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Steven J. Klearman
Steven J. Klearman
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Why Binding Arbitration Can Forfeit Your Rights

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Yesterday I blogged on some of the negative aspects of binding arbitration. Here’s more information on why this often misunderstood form of alternative dispute resolution can be problematic.

Buried in the fine print of most consumer contracts – such as credit cards, insurance plans and car deals – is a clause, which waives the buyer’s constitutional right to trial by jury. These contracts mandate that consumers give up their rights before a dispute even occurs – this is called “mandatory, binding, pre-dispute arbitration.” Arbitration was conceived as an informal, expedited process for resolving routine disputes between businesses. But when it is imposed on a weaker party, such as a consumer, arbitration can be used to defeat valid claims. Arbitration has several unique characteristics that stack the deck against consumers, making it harder for individuals to prevail in a dispute with a business.

Costs are high:An injured party must pay steep filing fees just to initiate a case–seldom less than $750. These fees do not cover the arbitrator’s hourly charges, which are generally in the range of $200 to $300 per hour, split between the parties. All these fees must be deposited in advance, and almost always amount to thousands of dollars. Because the injured person has usually sustained a serious loss in the dispute with the business–foreclosure on a home, firing from a job, denial of medical care–most individuals covered by an arbitration clause cannot afford these costs and are forced to drop their cases.

Biased Arbitrators: Even though arbitrators are supposed to be impartial, they are often biased toward business, since only businesses will be repeat users of a particular arbitrator. If an arbitrator knows that a business may use them again and again, they are inclined to rule in their favor.

Limited discovery: Discovery is the process by which parties in a legal dispute obtain information and evidence in the possession of their opponent or third parties. In arbitration, discovery is a privilege, not a right, and many businesses draft arbitration clauses to severely restrict the consumer’s ability to obtain necessary evidence. Moreover, since arbitrators do not have the power to enforce subpoenas, claimants must sometimes file lawsuits to get compliance–defeating the purpose of arbitration.

Prohibition of class actions: Nearly every arbitration clause prohibits participation in class action lawsuits. Class actions are the only effective remedy for wide-scale scams that rip off individual consumers or farmers in small amounts. Individuals do not have the time or resources to recognize, investigate, or prove the existence of such fraudulent practices.

Inconvenient locations: Arbitration clauses often require that hearings be held in a location inconvenient to the injured consumer or worker. Individuals may have to bear the cost of long-distance travel to have their case heard. For example, the Internet auction site e-Bay requires its customers to travel to its home turf of San Jose, California, to arbitrate any dispute.

One-way requirements. Most arbitration clauses require only the weaker party (the consumer, employee, or franchisee) to arbitrate his or her claims, while allowing the dominant party (the corporation) to sue in court on its claims. Thus, a sexual harassment victim can be forced to arbitrate a discrimination claim against a former employer, but if the employer sues to stop her from joining a competitor, the employer’s claims are heard in court.

No public record. While proceedings and records of the courts are open to the public, most arbitration clauses and provider organizations require that proceedings be kept confidential. As a result, only the businesses that impose arbitration can track past decisions and know which arbitrators have ruled for them. Public discussion of the fairness of an arbitration ruling is discouraged, even if the case raises policy issues of wide concern. Moreover, arbitration sets no legal precedents to guide companies’ future conduct.

Limited judicial review. Parties are allowed only limited judicial review of an arbitration award. A decision may only be overturned when there is fraud or “manifest disregard of the law.” This is a very high hurdle to overcome because arbitrators are not required to issue written findings of fact or legal conclusions. Oddly enough, courts will refuse to hear appeals of arbitration decisions even when both sides have agreed to let a court do so!

Limited remedies. Courts can provide a range of remedies that are not available to a claimant in arbitration. Injunctive relief–a court order compelling the offending party to do something, or prohibiting that party from taking some action–cannot be obtained through arbitration. Arbitrators often split the difference between the two sides in awarding damages instead of determining the true costs of injuries. As a result, arbitration awards to consumers and employees are substantially lower than court awards.

Information for this blog comes from http://www.peopleoverprofits.org