In today’s marketplace, consumers have a choice when purchasing such things as cellphones, banking services and even medical procedures. Sign the contract and get the product. Don’t sign the contract and don’t get the product.
Increasingly, the choice consumers do not have is to sign the contract and still be able to bring a class action against the company.
A recent opinion from the Supreme Court of the United States has affirmed the justices’ earlier stance that arbitration agreements can include class-action and class-arbitration waivers that effectively prevent consumers from joining together to fight the product manufacturer or service provider.
However, the ruling — along with rumblings from the public and concerns about businesses overreaching — may be ratcheting the pressure on Congress and federal agencies to bring new regulations that would give consumers more choices.
In the meantime, Indianapolis attorney John Van Winkle believes arbitration clauses in consumer contracts will proliferate.
Van Winkle of Van Winkle Baten Dispute Resolution senses a tension between the Supreme Court seemingly giving leeway to arbitration agreements and Congress wanting to rein in the more extreme provisions. Eventually either Capitol Hill will act or the justices may impose some limits.
The current trend in consumer contracts is “potentially troublesome,” he said, and will not remain unchecked. Certainly, if some agreements continue to try to overreach, Congress will have an easier time taking action.
Attorneys were not surprised by the Supreme Court’s December ruling on arbitration clauses, DirecTV, Inc. v. Imburgia, et al., 577 U.S. __(2015). Going back to the 1970s, the court has held a consistent view of the Federal Arbitration Act and upheld arbitration agreements.
Class-action waivers are a fairly recent development. They did not appear in the agreements until a trend developed of class actions erupting in arbitration contexts that were perceived to put the defendants —businesses — at a disadvantage.
James McKenna of Jackson Lewis P.C. in Chicago said Imburgia fits into the pattern of the Supreme Court enforcing the agreement as written.
Sticking to precedent
Indeed, with Imburgia, the Supreme Court reaffirmed its precedent that arbitration agreements that prohibit class actions and class arbitrations are enforceable. The ruling held that the Federal Arbitration Act preempted a California law that barred class waivers.
This case followed AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) and American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), both of which ruled class waivers are enforceable in arbitration agreements.
In Imburgia, two consumers brought suit against DirecTV for being charged early termination fees. The service contract included a waiver of class arbitration but noted if the “law of your state” does not recognize such waivers as enforceable, then the entire arbitration provision is unenforceable.
The California Court of Appeals found the language of the contract indicated the parties had chosen California law to govern and the Golden State’s prohibition on class waivers prevailed. But the Supreme Court reversed, holding the lower courts must following the ruling in Concepcion.
The irony of Imburgia is that Justice Stephen Breyer, who wrote the dissent in Concepcion, wrote the majority opinion.
Justice Ruth Bader Ginsburg dissented, finding the Federal Arbitration Act does not apply to proceedings in state courts.
“Today’s decision steps beyond Concepcion and Italian Colors,” Ginsburg wrote, joined by Justice Sonia Sotomayor. “There, as here, the Court misread the FAA to deprive consumers of effective relief against powerful economic entities that write no-class-action arbitration clauses into their form contracts.”
Looking at Imburgia and the previous rulings, Thomas Stipanowich, academic director of the Straus Institute for Dispute Resolution at Pepperdine School of Law, noted the trajectory the court has been taking on arbitration law could change with the death of Justice Antonin Scalia.
Many of the prior rulings were 5-4 splits with Scalia either authoring or strongly influencing the decisions enforcing arbitration agreements. The court is now pretty much evenly divided and depending on the judicial temperament and philosophy of the individual confirmed to replace Scalia, the Supreme Court could shift views.
To South Bend attorney Joseph Simeri, the court’s decision was disappointing in that it prohibits consumers from accessing the court, leaving them little chance of getting a fair shot.
“Everybody wants to win,” he said, “but they can accept losing if they think it’s fair.”
Primarily arbitrating employment matters, Simeri said the arbitration process can be the best process for certain situations. Arbitration gets to the heart of the issue and is quicker and less expensive than going to the courts. But the key is to keep the process fair with both sides volunteering to participate and select the arbitrator.
If one side is allowed to select the arbitrator and set the parameters for the process, Simeri worries lay persons, already unable to go to court, will get discouraged and quit fighting.
Adding to the unfairness are the contracts themselves. Consumers either don’t read the contract or don’t understand the arbitration clause. If they do read and understand, they don’t have a choice but to accept the terms in order to get the goods and services.
A study by the Consumer Financial Protection Bureau found tens of millions of consumers are covered by arbitration clauses yet three out of four surveyed were unaware they were subject to them. In addition, the report noted class-action waivers appeared in arbitration clauses to varying degrees with 57 percent of mobile wireless contracts and 6 percent of payday loan contracts having such provisions.
Looking closely at the contracts themselves, the CFPB study discovered the arbitration provisions tended to be wordy, complex and written at a higher grade level when compared to the rest of the document.
Judith Fox, clinical professor at the Notre Dame Law School, said arbitration agreements are confusing and essentially prevent consumers from getting relief. Dollar amounts at the center of some disputes may be so small that holding the company accountable is only practical when the consumers can join together.
As to businesses’ contention that arbitration helps stop frivolous lawsuits, Fox countered that if companies cleaned up their business practices, they would not get sued.
Pressure to act
Congress and the CFPB have been considering action to limit abuses in arbitration agreements.
Fox, who is on the CFPB Advisory Board, advocates banning all arbitration clauses in consumer contracts. At the very least, companies should be required to use plain language and give consumers the ability to opt out.
Stipanowich doubts Congress, given its current makeup, will take any action. But the CFPB could institute a limit similar to the regulation that the Securities and Exchange Commission implemented on investor-broker arbitration agreements. Mainly, the SEC ruled class-action waivers were not enforceable. However, if class-action waivers become unenforceable, consumers might find their only choice is court.
Stipanowich anticipates if the waivers go, some companies will throw out the arbitration agreement altogether. The primary reason for them is to avoid class actions and if that is no longer an option, arbitration will be cut from contracts and the businesses will turn to relying on the courts.•