Arbitration Fairness Act

Arbitration Fairness Act

A large and growing number of corporations now require millions of their consumers and employees to sign contracts that include mandatory arbitration clauses.  Most of these individuals have little or no meaningful opportunity to negotiate the terms of their contracts and they find themselves having to choose either to accept a mandatory arbitration clause or forgo securing employment or needed goods and services.

Arbitration is a form of alternative dispute resolution (ADR), a method wherein a neutral third party makes a binding decision in a disagreement.  During the hearing, the two parties present their case in front of an arbitrator, the neutral third party.  The aim is to present evidence, plead cases, and cross-examine the witnesses of the opposing sides as if it was in a court room in front of a Judge.  Arbitration remains a popular form of dispute resolution; it has its own rules and procedures and many are similar to the rules and procedures of the courts.  Arbitration has been used in a wide variety of contexts to resolve disputes, from simple commercial matters to those involving residential leases, medical informed consent forms, banking and credit card agreements, vehicle sales agreements, construction agreements, attorney-client fee arrangements and employee disagreements.  Arbitration has been an enduringly popular choice for parties (mostly the companies); in both state-to-state and commercial dispute resolution, since the beginning of recorded history.  The main attractions of arbitration are that parties get to choose the arbitrator, and it reduces the expenses and delays usually present in state courts.

In fact, U.S. courts also readily enforce arbitral clauses in situations in which the clause was never technically bargained for, such as in consumer agreements or employment relationships.  Few people realize or understand the importance of the deliberately fine print that strips them of their rights, and because entire industries are adopting these clauses, people increasingly have no choice but to accept them.  Often an employee has no idea that he or she signed away his or her rights to take their employer to court until a dispute gets so serious where he or she is ready to do so.  Many corporations add unfair provisions to their arbitration clauses that intentionally tilt the systems against individuals, including provisions that strip individuals of substantive statutory rights, ban class actions, and force people to arbitrate their claims hundreds of miles from their homes.

The Arbitration Fairness Act is currently pending in both the House and the Senate.  The Act, if passed and signed into law by President Obama, would work some of the most fundamental needed changes to U.S. arbitration.  Congressman Johnson has described the Act as a “pro-consumer” bill designed to protect the right to a jury trial by preventing the use of mandatory arbitration clauses in employment and consumer contracts.  These bills would amend the Federal Arbitration Act to make pre-dispute arbitration agreements that require arbitration of employment disputes invalid and unenforceable.  The Arbitration Fairness Act bans mandatory binding arbitration clauses in consumer and employment contracts, including franchise agreements.  Most importantly, the Act would simply outlaw broad categories of arbitration.

Arbitration may be a very good idea for most companies, but may not be well-suited for others.  Arbitration is not always cheaper or more efficient than going to court.  The simplicity that makes arbitration so appealing on many levels can also have less pleasing results.  Cases can drag on for an indefinite period when other parties do not cooperate or there are scheduling difficulties.  Such complications may result in unexpected expenses, due to the fact that each meeting or review includes the cost of renting a space and paying the arbitrator’s bill.  The fewer practical precautions and official procedures in arbitration mean that it is easier for the other party to misbehave or act unethically without consequences.  There is no judge present to enforce proper proceedings. If something goes wrong in a case or there is a noticeable mistake made by an arbitrator, it is very unlikely to be readdressed.

Some are concerned that the arbitrator’s award is unfair or that irrational clauses work in favor of a large employer or company when challenged by an employee or consumer who has less financial stability and power.[1]  Another concern is that the process of choosing an arbitrator by a party within an industry may be less objective, more likely to be influenced in favor of the appointing group.  Many employers avoid taking a case to trial because of a potentially over-generous jury, another significant advantage of arbitration.  The unpredictability of juries and the fear that a jury may award excessive emotional distress and/or punitive damages drive many court cases to pretrial settlement.  Although laws vary from state to state, arbitration awards are final and binding on all parties to the arbitration.

Given the possible threats and unevenness for those who unwillingly enter arbitration contracts, the sensible consumer can take a number of steps to become better informed.  Read or go through all agreements you have entered into with a company.  If you find an arbitration clause disagreeable, be sure to make your feelings known to company management.  It is sometimes possible to negotiate the provisions.  Companies should consider all the factors, both pro and con, before adding arbitration clauses to their business agreements.  In the end, arbitration is not always the quickest and cheapest method to settle a dispute.  Anyone with concerns about a legal claim against his or her employer should consult with an attorney for legal advice.

[1] Some believe that an arbitrator is running a business; thus, if the arbitrator rules against a company that routinely brings its cases in front of him or her, then the arbitrator will be blackballed and will not be able to obtain any new business.  As a result of such a business matrix, the arbitrator will be very business friendly because he or she obtains most of his or her fees and income from the business community that force such arbitration clauses on their employees and customers.