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Written by: Cory Watson Attorneys

Arbitration Clauses Are Taking Away Consumers’ Rights

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A report released by the Consumer Financial Protection Bureau (CFPB) on March 11, 2015, found that forced arbitration clauses are now extremely common, and are restricting consumers’ ability to seek legal relief by preventing consumers from filing their claims in court and preventing consumer participation in class actions.

An arbitration clause is legal language in a contract that prevents you from filing a dispute in court, and instead requires you to file your claim with a private panel.  These clauses are usually buried in the fine print of consumer contracts, such as credit cards, mobile wireless contracts, vehicle purchases, or payday loans.  Arbitration clauses are “forced” because they are something you can’t negotiate; they are usually part of your purchase—take it or leave it.

In practice, arbitration clauses can prevent consumers from taking the company that harmed them to court, and many specifically prevent consumers from joining a class action lawsuit.  “Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” said CFPB Director Richard Cordray.  “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year.”

What is Arbitration? Arbitration is a method of resolving disputes outside of court.  A claim filed in arbitration is decided by a private arbitrator, usually picked from a list of corporation-approved decision makers.  Despite the widespread use of arbitration clauses, more than 75 percent of consumers surveyed “did not know whether their credit card agreement contained an arbitration clause,” according to the report.  Do you know whether your credit agreements contain a clause forcing you to arbitration, and prohibiting your ability and right to sue the credit company directly and participate in a class action lawsuit?

Arbitration is stacked against consumersthat’s why companies put forced arbitration clauses in your contracts.  The report found that consumers obtained relief in only 9 percent of disputes in claims forced to arbitration, yet when companies made a claim, they obtained relief in 93 percent of disputes.  Consumers also recovered little, if any, in forced arbitration while companies recovered much more.  The CFPB found that consumers won an average of 12 cents for every dollar, while companies won 98 cents for every dollar claimed.

Forced arbitration is designed to prevent class action lawsuits.  The report found that 90 percent of arbitration clauses prevent class action lawsuits without any benefit to consumers—there was “no evidence that arbitration clauses lead to lower prices for consumers.”  “Forced arbitration clauses and class-action bans eliminate valid claims against bad industry practices and leave consumers of financial products and services with practically no meaningful avenue to seek remedies for harm,” noted Christine Hines, Consumer and Civil Justice Counsel at Public Citizen, a national non-profit organization that advocates for consumer rights in the marketplace, and promotes corporate and government accountability.  “Class actions often are the only economically feasible way for consumers to seek remedies for these losses and systemic violations of the law,” she said.

Arbitration clauses are specifically designed to block class actions, which are often the only way for consumers to protect their rights.  It “is rare for a company to try to force an individual lawsuit into arbitration. But it is quite common for arbitration clauses to be invoked to block class actions,” claimed CFPB Director Cordray.  Companies invoked arbitration clauses to block class actions “in nearly two-thirds of the cases” studied, he said.

What is a class action? A class action is a type of lawsuit in which one or several persons sue to represent the interests of a larger group.  The class action is among the most powerful legal tools available in consumer cases where each individual claim is worth a small amount­ and may not cover the cost of the lawsuit.  Through class action suits, consumers fighting for small amounts can split legal fees and litigation costs.

Consumers get significantly more relief through class actions. Class actions help consumers protect their rights and police bad corporate behavior that may otherwise be too costly.  The CFPB found consumers benefit much more from class action lawsuits than from arbitration.  Unlike forced arbitration, the CFPB “found that larger numbers of consumers are eligible for financial redress through class action settlements than through arbitration or individual lawsuits.”  Across substantially all consumer finance markets, at least 160 million class members were eligible for relief over the five-year period studied. “We found that those settlements totaled 3 Billion in cash, in-kind relief, and fees and expenses,” stated Cordray.  “That means approximately $2.2 billion was available as monetary and in-kind relief for the benefit of affected consumers.”

Help prohibit forced arbitration from ALL consumer financial terms.  The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the CFPB the authority to prohibit forced arbitration in consumer financial contracts now that it has finished its study. Urge the CFPB to take the next step and prohibit forced arbitration bysigning this petition to the CFPB.

The attorneys at Cory Watson have long been strong advocates for consumers, and continue to vigorously fight for consumers’ rights in multiple class action lawsuits.

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