Think what you're about to give up.

Photographer: Akos Stiller/Bloomberg

Sorry, You Can't Have Your Day in Court

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Big-dollar civil damage lawsuits are a terrible way to discipline corporate misbehavior. They put complex decisions in the hands of ill-informed juries, reward litigious ninnies who spill hot coffee on themselves, deliver most of the rewards even in worthy cases to plaintiffs’ attorneys, and are so lottery-like and thus unpredictable that they don’t seem to do much to deter misbehavior.

But if you get rid of them, what’s left then?

The New York Times has been exploring this question over the past couple of days with its “Beware the Fine Print” series (Part I, Part II, video), which describes how arbitration has replaced the class-action lawsuit as the only real recourse consumers and employees have for many grievances against corporations. To buy a mobile phone or get a credit card or take a new job, Americans now increasingly find themselves having to agree to an arbitration clause that prevents them from taking the seller or employer to court.

The Times credits two Supreme Court rulings, AT&T Mobility LLC v. Concepcion in 2011 and American Express Co. v. Italian Colors Restaurant in 2013, for this shift. I’m not going to attempt to judge the legal merits of these decisions, other than to note that they seem to be in keeping with the 2013 assessment by law professors Lee Epstein and William M. Landes and U.S. appeals judge Richard A. Posner that the court has become markedly friendlier to business since John Roberts, who often represented corporate defendants in his time as a partner at Hogan & Hartson , became chief justice in 2005.

As a result, the legal ground has shifted. Together with state-level tort reforms and a 2014 Supreme Court decision that reined in shareholder class-action lawsuits, the arbitration rulings mean that it’s gotten  a lot harder to sue corporations for perceived naughtiness. There are occasional moves in the opposite direction -- the Consumer Financial Protection Bureau unveiled a draft rule in October that would ban arbitration clauses for credit-card and checking accounts. But in general, the decades-long campaign by business groups to rein in our nation’s lawsuit habit appears to be bearing fruit.

This means that, going forward, there will be fewer frivolous lawsuits and less lottery-style justice. This has got to be worth something. It’s also what a majority of Americans have said they wanted, in poll after poll. Then again, if you ask the poll questions differently, you can get dramatically different answers. People are against lottery justice for others, but they’re not really in favor of seeing their own legal rights curtailed.

Arbitration isn’t necessarily a scam -- it can be a far more efficient way for individuals to pursue claims than going to court. But when it’s mandatory and binding it has some big built-in advantages for corporations. One is the disappearance of class-action suits, another is the fact that corporations tend to be repeat customers for arbitration, meaning that arbitrators hoping for continued work have incentive to cater to them. This is clearly a system that could use some adjustments and improvements.

Will it get them? Now that’s an interesting question. The groups that want to roll back forced arbitration -- such as the American Association for Justice, a major Democratic donor formerly known as the Association of Trial Lawyers of America -- have no incentive to tinker with it to make it work better. I can’t imagine that business groups feel that they do either.

Business organizations in the U.S. have had two big political targets during the past half-century. First came labor unions, followed in the 1980s by the plaintiffs’ bar. Private-sector labor unions are now only a minor force in the U.S. economy -- 6.6 percent of private-sector workers in the U.S. belonged to unions in 2014, down from 24.2 percent in 1973. Things aren’t quite as far along in the war against plaintiffs’ attorneys, but they too seem to be on the decline. Business has won, or is winning.

On the positive side, this has left the country with a more internationally competitive corporate sector and, possibly, a more efficient legal system than before. It has also substantially weakened two important institutions that, for all their flaws, have often battled for the interests of ordinary Americans when no one else would. Maybe it’s time to start looking for replacements.

  1. This would actually not appear to have any impact on hot-coffee lawsuits, since they tend not to be class actions and Starbucks and McDonald’s haven’t taken to getting people to sign arbitration clauses before buying coffee.

  2. Now Hogan Lovells.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net