“Always read the fine print…”
It’s age-old advice, but something nearly none of us actually do on a consistent basis. While most of that fine print we see in, say, credit card statements, is lengthy legal jargon that will have little impact on most people. However, that’s not always the case.
In 2015, the New York Times ran an investigation and concluded that corporations are including arbitration clauses in contracts, such as those that accompany credit cards, loans, or cell phones, that effectively ban their customers from filing class action lawsuits. The result is that people are forced to seek compensation through an arbitration hearing.
Knowledge is power and ignorance is certainly not bliss for consumers. According to a report by the Consumer Financial Protection Bureau (CFPB), more than 75 percent of consumers they surveyed didn’t know they were subject to arbitration clauses.
“Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year,” according to a statement by CFPB director Richard Cordray.
You don’t have to be a contract attorney to know that these arbitration clauses wouldn’t be added by corporations if they weren’t going to benefit them in some way. Companies prefer arbitration over class action cases or standard individual litigation because it saves them money.
The numbers don’t lie.
The American Arbitration Association is the largest administrator of arbitration disputes in the United States. Between 2010 and 2012, they handled an average of 600 arbitration disputes each year. However, millions of people could take part in a class action lawsuit.
According to the CFPB report, over half of all credit card debt is subject to arbitration clauses. That affects as many as 80 million people. The clause is also used in about 44 percent of insured bank deposits.
While the CFPB found that arbitration clauses are rarely invoked to block individual lawsuits, consumers rarely file lawsuits on their own, possibly because they can’t afford the associated legal fees.
Power in Numbers
This underscores another benefit of the class action route. Sometimes the financial impact is significant on the group level, but too small for litigation on the individual level. When legal fees and other associated costs are split across the total class, it’s then reasonable to seek justice.
The CFPB report was ordered under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which banned the arbitration clause from residential mortgages. Consumer advocates hope that it leads to restrictions on how companies can use arbitration clauses in the future.