Mandatory Arbitration

I was reading a contract pretty closely recently, and for some reason this time I actually paid attention to the mandatory arbitration clause. It actually made me angry, even though I don’t get angry much. I think this was the second time in 5+ years (the other time was when I learned about the billions of dollars of meat subsidies). I’m redacting the company’s name because it really doesn’t matter, I’m pretty sure that lots of companies have this, and the takeaway is not that a specific company is horrible. I’ve reworded to simplify the legalese (also just for laughs).

I AGREE THAT ANY AND ALL DISPUTES I MAY HAVE AGAINST <company> OR ANY <company> EMPLOYEE OR ANY PERSON WHO HAS SO MUCH AS BREATHED AIR FROM <company>’S PREMISES, INCLUDING BUT NOT LIMITED TO EVERY DISPUTE EVER, WILL BE SUBJECT TO BINDING ARBITRATION UNDER THE FEDERAL ARBITRATION ACT, EVEN IF THAT ACT DOESN’T ACTUALLY APPLY. I WILL PRETEND THAT JUDGES AND JURY TRIALS DON’T EXIST.

Well shit, that’s pretty horrible. So if I think that <company> has breached our agreement, I’m not allowed to sue them. I can’t go to the courts, I have to go to the arbitrator who the company selected, who gets fees from the company for every arbitration case, who has never heard of me before and probably will never hear from me again. Hmm, I wonder what the decision there will be.

THE ARBITRATOR, AND NOT ANY COURT, SHALL HAVE EXCLUSIVE AUTHORITY TO RESOLVE ANY DISPUTE RELATING TO THE INTERPRETATION, APPLICABILITY, ENFORCEABILITY OR FORMATION OF THIS ARBITRATION PROVISION INCLUDING, BUT NOT LIMITED TO ANY CLAIM THAT ALL OR ANY PART OF THIS ARBITRATION PROVISION IS VOID OR VOIDABLE.

Wait, WHAT? Are you telling me that I can’t even contest the contract itself? What if a company decides to just forge my signature on a contract they made up? You’re telling me a court won’t listen to that complaint? Surely there are some protections you can’t just give up like this, like with gross negligence? And if it’s not even clear that you gave up the protection, then surely the courts will judge that?

Wikipedia informs me that no, basically, I don’t have that protection. Turns out that in Prima Paint Corp. v. Flood & Conklin Manufacturing Co. the Court decided that you can’t sue because you believe the contract itself is void. The specific case I mentioned wouldn’t work — that’s a question about whether a contract was even formed, and so courts are willing to hear it. However, they won’t hear cases about the validity of a formed contract. So, if I understand this right, <company> could commit fraud to get you to sign a contract with one of these pernicious clauses, and now you’re stuck with arbitration with a biased “judge” who doesn’t have to rule based on the law.

The one saving grace is that you can appeal the arbitrator’s decision to courts, though they will only hear the case if the arbitrator’s decision is completely unreasonable (not just wrong). This probably does prevent some truly outrageous behavior, but it doesn’t seem strong enough.

Let’s read on…

PROVIDED, HOWEVER, THAT ANY CLAIM THAT THE CLASS ACTION WAIVER, COLLECTIVE ACTION WAIVER, OR REPRESENTATIVE ACTION WAIVER IN SECTION (c) BELOW, OR ANY PORTION OF THEM, IS UNENFORCEABLE, INAPPLICABLE, UNCONSCIONABLE, OR VOID OR VOIDABLE, WILL BE DETERMINED ONLY BY A COURT OF COMPETENT JURISDICTION AND NOT BY AN ARBITRATOR.

Huh, that’s an interesting special case. I bet this agreement prevents me from participating in class action lawsuits, and of course for that <company> would want courts to decide the legality. In fact, I bet the Supreme Court has probably already ruled that these sorts of clauses are fine, so this guarantees they get off scot-free, while the arbitrator could by some unfathomable reason agree with me since they aren’t bound by precedent. Let’s see what’s in section (c).

I HEREBY WAIVE ANY RIGHT TO BRING ANY CLASS OR COLLECTIVE ACTION. IF AND WHEN APPLICABLE LAW PERMITS WAIVER OF REPRESENTATIVE CLAIMS, I WAIVE THE RIGHT TO BRING ANY SUCH CLAIM.

Yup, there it is.

Overall I’m pretty disgusted that this is standard practice; it seems near-impossible not to participate. I’ve signed the damn contract anyway because it’s unlikely that this will actually affect me and I want what provides. Voluntary arbitration seems useful, since it reduces pressure on the courts and may let parties voluntarily avoid overly stringent laws, but making it mandatory adds far too many conflicts of interest to actually be worthwhile. The best argument I can see for it is that this removes the low-importance cases from the courts in a way that doesn’t look horrible to the average citizen. (Assuming, of course, that more reasonable solutions like triage systems look more horrible to the average citizen; I’m not sure if that’s true.) That’s not very compelling at all and doesn’t sound at all like the actual reason why this works, which I would guess is a lot of corporate lobbying. It also gives a pair of people a way to mutually circumvent an annoying law, which may be beneficial in some cases? I’m having a hard time of thinking of real examples.

Can anyone think of compelling reasons that this is not as horrible as it sounds to me?

  • Andrew

    Synced from FacebookComment hidden by request

  • Claire

    Synced from FacebookI think Buck Shlegeris had some reasons why this is sometimes a good thing.

    • Synced from FacebookYeah, iirc it was primarily that this is a mechanism for two people who want to enter a contract but also circumvent an annoying law. I tried to think of compelling examples here (on the same level as “this company can fraudulently get your signature and get away with it”) but failed.

      And he just posted a link, I’ll go read that now.

    • Buck

      Synced from FacebookYeah, in general mandatory arbitration could be good, but I agree with Rohin that the bit where the arbiters get to assess the validity of the agreement seems sketchy.

  • Buck

    Synced from FacebookBryan Caplan points out that mandatory arbitration could have some interesting libertarian consequences here:

    http://econlog.econlib.org/archives/2016/09/binding_arbitra.html

    • Synced from FacebookThis is one reason I’m not libertarian — I am not particularly keen on people being able to waive liability for “gross negligence”. I don’t trust people to produce enough demand for “no gross negligence” (as opposed to “reassure me I’m safe whether or not it is actually true”). And this applies to many other situations as well.