The Consumer Financial Protection Bureau announced Tuesday morning a “public inquiry” into how the financial services industry uses arbitration clauses to protect itself from consumer lawsuits. These clauses are often hidden from consumers, deep in contractual fine print, and strip away basic rights to judicial review.
Banks, credit cards, cell phone companies or even employers routinely offer contracts that, in the event of a dispute, mandate an arbitration procedure in which there is not a judge or jury—but rather, a private arbitrator often chosen by the corporation being sued.
Naturally, this creates a pseudo-judicial system heavily weighted towards corporations—in California, for example, a study found that corporations won 94 percent of the arbitration proceedings. In one of the more infamous cases of an arbitrator simply rubber-stamping a corporation’s case, a Minnesota arbitrator ruled in 2006 that woman owed a credit card collection agency $7,800 for a defaulted account—except the card was taken out by an entirely different woman who happened to have the same name.
Forced arbitration has a particularly pernicious effect in allowing companies to avoid class action lawsuits. Big companies hate class action lawsuits because without them, they are free to nickel-and-dime consumers without much fear of legal action—few people would take the time to individually sue their credit card company or cell-phone provider over a couple hundred dollars in bogus fees. Twenty states do not allow companies to ban class-action suits in contracts, but in AT&T Mobility v. Concepcion, the Supreme Court said companies can ban class actions through forced arbitration clauses. (Similarly, the Supreme Court upheld forced arbitration specifically by credit card companies in a case earlier this year).