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What’s The Rub With Mandatory Arbitration Clauses?

What’s The Rub With Mandatory Arbitration Clauses?

Posted on by Jon Colgan

In 2005, with more than twenty years of business experience behind her, Gina Constant enrolled in law school. Her resume? For two years, she was an engineer at a nuclear-chemical plant. She was and engineer and manager at Intel for fourteen years, and an entrepreneur in the health care space for five years. In contrast to her classmates, she was well acquainted with the constraints and rhythms of business per-usual. This is why the topic of her law school thesis struck me.

Her thesis, “Consumer Disputes: An Examination of Public Policy and the Typical Cell Phone Contract,” is a brilliant critique of mandatory pre-dispute arbitration clauses. I refer to it often. It’s clear from the first sentence whose side she’s on.

There are two things that make pre-dispute arbitration clauses phone contracts particularly abhorrent. First, telephone service is a public utility and it is against public policy to have people accessing basic and necessary services from large, completely profit-driven corporations through non-negotiated, standard form contracts that include waivers of constitutional rights. Second, while fair arbitration itself may be an excellent alternative to court litigation for a variety of reasons, cell phone pre-dispute arbitration clauses are littered with unfair terms that actually discourage consumers from arbitrating or litigating or resolving disputes in any manner save one: pay the disputed amount and pay it now.

After law school Constant went to work for a New Mexico firm where she specializes in intellectual property and chairs the Intellectual Property Section of the State Bar of New Mexico. In 2010, she was selected by the New Mexico Technology Council as one of the state’s top women in technology.

Here is a seasoned business and legal mind with years of experience and recognition in her field, not some busybody ranter or proverbial squeaky wheel. Why then was she interested in 2005 in writing about mandatory arbitration clauses? Seems kind of squeaky-wheelish, right? I wondered that myself. So, I asked her.

My interest arose out of dispute with Verizon. They said my husband’s company owed money that they didn’t. Someone [from Verizon] threatened arbitration . . . said it would cost so much more than just paying.

In short, Constant learned first-hand how hopeless cell phone disputes tend to be for consumers. There’s the disparity of resources, consumer to carrier; the coercive tactics (i.e. “threatened arbitration”); and the unfair contract itself. It offended her sense of fairness. So while in law school, she intended to shine some light on the shadiness.

What are the fundamental arguments for or against mandatory arbitration? I’ll leave you with the following breakdown.

Critics claim . . .

  1. Reductions in procedural protections such as right of appeal or access to discovery.
  2. Not as fast and cheap as proponents claim.
  3. Immunization from civil liability by prohibition of discovery and class proceedings.
  4. Undermine deterrence of and fails to address wrongdoings to consumers.
  5. Undermines transparency and precludes precedent-setting.

Proponents claim . . .

  1. Faster, cheaper, and more efficient than litigation.
  2. “[M]inimizes disruption and loss of good will. . . “
  3. Cost-savings keep prices low and help expand access.
  4. Class proceedings are without merit and don’t benefit consumers.

The takeaway? Consumers tend to be critics, while carriers tend to be proponents. Getting customers to contractually waive their constitutional rights like access to the courts is good for business, especially if consumers have nowhere else to go (recall that 93% of the US is beholden to just four carriers). But it’s not good for consumers and not good for the sanctity of the of The Constitution. Constant writes:

[O]nly when courts consistently strike arbitration agreements with unfair terms will companies have an incentive to draft agreements that encourage good faith dispute resolution on the part of both the company and the consumer.

I won’t hold my breathe waiting for the courts. But I will continue to build, and consumers can find redress there.