Forced Arbitration: Is this the End of Class Action?

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For decades, Americans who have been wronged by corporations and large companies could bring a class-action lawsuit, pooling their resources to alleviate the cost of suing. The class-action lawsuit made it possible for the “little guys” to take on big conglomerates.

But more and more corporations are adding arbitration clauses into terms of service agreements, essentially forcing a consumer to waive the right to sue in court or bring a class-action.

The arbitration clauses essentially force each individual to appear before an arbitrator or arbitration panel with a price tag that can sometimes far outweigh the cost of court.

For years, the practice of forced arbitration was prohibited by law in many states. But in 2011 the Supreme Court ruled in AT&T Mobility v. Concepcion that all state laws prohibiting forced arbitration clauses are preempted by the 1925 Federal Arbitration Act.

That led a host of corporations to add the clauses to terms of service and other contractual agreements.

For the consumer with a small claim, the cost of arbitration may far exceed the amount of the tort. Not only must the consumer pay one-half the cost of the arbitration, but may incur travel expenses if bringing an action against an out of state company. A class-action would allow a group of consumers with small claims to band together and file one large claim, hence, a more cost-effective and feasible avenue.

What are the chances of a consumer winning an arbitration?

A 2007 study, conducted by Public Citizen concluded that 95 percent of arbitration cases brought by consumers are settled in favor of companies.

According to the study, a sample of 19,300 cases showed that arbitrators ruled in favor of consumers five percent of the time. Meanwhile, companies such as MasterCard, Visa, Discover Financial Services and American Express Co. won 95 percent of the disputes, the study noted.

Critics of arbitration point out that arbitration providers want to get repeat business from companies, so they have a financial incentive to rule more often in favor of a business and that arbitration clauses do nothing more than shield them from costly lawsuits.

Proponents claim the consumer has as equal a chance of prevailing before an arbitration panel as they would in court. They also claim it’s more cost effective for the consumer to engage in arbitration rather than a costly lawsuit.

In AT&T Mobility v. Concepcion, American Express argued that arbitration is a more cost effective method for lower income plaintiffs to pursue their claims and that it prevents abusive lawsuits against corporations.

As VNN previously reported, a California resident lost an arbitration and was ordered to pay the prevailing party nearly $90,000 in legal fees. The amount does not include the cost of the actual arbitration.

Arbitration is provided under the Federal Arbitration Act enacted February 12, 1925 as a method of resolving disputes.

In the ruling of AT&T Mobility v. Concepcion the Supreme Court held that the Federal Arbitration Act does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds potential recovery.

Justice Antonin Scalia delivered the opinion of the Court. It was not unanimous.