Corporate America’s parallel justice system is a recipe for unfairness

American society is famed for its litigiousness. Yet a phenomenon spreading through the economy in recent decades has resulted in millions of people signing away the right to have their day in court.

US companies have been inserting mandatory arbitration clauses into the small print of contracts for everything from jobs to credit cards and nursing homes. These state that any dispute with the company will be resolved by arbitration rather than the courts: a simpler and more informal system where an arbitrator hears both sides and makes a decision. Typically the company selects the arbitration provider, the proceedings are behind closed doors and there is little chance to appeal.

This parallel justice system is now vast. In consumer finance, a 2015 study by the Consumer Financial Protection Bureau found that 16 per cent of credit card issuers used arbitration clauses (covering 53 per cent of credit card loans outstanding) along with 84 per cent of payday lenders (covering 99 per cent of storefronts).

In the labour market, mandatory arbitration clauses now cover about 55 per cent of non-union private sector workers, double the share in the early 2000s, according to a 2018 study by Alexander Colvin, an academic at Cornell University. Colvin says this means about 60m workers can no longer go to court to challenge violations of rights such as the minimum wage or protection against discrimination or harassment. The clauses are more common in low-wage workplaces, and they often come with class action waivers too.

Arbitration can have benefits for individuals. It is often quicker and cheaper than going to court. The American Arbitration Association, one of the biggest arbitration providers, charges an employee a $300 filing fee for a single-arbitrator dispute, for example, while the employer must pay $1,900 and a $750 case management fee. The big providers have rules which they say ensure the process is fair. Supporters argue the alternative would be lengthy legal proceedings which would benefit lawyers far more than ordinary Americans.

But there are reasons to worry nonetheless. Not every arbitration process is fair to the individual. In a case involving a US company elsewhere in North America, David Heller, an Uber driver in Toronto, wanted to take the company to court over worker rights. He was told his contract contained a clause which meant he had to resolve the dispute through arbitration in the Netherlands, which required upfront administrative and filing fees of $14,500. Canada’s courts eventually found the clause to be “unconscionable”, based on the inequality of bargaining power between the parties and the cost of arbitration.

Some studies suggest individuals are less likely to win in arbitration than in court, and the awards they receive are smaller. Keeping disputes out of court can also keep a lid on systemic issues which need to change in a particular company.

Resistance to mandatory arbitration in the US is growing. A bill introduced to Congress would ban the clauses in employment, consumer, and civil rights cases, while some companies such as Google have already dropped them after employee protests.

Plaintiffs’ lawyers have also found a way to turn the tables. They are filing hundreds or even thousands of individual arbitration claims to a single employer at the same time, which lands companies with a hefty bill in upfront fees. Gig company DoorDash ended up in court trying to get out of its own arbitration agreement last year after more than 5,000 couriers filed claims. It got short shrift from a judge.

And after Amazon faced more than 75,000 individual arbitration demands on behalf of Echo users, the company changed its terms of service to allow customers to file lawsuits, the Wall Street Journal reported this year.

It is possible to have a system which avoids unnecessary litigation without taking it off the table. In the UK, for example, people who want to take their employers to a tribunal are offered free conciliation by a government body called the Advisory, Conciliation and Arbitration Service. If the parties can’t agree, they can still go to tribunal. It works well: only about a quarter of the disputes handled by Acas lead on to a tribunal claim. Meanwhile, 82 per cent of claimant-side and 80 per cent of employer-side participants report being satisfied with the service.

A country where “I’ll see you in court” is the first response to any dispute isn’t healthy. But one where someone says “I can’t see you in court because I had to sign away my rights to do so” is surely worse.

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