Forced Arbitration: Killing the Right to Sue Big Companies, One TOS Agreement at a Time

Forced arbitration empty courtroom
Forced arbitration empty courtroom

To celebrate National Consumer Protection Week, we recently highlighted a few quick actions that consumers can take to protect themselves. But the sad fact is that the most potent consumer protection tool may soon be all but extinct.

We're referring to the class-action lawsuit, which for decades has allowed groups of wronged Americans to band together, pool their resources and take on companies ranging from Exxon Mobil to Toyota. But many companies are now preemptively ducking such lawsuits by getting consumers to sign away their right to file them.

So-called forced arbitration clauses say that in the event of a dispute, you won't be able to file a class-action suit. Instead, your dispute will be settled one-on-one in a private arbitration forum. These clauses are commonly inserted into terms of service agreements, which you must agree to if you want to use the product or service.

For years, this practice was prohibited by law in many states. But in 2011 the Supreme Court ruled in AT&T Mobility v. Concepcion that all state laws prohibiting forced arbitration clauses are preempted by the 1925 Federal Arbitration Act. And that opened the floodgates.

A Raw Deal for Consumers

In September 2011, just a few months after the Concepcion decision, Sony's PlayStation Network updated its terms of service with a forced arbitration clause. Shortly thereafter, Xbox Live -- Microsoft's own online gaming network -- followed suit with a terms of service update requiring users to waive their right to class action. And in March 2012 Netflix issued a terms of service update prohibiting subscribers from joining class-action suits against the company.

While its easy to envision a scenario where you'd need to sue a pharmaceutical company or restaurant chain, it might be hard to picture having cause to seek compensation for the malfeasance of a company that sends you DVDs or lets you play video games online. But consumers have found cause to sue tech companies of this sort in the past.

Just a few months before Sony changed its term of service, its PlayStation Network was hit with a devastating data breach that allowed the personal information of millions of users to be leaked. Several class action suits were filed by injured users. And Netflix recently settled a multimillion-dollar class action suit stemming from its illegal retention of customers' rental histories.

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Under these companies' new terms of service, such lawsuits would simply not be possible. Any consumer who felt wronged by Sony or Netflix would have to take them on individually before an arbitration panel. And experts say that that's a poor substitute for class action.

"A consumer might have a relatively small claim against company, but it's possible that maybe a thousand consumers might have the same small claim," says Christine Hines of the consumer advocacy group Public Citizen, which has been one of the loudest voices against this trend. "But it's not feasible economically for a consumer to [individually] pursue a small loss against the company."

Cost is a big issue. Consumers usually have to pay an hourly fee to the arbitration provider, and because you're not entitled to a hearing at a convenient location, there can be significant travel expenses: Hines says that if you're from California and you're trying to get damages from a company in Florida, you might have to fly to Florida to press your case. So if you're pursuing a claim for a few hundred dollars, even a judgment in your favor could easily be entirely eaten up by the costs.

But a judgment in your favor isn't a likely outcome, advocates note, because arbitration tends to be biased in favor of businesses. Hines points out that arbitration providers want to get repeat business from companies, so they have a financial incentive to rule more often in the business's favor. In one study conducted by Public Citizen, 95% of arbitration cases were settled in favor of the company.

What's Next?

It's easy for tech companies, websites and wireless carriers to insert arbitration clauses into their contracts, because people are used to skipping the terms of service agreements and fine print that accompany these services.

But now that the Supreme Court has given the go-ahead to forced arbitration clauses, what's to stop fast food restaurants, pharmaceutical giants, car manufacturers and other businesses from using the same tactic?

"That has certainly been a question that's crossed my mind," says Jean Sternlight, a professor at UNLV's Boyd School of Law and an expert on arbitration. "The temptation is there for companies to do it ... what could conceivably constrain them is if there were a strong consumer reaction against that."

Let's say, hypothetically, that McDonald's started putting arbitration clauses in the windows of all of its restaurants. There would undoubtedly be all sorts of negative media coverage, and it would lead to a perception among consumers that the fast-food chain was trying to shield itself from being sued over unsafe food.

In fact, this is exactly what a Whataburger location in Texas did in 2008, and it did indeed get some negative media coverage. But as far as we can tell, people didn't stop buying burgers. Nor have people stopped doing business with these companies using forced arbitration clauses.

"Most consumers are still unaware of what forced arbitration is and what the impact will be," says Sternlight. "When I speak to my law students, even they are unaware."

Another case currently before the Supreme Court, American Express Co v. Italian Colors Restaurant, may yet preserve some sliver of class-action rights if the court rules in favor of a group of merchants trying to sue the credit card company. But given the Roberts court's recent history on arbitration matters, Hines says she's pessimistic that the justices will hand American Express a decisive defeat.

If the court does indeed rule in favor of American Express, look for even more businesses to find ways to shield themselves from lawsuits.

"Companies would only be restrained either by their own good conscience, or by their fear that consumers would get mad," says Sternlight.

Hopefully consumers start to get mad before it's too late.

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at, and follow him on Twitter at @Brownellorama.

Photo: Mark Wilson, Getty Images