Arbitration vs. Public Courts: Important Considerations for Consumers

It’s a current reality of the legal world that cases against companies on the part of consumers have been increasingly difficult to get into public courts. This is because companies have often been including, sometimes furtively, arbitration agreements in the terms and conditions attached to the purchase of many goods and services. More important, however, is the fact that the Supreme Court of the United States (“SCOTUS”) has generally ruled in favor of such arbitration agreements, thereby making them usually enforceable and the law of the land.

Firstly, let’s make clear what “arbitration” means: it is the process of resolving legal disputes in a private forum and employing a third-party mediator. Thus, instead of filing a lawsuit in a traditional public courthouse and being subject to the dynamics of the United States judicial system as initially construed in the Constitution, a consumer bound by arbitration and filing a suit against a company will air their grievances and seek recompense in a private legal process. Most often, such arbitration will be overseen by JAMS or AAA; while JAMS is for-profit and AAA is not-for-profit, they are both private.

Secondly, it’s imperative to understand that, in this article, we are speaking in a consumer context– we aren’t concerned with businesses suing other businesses. Our concern is ordinary consumers who have been somehow wronged by a company and the legal dynamics and considerations to which they’re subject, which are fundamentally different from those in a commercial context.

SCOTUS and Arbitration

You have almost certainly heard about, and certainly been affected by, the many trends- jobs outsourcing, 401(k)s replacing pensions, breaking of labor unions, public financing of privately owned sports stadiums and teams, privately funded political action committees, etc.- forming the interplay between the public and private spheres. Consumer arbitration is one significant legal aspect of that same interplay.

There have been contracts, of course, between various parties doing business for millennia. However, it is a far more recent phenomenon for companies to routinely include arbitration agreements, particularly those entailing class-action waivers, in the terms and conditions of basic consumer contracts. Next time you, for example, sign up for cable or Internet service, rent a car, or purchase a mobile phone and wireless service, take a look at the fine print- you’ll most likely find an arbitration provision somewhere in there. As stated, however, it’s more important for the consumer to understand that the Supreme Court has been almost uniformly favoring the legality of such arbitration agreements- if this weren’t true, then these agreements would lack bite.

Consider, for example, this SCOTUS ruling (AT&T Mobility LLC v. Concepcion) from 2010. In this important case, a California consumer who claimed to be deceived by a wireless company (AT&T Mobility) and attempted to sue by aggregating many small claims into a class action, was rebuffed by a 5-4 SCOTUS vote favoring the right of companies to preempt class actions via waivers in arbitration agreements. Likewise, in its 2013 American Express v. Italian Colors Restaurant decision, SCOTUS favored, in a 5-3 vote, the right of credit card giant American Express to arbitration even though this would be economically infeasible for the defendants (a group of small businesses) to pursue individually.

While this case takes place in a commercial context, it’s highly relevant to this article and the consumer context as 1) it involves a number of small entities attempting to form a class against a much larger entity, and 2) it provides another recent example of SCOTUS’ penchant for favoring arbitration agreements. Also in 2013, SCOTUS, in a case (Comcast v. Behrend) involving Philadelphia-area consumers attempting to sue cable giant Comcast for monopoly pricing, made it more difficult to certify class actions; unsurprisingly, this also involved a 5-4 decision.

Through all this, SCOTUS has effectively been working to make consumer class-action lawsuits a dying breed; the business-friendly majority on the Supreme Court has been making it increasingly difficult for small parties to take collective legal action against large ones. This does not mean that class-action lawsuits are dead or impossible to get off the ground. This law firm, for example, is currently working to help push through a class action and there will continue to be attorneys and related parties who fight for the right of many small actors to collectively fight against large ones. However, given the current reality as described, it’s important for ordinary consumers to understand some key trade-offs involved with arbitration:

Arbitration vs. Public Courts: Cost

In the consumer arbitration context, it is the company being sued (the one that issued the arbitration agreement) that is obligated to pay the associated filing and arbitrator fees; this is consumer-friendly. However, this is not sufficient to say that the cost component always favors arbitration over public litigation. Consider that many lawyers take strong cases on a contingency basis – i.e., the consumer plaintiff isn’t obligated to pay attorney and other fees unless there’s a favorable verdict. Also, recall that arbitration is private- relative to public courts and the public record, arbitration lacks transparency. This means that, in some cases, a defendant business might employ stalling tactics whereby it doesn’t pay the required fees in a timely manner, thereby requiring further litigation; because arbitration is private and lacks transparency, there’s not always a clear enforcement mechanism by which defendant businesses are forced to pay fees in an adequate manner.

Furthermore, consumer plaintiffs may be required to pay related but additional costs, such as those surrounding depositions. Also, if rewards are significantly different in arbitration and public litigation, then this should affect the overall cost calculus. It is often the case that costs to the plaintiff consumer are roughly equivalent in arbitration and public courts.

Arbitration vs. Public Courts: Speed

Generally, arbitration is likely to proceed somewhat more quickly than public litigation, though this is certainly not a guaranteed outcome; just because something is private doesn’t mean that it will proceed more efficiently than its public counterpart. Yes, arbitration is geared towards entailing less red tape than the traditional judicial system; however, public courts routinely witness out-of-court settlements and reasonable hearing dates. As stated above, arbitration can be subject to stalling tactics on the part of defendants. While total speed is slanted in favor of arbitration, there are a number of factors that can influence a given outcome.

Arbitration vs. Public Courts: Consumer vs. Business

As you might surmise, arbitration is generally tilted towards business. However, this does not mean you can’t receive a good individual outcome from arbitration. It’s crucial to understand that, in aggregate, arbitration clearly favors companies because it allows them to divide and conquer many small parties. However, given the particular nature of any given claim and its associated parties, arbitration, just like the judicial system, can yield a variety of outcomes. In general, it is quite unlikely that a plaintiff consumer would receive an outsized reward from a mediator: arbitration is too business-friendly for that. However, any given reasonable consumer may find the arbitration process satisfactory. Unfortunately, it would take many, many arbitration decisions on behalf of plaintiff consumers to get many businesses to actually cease a bad behavior – i.e., arbitration outcomes will rarely serve as a deterrent.

Arbitration vs. Public Courts: Privacy & Binding Decisions

As stated, arbitration clearly lacks transparency relative to the public courts. If you’re seeking to sue a business, you’re probably not overly concerned with privacy in that regard. If, for some reason, you do desire privacy in your litigation, then arbitration is clearly preferable. Likewise, if you want your ordeal to receive more publicity, then you might especially wish to avoid arbitration.

Regardless, it’s important to understand that arbitration decisions, unlike those in the courts that allow for appeals, are binding– they can’t be reversed. Furthermore, arbitration decisions are likely to remain concealed such that news of a company’s behavior and any settlement will remain hidden. If you wish to make a company’s poor behavior known and perhaps help other consumers from being harmed in the same manner, then you will likely find arbitration unsatisfying.

Conclusion

In sum, it’s important to understand that arbitration has, at least for the time being, grown into an increasingly substantial element of the U.S. legal environment. You should know that the Supreme Court has been systematically ruling so as to bring this phenomenon about. Given this reality, you should be that much more aware of the stipulations entailed in the terms and conditions that will likely accompany your purchases of goods and services; perhaps take more time to read the fine print. Understand that arbitration has, in its entirety, been cultivated so as to favor large businesses over individual consumers. Nonetheless, arbitration can yield good outcomes for individuals. Finally, if you’ve been somehow significantly wronged in a consumer transaction, it’s wise to seek legal counsel who can help you navigate through all of this.

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