Mandatory Binding Arbitration: Bet you have it, don’t even know it

November 27th, 2009. By Kristine B

Or know what the h*$$ it is…

So, the good news (that’s right, there is some good news these days) is that some companies are dropping the mandatory arbitration clauses in their contracts. Of course, not every company is doing this. And the truth is that most people sign contracts and have no idea that they have signed a mandatory arbitration clause (even I’ve done it). So, this week’s Pleading Ignorance looks at mandatory arbitration. Because what you don’t know about mandatory arbitration really can hurt you.

So, What is Arbitration, Anyway?

Arbitration is a method of resolving disputes that avoids going to court. Now, you may be thinking that avoiding court is good for you—and it can be—but it can also be a bad thing, which I will get into later.

Arbitration involves both sides of a dispute presenting their cases before either one arbitrator (kind of like a judge in a court case but with less power) or an arbitration panel. The arbitrator or the panel then determines who is in the right.

In binding arbitration, the arbitrator not only determines liability (i.e., who’s wrong) but also determines an award for the wronged party (if an award is necessary). Also, the arbitrator’s decision is final. That’s it. No appeals, no further dispute, nothing. Case closed. That can be a good thing, if you find yourself on the winning side but of course, if you’re on the losing side, you have no chance to appeal the decision.

In non-binding arbitration, liability is determined but no award is handed out. The arbitrator can merely suggest possible awards but the two sides do not have accept those suggestions.

Arbitration sounds okay so far, right?

There are definite benefits to arbitration. The process can move more quickly than a court case and at least in binding arbitration, no appeal is allowed. So, these endless appeals of decisions and appeals about the appeals and paperwork filings and postponements and whatever else that go on in court cases and drag them out endlessly don’t happen with arbitration.

So far, so good.

However, many companies now enforce mandatory binding arbitration in their consumer contracts. What does that mean? It means that if you have a dispute with the company, you have no choice BUT to go through arbitration. You have basically waived your right to file a lawsuit. And that can be a bad thing.

So what kinds of companies and contracts are we talking about here? Well, one of the most commonly seen ones is the one for that mobile gadget sitting in your purse or pocket right now…

Let’s say—hypothetically, of course—a cell phone carrier has illegally overcharged 10,000 people by $100 on their monthly bill and is refusing to give that money back (doesn’t sound farfetched, does it?) It does not make a lot of sense for each of those people to file an arbitration over $100 each.

However, if those people joined together, and had the right to file a class-action lawsuit, they would be filing a lawsuit for at least $1,000,000—so they are much more likely to take action.

And, not overdramatize things, but my guess is that companies take class action lawsuits a lot more seriously than they take arbitrations. That’s because, according to a 2007 Public Citizen study, approximately 95 percent of cases decided in a California arbitration forum involving banks were found in favor of the banks. That certainly indicates that the arbitration deck is stacked in favor of the big companies. Consumer groups say consumers get a better chance of a fair hearing in the courtroom.

Where is Arbitration Good?

Arbitration can still be good in financial situations, such as filing an arbitration against an unethical stockbroker who has mismanaged your money. After all, in those cases a class-action lawsuit may be unlikely because each individual situation is unique—in a class action, the claims have to be similar. With financial claims, the circumstances surrounding the mismanaged money could be vastly different.

However, it is not just financial firms and cell phone companies that have mandatory arbitration in their contracts. Mandatory arbitration clauses can also be found in credit card contracts, home building contracts and many other areas where consumers are forced to sign a contract to purchase a good or service.

The tide is starting to turn. Just a few days ago, JPMorgan Chase announced it was dropping mandatory arbitration from its credit card clauses. Of course, this was not just done out of the goodness of Chase’s heart. This was more likely in response to a lawsuit alleging that the company, along with Bank of America, Citigroup, Discover and Capital One, met secretly for the purpose of requiring consumers to go through mandatory arbitration.

Earlier this year, the Supreme Court found that credit card users are not always bound by mandatory arbitration clauses. Now, some consumer groups are fighting to have such clauses removed from consumer contracts. They say that mandatory arbitration clauses force consumers to give up their rights, just for the sake of having a credit card or a cell phone.

At the very least, you should have a say in whether or not arbitration or a lawsuit is the right way to settle your dispute.

Tags: Arbitration, Binding Arbitration, Pleading Ignorance

This was posted on Friday, November 27th, 2009 at 10:33 am and is filed under Emerging Issues, Pleading Ignorance . Feel free to respond, or trackback. Read our comments policy.