Arbitration: How Corporations Get Around the Legal System

Have you ever waived your right to a trial before a judge and jury by signing a contract?  Of course not, right?  Wrong. In fact, if you have ever signed a cell phone agreement with AT&T, Verizon, or any other cell phone provider, you have done just that, and signed your way into something called Alternative Dispute Resolution.[i]

An Alternative Dispute Resolution (ADR) can be defined as any method that overcomes disputes while avoiding litigation; common examples include arbitration, conciliation, and mediation.  Many Americans are completely unaware of what any of these terms mean, let alone how they can drastically affect their lives.[ii]

Arbitration is a common form of ADR that many Americans can find themselves experiencing first-hand.  This process is considered a shortened “trial” that consists of either an arbitrator or a panel of arbitrators instead of a judge or judges.  The arbitrator decides the dispute with no jury and the verdict is not considered public record.  In this manner, all decisions in arbitration are kept strictly confidential unless a state mandates the publishing of the results.  Thus far, however, only California has required this publication.[iii]^,[iv]

Most people sign themselves into arbitration without even knowing it.  Arbitration clauses are often used in contracts that involve labor, construction, and securities, among others.  Further, many businesses are now placing mandatory arbitration clauses in their employee contracts to force disputes to be settled outside of the courtroom.

This is exactly what happened to Jamie Leigh Jones, a former employee of Halliburton who found herself caught in the middle of a heated national debate over the use of mandatory arbitration.  Ms. Jones alleged that she was drugged and gang-raped by fellow employees in Camp Hope, Baghdad, Iraq.  Her attempts to take her employer to trial over the attack failed, however, since she signed her name on a Halliburton employee contract that mandated all of her disputes with the company be solved through arbitration.[v]  Jones’ story, whether true or not, highlights the potential problems of mandatory clauses that give an employee no option in the courtroom.

After reading about the unfortunate situation of Ms. Jones, you might be inclined to conclude that this process is illegal.  However, you might be surprised to find out that the process is not only legal, but that the federal government has willingly allowed the practice since the 1920’s.

The Federal Arbitration Act (FAA), enacted in 1925, “seeks to ensure the validity and enforcement of arbitration agreements in any maritime transaction or […] contract evidencing a transaction involving commerce.”[vi]  Since the Constitution of the United States grants the federal government the authority to regulate interstate commerce, Congress was able to pass legislation confirming the legality of arbitration.  The FAA declares that contracts with arbitration agreements can only be deemed invalid if it includes provisions that would void any other general contract.

Although at first glance arbitration might sound unconstitutional, the United States Supreme Court has consistently ruled that the FAA is indeed constitutional and has even expanded its scope.  In Southland Corporation v. Keating, the court ruled that the FAA trumps any state law that limits arbitration agreements.[vii] In a second case, known as Rent-A-Center West v. Jackson, it ruled that only an arbitrator, not a judge, could challenge the enforceability of a contract as a whole if it includes an arbitration agreement.[viii]  Additionally, the court ruled in Hall Street Associates, L.L.C v. Mattel, Inc. that even if a contract calls for additional judicial review of an arbitration decision, it cannot expand the scope of the review already called for in the FAA.[ix]  Fighting the FAA and general arbitration in court has become almost impossible due to these decisions.

But is arbitration really all that bad?  Proponents of the process argue that it is an advantageous process that lessens the workload of the courts.  In addition, they maintain that it is cheaper, faster, more flexible, and more simplified than litigation.  Disputes can be solved in a much less contentious manner, where parties can come to a solution without the increased hostility of formal litigation.  Further, the privacy of arbitration hearings can be seen as a positive attribute, as neither party in a dispute is forced to publically disclose embarrassing or private information.

Opponents of the process fire back by pointing out that it is little more than a perverted version of what is already in place.  An arbitrator’s decision is almost always final; appeals are rarely an option.  Additionally, in many cases, the arbitrator is handpicked from a panel set-up by the company that the dispute is being brought against, a practice that exposes general concerns of objectivity in the process.  This uneven playing field is only propelled by the lack of transparency in the final outcome.

Critics of arbitration only had their arguments furthered when the advocacy group Public Citizen published a study that concluded that consumers lost 94 percent of arbitration cases in California.[x]  Although the actual percentage is disputed by external sources, there is a consensus that corporations win a majority of cases.  The question that all consumers must ask is whether lifting the burden of courts is worth a process that has no jury, a seemingly biased arbitrator, and little or no appeal options.  Critics do concede that courts in the United States are definitely overburdened, but since the arbitration process puts all consumers in a seemingly unfair situation, they remark that it might not be the right solution to that particular problem.

In recent years, opinion has been shifting towards the idea that consumers should be able to opt out of arbitration contracts if they deem the agreement too unfair.  As of now, certain contractual agreements give the consumer virtually no option other than arbitration in the event of a dispute.  In response, Senators Richard Blumenthal (D-CT) and Al Franken (D-MN) introduced The Consumer Mobile Fairness Act (CMFA) in late 2011.  The CMFA calls for the consumer option to settle disputes with cell phone providers through the judicial system.  Mandatory arbitration clauses would be illegal, but only for cell phone contracts.[xi]

Although the CMFA is an excellent start to amending arbitration clauses in contracts, it should not be the final solution. The Consumer Mobile Fairness Act should be expanded into a comprehensive bill that does not eliminate mandatory arbitration for just cell phone agreements, but also allows this option for all consumer and employee contracts.  If citizens would rather settle a dispute through the judicial process, they should explicitly have the right to do so.  This optional approach would still keep many disputes outside of the courtroom while giving the choice for concerned Americans to opt out of this extrajudicial course of action.  After all, if Alternative Dispute Resolution is the only option, then it is not truly an alternative to anything.