuits and substitute binding arbitration, but require “individual arbitration,” and prohibit class arbitration. So in other words, big companies like American Express, having successfully avoided being hauled into court at all, now also want to prevent class arbitrations.

The article also discusses the intimate involvement of the Chief Justice of the United States Supreme Court, the Honorable John Roberts, in depriving Americans of their constitutional rights, both before he went on the bench and after.

I recommend reading the article in its entirety, but here’s a brief excerpt:

On Page 5 of a credit card contract used by American Express, beneath an explainer on interest rates and late fees, past the details about annual membership, is a clause that most customers probably miss. If cardholders have a problem with their account, American Express explains, the company “may elect to resolve any claim by individual arbitration.”

Those nine words are at the center of a far-reaching power play orchestrated by American corporations, an investigation by The New York Times has found.

By inserting individual arbitration clauses into a soaring number of consumer and employment contracts, companies like American Express devised a way to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices.

Over the last few years, it has become increasingly difficult to apply for a credit card, use a cellphone, get cable or Internet service, or shop online without agreeing to private arbitration. The same applies to getting a job, renting a car or placing a relative in a nursing home.

Among the class actions thrown out because of the clauses was one brought by Time Warner customers over charges they said mysteriously appeared on their bills and another against a travel booking website accused of conspiring to fix hotel prices. A top executive at Goldman Sachs who sued on behalf of bankers claiming sex discrimination was also blocked, as were African-American employees at Taco Bell restaurants who said they were denied promotions, forced to work the worst shifts and subjected to degrading comments.

Some state judges have called the class-action bans a “get out of jail free” card, because it is nearly impossible for one individual to take on a corporation with vast resources.