Arbitration Scam on Consumers


Back in the day, arbitration was a reasonable alternative to court rooms. Consumers could seek justice when they were wronged, but in a forum that was quicker and cheaper than going to court. Unfortunately, arbitration has become nothing but a scam on consumers. Companies force consumers into arbitration via their contracts, mainly because the process favors the companies so heavily.

Namely, the arbitration clauses prohibit consumers from banding together to file class action lawsuits. Class action suits have a tarnished image, but are often the only option when there are thousands of consumers who have been harmed by products and services, but the monetary harm to each is relatively small. It is financially impossible for each consumer to pursue a relatively small case, so banding together in class action lawsuits creates economics that make sense.

Arbitration takes away the opportunity for consumers to band together, and denies them access to the court system, instead funneling them into an arbitration system that is not necessarily unbiased. A recently released report to Congress on arbitration has been summarized by Sheryl Harris of The Plain Dealer. The findings included:

  • Consumers forced into arbitration routinely win less, pay more and have less chance of getting companies to stop unfair practices.
  • Consumers aren’t lawsuit happy. They rarely consider suing. Most just want to close accounts if things go wrong.
  • Class-action suits help consumers right wrongs. In a five-year period, 160 million consumers were eligible for $2.7 billion in cash or other relief through class-action lawsuits. (Their lawyers did not pocket all that, despite what Big Business would have you believe: About 18 percent went to attorneys’ fees and litigation costs.)
  • Arbitration favored business. In the study period, arbitrators awarded consumers a combined total of $400,000 and ordered them to pay $2.8 million.
  • Judges and juries rarely get a crack at awarding money in consumer cases. Most cases settled before they went to trial.
  • Companies that settled class actions usually also agreed to change their business practices.
  • The use of arbitration had no impact on the prices companies offered to consumers, nor did it impact consumers’ access to credit.

Companies, it turns out, weren’t using mandatory arbitration clauses to protect us. They were protecting them. The CFPB found that companies overwhelmingly invoked the arbitration clause to head off class-action suits.

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