ArbitrationArticles on arbitration

The New York Times has come out with a pair of articles about arbitration. They shed light on how arbitration clauses have damaged the quality and availability of civil justice for most Americans.

The articles, by Jessica Silver-Greenberg and Michael Corkery, cover how in their view arbitration favors companies over consumers and workers (“In Arbitration, a ‘Privatization of the Justice System‘”) and how companies have used arbitration clauses to avoid responsibility for improper practices that harm many people (“Arbitration Everywhere, Stacking the Deck of Justice“). Both appear in the November 1, 2015 issue of the newspaper.

The reporters find that businesses require arbitration because — surprise — it favors them. They conclude that the recent phenomenon of taking disputes out of the courts and forcing them into arbitration assures a business-friendly environment:

Over the last 10 years, thousands of businesses across the country — from big corporations to storefront shops — have used arbitration to create an alternate system of justice. There, rules tend to favor businesses, and judges and juries have been replaced by arbitrators who commonly consider the companies their clients, The Times found.

Businesses as clients

Why do arbitrators “commonly consider the companies their clients”? Largely because arbitrators depend on the parties to choose them, often from a list. For consumers and employees, the experience may happen once in a lifetime, but for big companies — and, more importantly, for their big firm lawyers — picking arbitrators may happen several times a year. Although arbitrator-candidates should of course resist the commercial need to seem appealing to repeat customers, common senses suggests that the desire for work could affect attitudes towards the merits of claims. It may also have a more general effect, influencing the sort of person who typically chooses to go into the business of serving as an arbitrator (defense lawyers?).

The second article — about how a group of lawyers and corporate clients in recent years hatched a plan to thwart class actions with arbitration clauses — tells the story of an extraordinarily successful effort to enlist the help of the U.S. Supreme Court. A series of decisions by the Court applied a 1925 law, the federal Arbitration Act, in ways that help corporate America save billions of dollars in damages that it in fact owed. In one case that I had against AT&T, for example, an arbitration agreement that covered customers in every state except California allowed Ma Bell to pay $16 million to a class of Californians rather than $160 million to a nationwide class for an overcharge that a jury found occurred nationwide. Today, not even the California class could get their case to trial. The same goes for other groups of consumers who have sustained small individual losses but large aggregate ones.

Bashing class actions

The authors do give the U.S. Chamber of Commerce and other proponents of the strategy their due. They note that the Chamber urges that class actions do not benefit anyone but the class action lawyers and often cites the disparity between what each class member may receive in a consumer class action for small overcharges and what the lawyers receive.

I do not get why that argument convinces any reasonable person. Everyone knows that the lawyers work on a contingent-fee basis. They often spend hundreds of thousands and even millions of dollars out of pocket, and they will recover nothing unless they secure benefits for the class. If the class as a whole receives $25 million in benefits from the lawyers’ $5 million worth of expenses and work, why shouldn’t the lawyers get at least their $5 million back? Who is that unfair to?

Worth reading

Ninety years after Congress passed the Arbitration Act for business disputes, the statute has become a device for insulating companies from the consequences of wrongdoing against people who have little bargaining power. Ms. Silver-Greenberg and Mr. Corkery have done an admirable job of laying out the pros and cons of the pro-arbitration environment the Court has created. Their articles are worth a read.