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Judgment Day: The Future of Mandatory Arbitration in the Wake of the Equifax Hack

The Equifax hack shocked Americans in both its scope and preventability. The Social Security numbers of over 143 million citizens were exposed, despite the fact that a patch for the exploited vulnerability had been available for months prior to the breach. As customers attempted to secure their exposed information using Equifax’s reparation offer of one free year of credit monitoring, they came up against a roadblock in their pursuit of accountability. Using the one-year service required consumers to sign a mandatory arbitration clause. This meant that any disputes raised against the company would have to be resolved outside the court system through individual arbitration. Unfortunately, arbitrators often have incentives to side with corporations, and payouts for individuals often pale in comparison to the filing fee. Massive public outcry forced Equifax to clarify that this clause applied only to claims arising from the one year of monitoring, as opposed to the breach, but further public pressure pushed the company to waive it entirely.

All this commotion shined a light on an issue little-known to the public, but one continually rehashed among lawmakers and regulators. A 2015 survey conducted by the Consumer Financial Protection Bureau (CFPB) revealed that 75 percent of Americans did not know whether they had signed an arbitration clause with a financial company, despite the ubiquity of such clauses within the industry. Most recently, the CFPB issued a regulation in July banning arbitration clauses that restrict a consumer’s right to pursue class-action lawsuits. In late October, however, the Senate repealed the rule, meaning that, although it seems unlikely, broad legislative action is sorely needed.

The arguments in favor of mandatory arbitration clauses are narrow and cater to business interests at the expense of consumers and employees. From the perspective of business owners, arbitration clauses allow cases to be settled cheaply, privately, and expediently. Most importantly, arbitration clauses often prohibit class action suits, meaning that businesses are insulated from large damages and consumers are disincentivized from even pursuing their claims in the first place. Many argue that such clauses help protect small business from frivolous lawsuits, which significantly burden economic growth, and ensure that cases avoid juries, where many tend to side against the corporation even without adequate evidence of wrongdoing.

The drawbacks of such a system directly target consumers and employees. In the case of last year’s Wells Fargo scandal, which revealed that the bank encouraged, and sometimes coerced, employees to open millions of additional accounts for preexisting customers without consumer authorization in order to meet sales quotas, consumers had raised claims against such practices in arbitration venues. Yet the private nature of these proceedings and the inability of customers to form a class action suit kept this behavior out of the public eye and prevented a suit from taking place earlier. In the case of Fox News, the inclusion of an arbitration clause in Gretchen Carlson’s employment contract meant that her sexual harassment suit against Roger Ailes would be kept behind closed doors and the details of the network’s work environment had to be hidden from the public. As a result of such clauses, large firms insulate themselves from any real accountability and incentives to change malicious behavior. Bad practices are simply not exposed.

Further compounding the problem, arbitrators have been found to have a significant pro-business bias. According to the advocacy group Public Citizen, a four-year survey of California arbitration claims involving banks and credit card companies revealed that arbitrators ruled in favor of consumers only six percent of the time. Arbitrators have a financial incentive to side with businesses, because they can become repeat customers. At every step of the way, mandatory arbitration clauses systemically favor businesses in ways that disproportionately harm consumers and employees.

Prior to 1925—and even continuing into the mid-century—arbitration clauses were met with hostility in the court system, making their rise all the more confusing. But in 1925, the Federal Arbitration Act (FAA) laid the groundwork for mandatory arbitration as we see it today. Though not intended to open the floodgates of mandatory arbitration, the bill has since been interpreted by the Supreme Court as creating “a national policy favoring arbitration” that governs both federal and state courts, setting a very arbitration-friendly modern precedent.

Challenges to this standard have been placed before the Supreme Court in recent years, most notably with the 2013 case of AT&T Mobility LLC v. Concepcion regarding arbitration clauses in consumer contracts. According to California state law, any arbitration clause that included a class action waiver was unenforceable since it protected one of the parties from recourse taken against them for their wrongful behavior. In a 5-4 decision, the Court ruled that “individualized proceedings are an inherent and necessary element of arbitration that do not permit blanket rules banning class action waivers.” In effect, this rejected any sort of state law that would attempt to preempt and avoid the mandates of the FAA.

At the state level, there have been moderately successful attempts at decreasing the power of mandatory arbitration clauses. In New Jersey, the state’s Superior Court in the cases of Dispenziere v. Kushner Companies and Atalese v. United States Legal Services Corp held that the arbitration clauses in subject were unenforceable as they lacked “clear and unambiguous language” that the “plaintiff is waiving her right to seek relief in court for a breach of her statutory rights.” By relying on the principle of mutual consent—the requirement that parties agree on the basic facts of a contract when agreeing to one—the New Jersey court used the exception permitted by the FAA that allows courts to void arbitration clauses “upon such grounds as exist at law or in equity for the revocation of any contract.” Nevertheless, these rulings provide little hope for widespread change since arbitration clauses could easily be amended to include the necessary language.

With legal precedent well established—the Supreme Court is expected to reaffirm the validity of mandatory arbitration clauses in employee contracts this year—and the FAA still on the books, the only way forward is through regulatory or legislative action that would rewrite the rules governing arbitration clauses.

The Senate’s repeal of the CFPB’s ruling was a step in the wrong direction. For consumers in the financial industries under the agency’s purview, the rule would have allowed them to form class actions that would more easily and effectively recover damages resulting from corporate malfeasance. Given the larger payments that corporations would theoretically be doling out, this would have undoubtedly changed practices within the industry and created strong deterrents against misbehavior.

In the wake of the CFPB regulation’s repeal, broader action, which can only be achieved through legislation overruling the FAA, must be taken. In 2016, Democratic Senators Patrick Leahy of Vermont and Al Franken of Minnesota introduced a bill dubbed the Restoring Statutory Rights Act, which would have, according to George Slover of Consumers Union, “restore[d] the Federal Arbitration Act to what Congress intended, arbitration as a way for businesses to decide to handle their business disputes, but not as a way to insulate their misconduct from accountability to consumer.” Unfortunately, it died in Congress before being put to a vote. With Republican majorities in both chambers of Congress, any similar bills in the near future are likely to suffer the same fate.

The need for pressure from advocacy groups so that this issue becomes a legislative priority in the next Democratic Congress is even more critical in light of this bleak prognosis. The Equifax hack provided a timely reminder of the ways that mandatory arbitration clauses serve business interests while failing to protect consumers and employees. By keeping proceedings in private and preventing class-action lawsuits, the current system insulates companies from accountability and perpetuates bad behavior. In their mandate that parties pursue claims individually—often at exorbitant expense—arbitration clauses prevent claimants from doing so in the first place. And even in cases where claims are pursued, a pro-business bias distorts proceedings. At a time when consumer and employee rights are slowly eroding, banning mandatory arbitration clauses provides a chance to restore balance and justice to a system which is sorely lacking both.

Photo: Image via CyberHades (Flickr)

About the Author

Nicholas Lindseth '21 is the Senior Managing Web Editor of the Brown Political Review. Nicholas can be reached at nicholas_lindseth@brown.edu

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