Years ago, I had the privilege of representing a young mother trying to care for two children alone. Her husband had abandoned her. Worse yet, he’d been living off credit cards and left his wife (we’ll call her Vickie) saddled with a $50,000 debt consolidation mortgage that, as a Wal-Mart cashier, she had little way of repaying.
Many of the less scrupulous lenders at the time were called “predatory” for good reason. They targeted “subprime” borrowers: folks who, like Vickie and her husband, were stretched thin, deep in debt, and unsophisticated in the why’s and how’s of obtaining a competitive mortgage loan. In their case, the lender took fullest advantage. It insisted on an interest rate that, at seventeen percent, was just short of usurious. Against a $39,000.00 consolidated debt, they announced at the closing table that they were charging the borrowers a loan origination fee of almost $5,500.00 and $5,800.00 for “credit life insurance.” They recorded against their home not one, but two mortgage instruments: the deed of trust corresponding with the loan and another from another lender for a line of credit that was never used.
Finally, buried somewhere in all the loan documents was something called an arbitration clause. Arbitration is a method of resolving disputes out of court that is touted as by the main provider of such services (the American Arbitration Association) as “faster and more cost effective than litigation.” Others in the know offer less positive assessments.
Richard Alderman, who taught at the University of Houston Law Center for 42 years and serves as the Editor-in-Chief of “The Journal of Commercial and Consumer Law,” commented in a recent article, “Consumer arbitration in the United States is often simply a way for a business to reduce the number of disputes, avoid the courts and juries, and achieve more favorable results. Arbitration is not about relocating or simplifying consumer dispute resolution; it is about eliminating consumer disputes and controlling their resolution.”
In a 2022 report on H.R. 963, the Forced Arbitration Injustice Repeal (or FAIR) Act of 2022, the U.S. House Judiciary Committee commented that “forced arbitration clauses [are] often buried deep within the fine print of employment and consumer contracts,” that arbitration “often favors the company over the individual,” and that “because [it] lacks the transparency and precedential guidance of the justice system, there is no guarantee that the relevant law will be applied to these disputes or that fundamental notions of fairness and equity will be upheld in the process.”
Effect of Forced Arbitration
In Vickie’s case, the lender foreclosed. We responded by filing an emergency petition for a temporary restraining order, pleading and proving to the satisfaction of the court violations of the Home Ownership and Equity Protection Act, the Truth in Lending Act, and other laws. Having stopped the foreclosure, we propounded written discovery on the loan and surrounding practices and noticed for corporate depositions both loan officers and members of the lender’s corporate leadership.
Then came their motion to dismiss the case and compel arbitration, which brought our case to a standstill.
Such motions are difficult to overcome. The U.S. Supreme Court, in case after case, has held that the Federal Arbitration Act of 1925 (“FAA”) preempts state law and even federal law challenges to arbitration. “The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, ….” Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983); courts must “rigorously enforce” arbitration agreements according to their terms, Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213, 221, even for claims alleging a violation of a federal statute, unless the FAA’s mandate has been ‘overridden by a contrary congressional command’. CompuCredit Corp. v. Greenwood, 565 U. S. 95, 98, 132 S. Ct. 665; see generally Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 228 (2013).
Reasons for Concern
As the courts continue to strongly favor arbitration clauses, rights of consumers and others involved in disputes suffer. In an Arbitration Study submitted to Congress in 2015, the Consumer Financial Protection Bureau (CFPB) offered reasons for concern:
- Limitations on Damages. Caps on damages in contracts with arbitration features are typical. 60% of checking account contracts with arbitration clauses in the CFPB sample, covering almost 80% of insured deposits, included some damages limitation. All the mobile wireless contracts with arbitration clauses in the CFPB sample included some damage limitation outside the arbitration clause: six of the seven contracts expressly waived recovery of consequential and punitive damages; the other waived recovery of consequential damages with no mention of punitive damages. Such caps are commonplace in other sectors as well.
- Time Limits to File Claims Are Slashed. Statutes of limitation under state laws typically extend out years. In Florida, for instance, actions for breach of contract can be brought within five years. Compare the report from the CFPB, which found credit card, prepaid card, and payday loan contracts with arbitration clauses that set far shorter time limits to file claims in arbitration. “Four credit card arbitration clauses, all from small issuers, specified time limits for consumer claims, most commonly one year from when the claim arose. One of these issuers,” reported the CFPB, “required both the issuer and the consumer to give the other notice of any claim within 90 days of the claim arising.” Checking account time limits ranged from one to two years from when the claim arose, with one bank imposing a 90-day notice of claim requirement for both the bank and the consumer.
- No Right to Jury Trial, Class Action. Under both the Seventh Amendment to the U.S. Constitution and Article 1, Sections 22 and Section 16 of the Florida Constitution, parties in most criminal and civil cases have a right to have their case heard by a jury of their peers. In arbitration, no jury trial is available. Likewise, under both the Federal and Florida Rules of Civil Procedure, litigants have the right join with others in a certified “class action” to jointly assert common rights. In arbitration, there is no such right. Where amounts in dispute are small as to one party, being able to join such a claim with others that are similar can be a valuable tool.
- Virtually No Right to Conduct Discovery. Vickie’s case (discussed above) illustrates what happens to discovery when a party seeks to force arbitration: discovery is shut down. Both the Federal and Florida Rules of Civil Procedure provide several means by which a party can discover evidence in the possession of the opposing party or a third party: through depositions, written questions, requests for admissions, and requests for documents. Under AAA Arbitration Rules, there is almost no discovery. “The arbitrator may direct . . . specific documents and other information to be shared between the consumer and the business. …. No other exchange of information … is contemplated under these Rules, unless an arbitrator determines further information exchange is needed to provide for a fundamentally fair process.” AAA Commercial Rules, Rule R-22; AAA Consumer Rules, Rule R-22(a)(1).
- Virtually No Right to Appeal. A hallmark of civil litigation is the right to appeal. In arbitration, as Richard Alderman points out, “decisions of arbitrators are [generally] not appealable.” He explains, “A court has very limited authority to vacate an arbitrator’s award. Federal Arbitration Act, 9 U.S.C. § 10 (1994) (indicating that an arbitral award can be vacated only on narrow grounds including corruption, fraud, partiality, and misconduct). In most cases, the award may not be appealed based on the incorrect application of law or an improper factual finding.”
- Costs can be Exorbitant. Particularly in larger disputes (outside the small claims arena), the costs of arbitration almost always exceed the costs of litigation. Alderman quotes Public Citizen’s The Costs of Arbitration, April 2002. “AAA cites $700 per day as the average arbitrator’s fee in 1996. …. Fees up to $600 per hour are not uncommon.” He continues, “The CPR Institute for Dispute Resolution estimates arbitrators’ fees of $250-$350 per hour and 15-40 hours of arbitrator time in a typical employment case, for total arbitrators’ fees of $3,750 to $14,000 in an ‘average’ case.” R. Alderman, Why We Really Need the Arbitration Fairness Act, It’s All About Separation of Powers, at n. 55.
There are some options, or at least things to consider.
- First under the AAA’s Consumer Arbitration Rules (applicable to smaller claims), consumers have the right to decline arbitration and litigate in small claims court, where available. Florida has such courts, their county courts, with jurisdiction up to $50,000.00. Florida Small Claims Rules apply where the value of the case is no more than $8,000.00.
- Here is a suggestion that applies universally: read before you sign. Arbitration clauses are typically toward the end of contracts and appear in small print. Where you spot a contract containing a forced arbitration provision, request an opt-out. Some businesses will honor the request (all should) versus losing the business.
- Next, explore “mass arbitration,” which is sometimes available and can add leverage to a consumer’s position versus fighting it alone. Mass arbitrations are a recent phenomenon where thousands of plaintiffs — often consumers, employees, or independent contractors — bring demands alleging the same improper conduct against a company at the same time. One law firm, Keller Lenkner LLC, has filed about 40,000 arbitration complaints against Intuit (TurboTax), more than 12,500 arbitration claims against Uber and over 6,000 arbitration claims against DoorDash.
- Write your congressional delegation. The FAIR Act passed the House of Representatives last year, with at least one GOP supporter. With more public support, Congress may be persuaded to tackle the issue again.
- If all else fails, consider taking your business elsewhere. Not everyone forces customers to arbitrate disputes and, as this article hopefully demonstrates, there are reasons to avoid arbitration.
As for Vickie’s case, it was never arbitrated. Although the lender prevailed in seeking arbitration, it never submitted the case to arbitration. The case languished for years while Vickie paid the lender nothing until, finally, the lender settled reasonably: for pennies on the dollar.