It’s a safe bet that most Americans have scant — if any — knowledge that their every call, swipe, job dispute, or even the purchase of an Amtrak ticket has bound them to mandatory arbitration.
Which means that if, say, their hand gets burned from an overheated cell phone, or their new washing machine becomes a mold incubator, or their Title VII rights are violated at work, there is no “see you in court.” Instead, the aggrieved party will be forced to arbitrate.
And shoulder half the cost.
For Brittany Smith, a discovery specialist at the Oakland law firm of Gwilliam Ivary Chiosso Cavalli & Brewer, the entire underlying principle is faulty.
“No one should be forced into a process that they do not understand or know anything about. People should have a choice,” she said.
Should, but largely don’t. Indeed, Smith notes, “a majority of all nonunion, private-sector employees [56.2%] are bound by arbitration agreements.” According to the Economic Policy Institute, which issued the report, “by extrapolating to the overall workforce, this means that 60.1 million American workers no longer have access to the courts to protect their legal employment rights and instead must go to arbitration.”
Mandatory arbitration requires employees or consumers to agree to arbitrate legal disputes with an employer or business rather than going to court. Although voluntary, such agreements are a necessary precondition to the transaction and are legally binding. Often these agreements also include prohibitions against class action suits.
Unfortunately, as Smith readily acknowledges, the whole subject of mandatory arbitration has failed to capture the kind of public scrutiny it deserves. “It just sounds boring, which is part of the problem,” Smith said. “It’s about contracts and about reading small print.”
And, in the right mouth, it can be spun to seem benign, even positive. “Companies frame arbitration in a positive light,” Smith said. “Usually, individuals are not informed about the negative aspects of arbitration. For example, when an HR [Human Resource] person is onboarding you, they might say things like, ‘Oh, we split the costs’ and ‘it will save you time and money.’”
Arbitration favors the big company
Although there is no outright deception in getting a customer or employee to agree to arbitration, neither is there a thorough explanation of what is at stake. “You’re basically talking about a little clause, usually buried in a dense, multi-page contract. It is not the kind of thing you’re really going to focus on if you want that job or phone.”
And therein lies the central inequity. By agreeing to mandatory arbitration, consumers, job seekers and employees are essentially rigging the game in the employer’s or company’s favor. “Mandatory arbitration completely favors the big companies and organizations that demand it and is fundamentally unfair to plaintiffs,” said Gwilliam Ivary partner and cofounder Gary Gwilliam.
Indeed, companies control all the levers. For starters, they write the agreements. And if a dispute comes to arbitration, they get a hand in picking the arbitrator. “When you go to court, you don’t get to pick the judge.”
Because these companies are likely to return to arbitration, unlike the individual, an arbitrator is more likely to side with the company — the repeat-player effect.
“They know the arbitrator, and the arbitrator knows them,” Smith said. “They pick the arbitrator that they prefer. The unsuspecting individual, who is comparatively uninformed, will likely just go along with the company’s choice.”
And if the individual doesn’t sign? “It can mean no job. It shouldn’t be so easy to force people to sign over their rights and their entitlement to a truly fair trial.”
Furthermore, she stresses, the consequences go beyond the specific injury to a particular individual: arbitration hearings shroud the transgression in secrecy. “What we lose is the public knowledge that can come from filing a lawsuit,” Smith said. “A lawsuit puts everyone on notice that this company discriminated against me or did something illegal or dangerous. If an employee goes right to arbitration, there’s no public record, no warning to future employees or prospective whistleblowers. It serves a social good to publicly hold the company responsible.”
Extrajudicial dispute resolutions weren’t part of the U.S. judicial system until 1925, when Congress passed the Federal Arbitration Act. But it has been only during the past 30 years that the courts have been issuing rulings that have strengthened companies’ ability to enforce arbitration clauses. In 2011, for example, in AT&T Mobility v. Concepcion, The Supreme Court struck down a California law that sought to prevent arbitration clauses from restricting class-action lawsuits. And in 2022, in Viking River Cruises, Inc. v. Moriana, the court preempted a California rule that would have allowed workers to sue under the state’s Labor Code Private Attorneys General Act (PAGA).
At the same time, there are rumblings that the scales have tilted too far toward companies and that a rebalancing of power is in order. “Mandatory arbitration is now falling out of favor and, thankfully, enlightened courts and legislators are beginning to take action to ban this practice,” Gwilliam said.
Cases in point: In 2016, the Consumer Financial Protection Bureau proposed a rule that would prohibit companies from inserting any language that would restrict consumers from bringing class action lawsuits. And in 2022 President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, which bars companies from settling sexual harassment suits through closed-door arbitration sessions.
In the meantime, while waiting for large-scale change, Gwilliam Ivary Chiosso Cavalli & Brewer will keep bringing cases. “Seeing what people have gone through and how it’s affected them, and their lives has made this a priority for our firm,” Smith said. “We have three of these cases right now. We took two up to the Supreme Court of California, but, unfortunately, the Court denied our efforts to keep our clients from forced arbitration.”
In the meantime, for the rest of us, Smith recommends taking a personal inventory of all our contracts, from the websites we visit to the companies we work for. “The most important thing, I think, is just to know if you have any of these clauses and to be aware of the pros and cons. Just knowing that they exist is valuable on its own.”