Forced Arbitration Denies Day in Court

Injustice, Thy Name Is Forced Arbitration.

Forced arbitration robs ordinary people of their day in court.

Javier lost his job when he was deployed overseas despite federal laws protecting employment for members of the armed services.

A court told Alan and other small business owners that they couldn't take American Express to court for charging exorbitant exchange rates.

Marjorie, Roberta, Richard, Dean, Frances, Beulah, Horace, and Mary all suffered terribly and died from nursing home neglect, yet their families were not able to sue the nursing home companies.

How could injustices like these be allowed to exist in America where everyone has the right to take wrongdoers to court? It's called forced arbitration, and you or a loved one, maybe next to lose your rights. And, it's a violation of our constitutional rights.

Constitutional Right to Trial

The Seventh Amendment of the United States Constitution provides:

"In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any court of the United States, than according to the rules of the common law."

Article I, section 15 of the Texas Constitution provides in pertinent part:

"The right of trial by jury shall remain inviolate."

Despite these federal and state constitutional articles, Texas courts allow forced arbitration if they consider the contract fair to both parties. The agreement can't be overly broad in scope, meaning the arbitration agreement can't be one intended to cover the entire relationship between the parties. Moreover, the parties have to enter into the contract voluntarily, and the terms of the agreement can't provide an unfair advantage to one party.

Unfortunately, courts tend to favor more sophisticated parties in determining whether or not to enforce an arbitration agreement. People like Javier, Alan, and Marjorie often can't discuss or change the employment contract, nursing home contract, or credit card vendor agreement that they sign. As a result, contractual terms often leave many people with mandatory arbitration clauses even if one party has far more negotiating power.

How Does Forced Arbitration Harm Consumers?

While arbitration may initially seem like a good idea to avoid courtrooms and costly litigation, arbitration can often be more expensive than traditional litigation. Moreover, people with little bargaining power can end up losing their right to a trial by jury. Instead of a judge, you will have a private arbitrator often hired and paid for by a large corporation, deciding a case in a confidential proceeding with no significant right to appeal.

Forced arbitration agreements can also prevent individuals from joining together in one lawsuit as a class action. When individuals can’t afford to litigate corporate wrong-doing on their own, this takes away the power of the group to make corporations do the right thing.

Who is Hurt by Forced Arbitration?

Some consumers that are harmed by forced arbitration include:

Bank Account Holders

When Wells Fargo got caught defrauding customers, you’d think the bank would have been ashamed and quietly made amends. Going back to 2002, the bank opened more than 3.5 million fraudulent accounts, including nearly 150,000 in Texas, in customers’ names without their consent. When customers tried to sue because of the overdraft fees they incurred for accounts they didn’t approve, Wells Fargo tried to invoke a forced arbitration clause to prevent class action and individual lawsuits.

Military Families and Veterans

When servicemembers deploy to defend their country, certain federal protections are supposed to kick in to protect them. Under the Service Members’ Civil Relief Act, those engaged in commercial business with deployed or active duty service members must follow rules about refunding deposits, allowable interest rates for credit cards and mortgages, installment contracts, foreclosures, judicial proceedings, and more. Congress intended that the law prevent businesses from taking advantage of servicemembers forced to drop their affairs and deploy at a moment’s notice. Unfortunately, forced arbitration clauses prevent military families from pursuing those who break the law.

Payday Loan Borrowers

The vast majority of payday lenders in Texas use forced arbitration clauses in their agreements. When these payday lenders take advantage of desperate people by charging usurious and illegal interest rates, or by using abusive and unlawful debt collection practices, consumers are often forced into arbitration, unable to have their day in court.

Families Subject to Illegal Debt Collection Practices

Texas families made more than 32,000 complaints about debt collection practices to the Consumer Financial Protection Board in 2018. It was the number one complaint made to the CFPB. In 2017, more than 97,000 Texas consumers complained about debt collection to the Federal Trade Commission. Out-of-state debt collectors will often tack on illegal or fees and engage in harassment of debtors. They may also sue the wrong person or sue for amounts that are incorrect or not owed and then use forced arbitration clauses to prevent consumers from fighting back in court.

College Students

When for-profit colleges engage in predatory or deceptive practices to attract Texas students, they often use forced arbitration clauses to prevent students from using class action lawsuits to sue for fraudulent conduct. Moreover, student loan servicers like Navient, who have been caught misleading borrowers, failing to allocate payments correctly, and failing to release co-signers, also use forced arbitration to prevent frustrated student borrowers from suing them in court.

Prepaid Debit Card Users

Another frequent topic of complaint to the FTC and the CFPB involves prepaid debit cards. More than 35% of people in Texas are unbanked or underbanked, relying on prepaid cards to manage or store their money. More than 90% of these prepaid cards include forced arbitration clauses. If a user faces illegal fees or if their cards are frozen, they could have no recourse in court because of forced arbitration clauses. In 2017, when RushCard froze the accounts of more than 650,000 account holders while they were dealing with technological problems, the Consumer Financial Protection Bureau ordered RushCard to compensate account holders. The card company also settled a lawsuit with account holders for $19 million. If the courts had allowed RushCard to invoke forced arbitration, many cardholders would have gone without compensation.

Unenforceable Arbitration Agreements

Luckily, the courts won't enforce all arbitration agreements. Texas courts may rule such an agreement unenforceable if it is unconscionable. Texas courts will look at two things – procedural unconscionability and substantive unconscionability - to determine whether an arbitration agreement is unconscionable.

Procedural Unconscionability

Procedural unconscionability concerns the circumstance under which the contract was signed. So, the courts will consider the relative bargaining power of the two parties and whether or not the party signing the contract had other options.

Substantive Unconscionability

Substantive unconscionability concerns the actual terms of the contract, including:

  • Which party bears the cost of arbitration;
  • The statute of limitations;
  • Whether the parties are required to keep the results of the arbitration secret;
  • Whether only one side is required to arbitrate the dispute; and
  • The availability and scope of discovery.

For employees, even the knowledge of an existing arbitration policy is generally enough to make an arbitration agreement enforceable.

Arbitration can be significantly more expensive than traditional litigation. Moreover, once fully arbitrated, it can be difficult to appeal or contest an arbitration decision. It may also be challenging to know that the arbitrators are objective, considering the private nature of arbitration. As a result, Texas courts should protect the rights of the citizens of Texas under the Constitution of the United States and Texas by preserving the right to trial.

 

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