How Hidden Arbitration Clauses Are Taking Away Your Legal Rights

ConsumerEmployee RightsLegal Analysis
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Arbitration clauses are buried deep within consumer and employer contracts, causing many Americans to unknowingly sign away their rights to a trial by jury.

Arbitration is changing the legal landscape, popping up everywhere from employer agreements to your favorite app’s terms of service. But what is it?

Arbitration agreements require that legal disputes are resolved in private arbitration, rather than in court. Arbitration does not involve a jury; instead, decisions are made by a third-party arbitrator or tribunal. The intent is that if decided outside of court, disputes will be resolved more efficiently.

Initially, arbitration was used between companies. But when employees and consumers were first presented with these agreements, an important shift happened: No longer were the terms agreed to voluntarily and knowingly, but often, without the knowledge of the other party.

These clauses are often buried deep within a contract and use confusing and dense terminology. As a result, many employees and consumers agree to them without understanding that they are signing away their rights to a trial by jury, including class action lawsuits. (Remember that “terms of service” box you clicked in a rush?)

A Timeline of Arbitration’s Rise in Popularity

Arbitration agreements have been around since the 1920’s. But, between 1985 and 2015, 14 Supreme Court decisions made arbitration an industry standard. Here are some key moments in its history.

1925: Federal Arbitration Act

Legalizes arbitration. Initially created to offer an alternative legal procedure for disputes between companies.

1991: Gilmer v. Interstate / Johnson Lane Corp.

Ruled that a non-union employee who was under an arbitration agreement couldn’t settle their workplace discrimination complaint in court. More employers begin to use arbitration agreements.

1999: Meeting of the “Arbitration Coalition”

Corporate attorney Alan Kaplinsky gathers major banks and financial institutions to discuss arbitration clauses. Arbitration becomes increasingly common in the financial sector.

2011: AT&T Mobility v. Concepcion

Plaintiffs fight to file a class action lawsuit against AT&T. The Court rules in favor of AT&T’s class action waiver, causing other companies to adopt similar waivers.

2013: Italian Colors v. American Express

Plaintiff uses the Sherman Actwhich allows citizens to take on monopolistic entitiesto argue their right to form a class action lawsuit against American Express. Court rules in favor of American Express.

The Problems With Arbitration

Arbitration Agreements Are Everywhere

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Credit: The PEW Charitable Trusts

In most cases, you are unable to opt out of arbitration agreements. You either agree to the terms and work for the company or purchase the particular product, or you do not.

In 2010, the National Employment Lawyers Association estimated that one-third of the nonunion workforce in America was forced to sign arbitration agreements.

They’re even more common in the financial sector: In 2016, PEW discovered that 70% of major banks had mandatory arbitration agreements, and 73% used class action waivers.

Though banks argue that their customers willingly signed their rights away, PEW found that 95% of respondents wanted the right to a trial in the event of a dispute with their bank.

James Young, an attorney for ClassAction.com, shared with us just how widespread arbitration has become.

“These clauses have enabled big businesses to force both customers and employees into a seemingly rigged arbitration system for almost every type of legal dispute: consumer fraud, unsafe products, employment discrimination, nonpayment of wages, and countless other state and federal laws intended to protect citizens against corporate wrongdoing.”

Even if You Don’t Sign an Agreement, You Can Still Be Bound by Its Terms

In some cases when individuals have refused to sign arbitration agreements, they were still prohibited from going to court.

Mother Jones reported that even though Fonza Luke refused to sign her employer’s arbitration agreement, when she needed to file a workplace discrimination lawsuit she was told it had to be settled in arbitration. By showing up to work, her employer argued, she had agreed to their terms.

General Mills argued that if you “liked” the company on Facebook, you accepted their arbitration agreement.

A similar decision was made this year by the Sixth Circuit. Former University of Phoenix employees tried to form a class action lawsuit against the school, arguing that they never signed an arbitration agreement. Using Kentucky law, the court ruled that continued employment indicated acceptance of the employer’s terms.

This interpretation is found in consumer agreements as well. By purchasing a product, for example, you have agreed to a company’s terms—whether or not you know what those terms are. In one extremely farfetched incident, General Mills argued that if you “liked” the company on Facebook, you accepted their arbitration agreement.

Mandatory Arbitration Violates the Constitution

The most problematic aspect of forced arbitration is that it strips away the legal rights of employees and consumers.

“By inserting such clauses in every possible contract, businesses effectively moot the judicial system.”

“Mandatory arbitration is a limitation on your right to seek relief,” said James Young. “By inserting such clauses in every possible contract, businesses effectively moot the judicial system. The result is anathema to the founding fathers’ intentions as outlined in our Constitution.”

The Second Circuit recently protected the right to a trial by jury when they ruled that Uber could not force a class action lawsuit into arbitration. The small print of the app’s online agreement, they ruled, did not sufficiently warn customers they were waiving this right.

Explaining the verdict, U.S. District Judge Jed Rakoff said that a trial by jury “can be waived only if the waiver is knowing and voluntary.”

The importance of knowingly signing away your rights is currently playing out in many nursing homes. Facilities argue their patients consented to arbitration terms upon their arrival, but families argue their loved ones did not understand what they were signing. When families try to sue nursing homes for neglect or mistreatment, they find their legal rights barred.

The Centers for Medicare and Medicaid tried to stop this by passing a rule restricting arbitration agreements in nursing homes. However, this was blocked in November 2016 (within days of the rule taking effect) by a Mississippi federal judge.

Mandatory Arbitration Violates National Labor Laws

By prohibiting class action lawsuits, employers are also at risk of violating labor laws. In particular, the National Labor Relations Act (NLRA) permits employees to organize against employers by forming unions or through collective action.

Employers often argue that the Federal Arbitration Act trumps the NLRAan idea that many courts have sadly supported. As it stands, the legality of mandatory employee arbitration agreements depends on which judicial district is reviewing the case.

This inconsistency has necessitated Supreme Court review. Among the many cases awaiting trial is a case between the National Labor Relations Board (NLRB) and Murphy Oil USA.

The NLRB, which enforces labor laws, is appealing the Fifth Circuit Court of Appeals’ ruling that Murphy Oil can use mandatory arbitration agreements to prohibit their workers from filing class action lawsuits. They argue it violates the NLRA.

(Click below for Part 2.)

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