How Mandatory Arbitration Clauses Impact Consumer Rights
The implications of the fine print and latest rule changes for Oregonians
on November 9, 2017
Updated on September 6, 2022
A congressional move in 2017 regarding class action arbitration waivers may seem esoteric and insignificant to the average consumer, but it limits your ability to seek justice against large businesses and financial institutions.
Every time you sign up for a credit card or bank account, you’re subject to the fine print. Most people don’t read the boilerplate language, but buried in the minutiae is a much-debated phrase related to the requirement that disputes be subject to “mandatory arbitration.”
What Does Mandatory Arbitration Mean?
These arbitration agreements bar consumers from class-action lawsuits, forcing individuals into private suits.
Banks and business interests assert that private arbitration is a more efficient and flexible process for consumer claims, allowing for speedy resolution and lower costs. They argue that class action lawsuits are time-consuming and costly, an expense that is passed on to consumers in the end.
But this relative savings comes at a cost, says Portland consumer law attorney Justin Baxter. “Arbitration is run by private companies that hold quasi-court forums. There’s a range of rules and remedies. Consumers lose the benefit of a jury of their peers, and instead have their cases decided by a lawyer, whose full-time professional practice is being an arbitrator. Consumers also lose out on the public scrutiny of the legal process, because arbitration is confidential,” he says.
“There’s a reason why big companies like Wells Fargo put these into their boilerplate: to protect Wells Fargo.”
According to The New York Times, “Arbitration clauses have derailed claims of financial gouging, discrimination in car sales and unfair fees.”
One key aspect of mandatory arbitration clauses is the loss of the ability to join claims into a single class action on behalf of many. “The problem is that no one is going to take the time or trouble to bring an individual arbitration case to get their $30 back. So that just goes away, and all the thousands of cases like it go away,” Baxter adds.
The Political Battle Over Mandatory Arbitration
In July 2017, the Consumer Financial Protection Bureau (CFPB) issued a ruling that banned companies from using mandatory arbitration clauses and granted consumers the right to file class action claims as part of their legal rights. “Functionally, this meant that class binding arbitration waivers became unenforceable,” Baxter says.
However, in October 2017, Congress repealed the ruling. This means class actions are, once again, disallowed in arbitration.
“A lot of the conversation has been it’s just these class action trial lawyers against the big banks, for whom Wells Fargo is kind of the poster child, each representing their own interests. But that’s not really the case,” says Baxter. “It has real impact on consumers. People who were harmed by Wells Fargo, for instance, now have no recourse. For hundreds of thousands of people who had accounts opened in their names without their permission, many of them charged fees or overdraft charges. The upshot is all those charges were swept away quietly.”
Is there anything an individual consumer can do to avoid this term in a contract? Probably not, Baxter says. “It’s really rare for an individual to negotiate this term out of a contract. In some instances, the contract language might provide for an opt-out, but as a practical matter, no one opts out. No one reads the fine print.
“Arbitration has generally been upheld, considered a creature of contract. Two people make a handshake agreement to skip court. But when it’s in a contract on a take-it-or-leave-it basis, the consumer never really chose it,” he adds.
For more information on this area of law, see our overview of consumer law.