Why and How Forced Arbitration Strips Consumers of Their Right to Sue in Court

In the Summer, 2014 issue of Washington Monthly, Lina Kahn wrote about how arbitration clauses are used by America’s corporations big and small to shield themselves from lawsuits. For example, suing Target over its loss of customer data to hackers:

may seem like an archetypical story of our times, combining corporate misconduct, cyber-crime, and high-stakes litigation. But for those who follow the cutting edge of corporate law, a central part of this saga is almost antiquarian: the part where Target must actually face its accusers in court and the public gets to know what went awry and whether justice gets done.

In the words of Khan, when it comes to forced arbitration and the constitutional right to a jury trial, the Supreme Court has ruled that “[c]ertain inalienable rights . . . are actually kind of alienable.”

Khan goes on to chart the course of the “inalienable” right of access to court from 13th Century England, through the foundation of the United States to the more recent Supreme Court jurisprudence on arbitration. She links the rise of arbitration clauses in consumer and employment contracts to the 1990s “received wisdom . . . that America had become an excessively litigious society.” That “received wisdom” does not match contemporary reality:

Yet while anecdotes about frivolous litigation have risen to the rank of cliche, the number of lawsuits brought by Americans has actually been falling for decades. The latest data shows that, on a per capita basis, the total number of cases commenced in U.S. district courts fell by 11 percent between 1996 and 2013, personal injury cases by 58 percent, and civil rights cases by 29 percent. At the state level, the number of tort cases filed per capita between 2001 and 2010 dropped by 23 percent in Texas district courts, by 29 percent in California superior courts, and by 30 percent in New York supreme and county courts.

Advocates of forced arbitration claim that forced arbitration — i.e. forcing somebody into a secret forum where there is no judge, no jury, and no right of appeal — leads to better outcomes for consumers and employees than litigation:

One by an attorney at the National Arbitration Forum claims that consumers prevail in 61 percent of the arbitrations they initiate. Another funded by the U.S. Chamber Institute for Legal Reform surveyed empirical research to conclude that individuals achieve “superior” results in arbitration compared to courts.

However, Khan notes that these studies are flawed: Public Citizen found that one of the three large arbitration forums ruled against consumers in 94 of cases. More recent research also points to unfavorable outcomes for employees:

Mark Gough, a PhD candidate at the Industrial Labor Relations School at Cornell University, focused on employee-employer disputes and documented the same trend: arbitration decreases the odds of an employee win by 59 percent, and decreases the amount awarded by 35 percent. For employees, “[o]utcomes in arbitration are starkly inferior to outcomes in litigation,” Gough concluded.

However, all these studies, whatever they show, “must either draw from small sample sizes or depend on the big arbitrators . . . to voluntarily share data. No public body even tracks the number of arbitration claims filed.” Many private arbitrators have simply ignored a California state law requiring them to provide information about consumer arbitrations.

Kahn also reprises the National Arbitration Forum scandal, and concludes that the principle threat posed by forced arbitration is not only to individual consumers – but to society as a whole. Without the ability to bring private suits:

core legislation that Americans have won through decades-long fights for a more just society—including minimum-wage laws, bans on racial discrimination, and checks on monopolies—is greatly imperiled.