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Arbitration Is Everywhere and Not All Bad

Stephen L. Carter is a Bloomberg View columnist. He is a professor of law at Yale University and was a clerk to U.S. Supreme Court Justice Thurgood Marshall. His novels include “The Emperor of Ocean Park” and “Back Channel,” and his nonfiction includes “Civility” and “Integrity.”
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The New York Times published this week an expose of the horrors of arbitration clauses forced upon consumers by companies with which they do business. Having just covered this topic in my first-year contracts course, I thought I might supply some of the details that the Times omitted from its initial explanatory article.

The Times began its series by advancing three related themes: (1) consumers generally have no option but to agree to the arbitration clauses; (2) the clauses are a recent (“More than a decade in the making”) innovation aimed at shielding companies from class actions; and (3) the clauses harm consumers. Let’s examine these in turn.

Claim (1): The Times is correct that arbitration clauses have become ubiquitous. Every time a consumer clicks “I agree” or signs a contract, she’s probably accepting arbitration as her only option in the case of any dispute. Following the coinage of the legal theorist Fritz Kessler, scholars and courts refer to an agreement of this kind as an “adhesive” contract. The consumer who clicks “I agree” cannot even find a human being with whom to communicate in order to dicker for better terms. The consumer faces a Hobson’s choice: Take the contract offered or nothing at all. Adhesive contracts have long divided scholars. Nevertheless, they nowadays turn up just about everywhere consumers shop.

Claim (2): The Times tags as the principal villain a 2011 Supreme Court case, AT&T Mobility v. Concepcion. But that decision had nothing to do with class-action lawsuits. It upheld clauses in consumer contracts barring “class-wide” arbitrations -- that is, arbitration in which the arbitrator determines the rights of a class rather than of an individual complainant. The dispute between the majority and the dissent wasn’t over whether the clauses are good or evil but whether they’re barred by the Federal Arbitration Act.

I tend to agree with critics who allege that the majority harbored too “romantic” a view of what arbitration is actually like -- but that romantic view, erroneous or not, was embedded in any number of precedents.

The validity of arbitration clauses that prohibit lawsuits has been established for more than 70 years. Indeed, the very point of the Federal Arbitration Act (which this year celebrates its 90th birthday) was to oust the jurisdiction of judges when the parties had agreed to arbitration. The courts subsequently applied the Constitution’s supremacy clause to overturn competing state laws purporting to allow litigation when the arbitration clause banned it.

After the AT&T Mobility case was decided, critics -- myself included -- predicted direly that corporations would adopt increasingly burdensome and one-sided arbitration clauses. But this hasn’t happened. The language of the clauses has proved, as academics like to say, “sticky.” They change slowly, if at all. The reasons for the stickiness can be debated, but empirical studies of consumer contracts verify that the stickiness is there.

Claim (3): Do the clauses harm consumers? Here we need to review a bit of theory. Like all standard form contracts, adhesive contracts are used by repeat players in a market to manage juridical risk. For example, I as a New York Times digital subscriber am subject to terms of use drafted by the Times to limit its risk. If I object to a term, my only recourse is to stop subscribing. Should the Times be forced to negotiate with me, its cost of doing business would rise. Should the company be prohibited from using a clause that renders the result of any breach predictable, its uncertainty rises, and this, too, the cost of doing business must reflect. In both cases, the higher cost would be passed along to consumers.

Still, this highly general argument cannot justify all the terms that a company might try to impose. And even the fact that consumers as a class might benefit from the lower costs resulting from a particular adhesive clause is scant comfort to those who have suffered some of the horrors listed in the Times stories. So the question must be asked whether a term requiring arbitration of consumer claims is in some sense worse than other clauses an adhesive contract might contain.

The Consumer Financial Protection Bureau has proposed severe restrictions on the use of arbitration clauses in consumer contracts. But before imposing such a rule, we ought first to gather enough data to figure out whether in fact the costs the clauses impose on consumers are larger than the benefits. Vague claims about the right to one’s day in court don’t answer the question. And, certainly, one would want to know more about what actually occurs in individual arbitrations. Sometimes what’s good for business is bad for consumers -- but not always.

The Times, although it examined the outcomes of several thousand arbitrations, makes only passing reference to the detailed study of arbitration awards published this summer by the CFPB, a report rich with data. The article fails to mention any of the thoughtful responses the report generated -- including, in particular, a point-by-point rebuttal by professors Jason Scott Johnston of the University of Virginia School of Law and Todd Zywicki of the Mercatus Center at George Mason University. The CFPB concludes that consumers fare better in class-action litigation than in arbitration awards. Johnston and Zywicki, going beyond the CFPB’s data, respond that consumers fare better in single arbitration settlements (not awards) than in class-action settlements. (Success in class-action lawsuits usually comes via settlement.)

It matters greatly who’s right. The topic is certainly worth a detailed investigative report. Let’s hope the Times revisits the problem soon -- but this time delves a bit deeper.

  1. In home mortgages and refinancing, arbitration clauses were essentially banned by the Dodd-Frank Act.

  2. The Times also criticizes the 2013 Supreme Court decision in American Express Co. v. Italian Colors Restaurant, which refused to make an exception for plaintiff seeking to bring antitrust claims.

  3. The authors also single out Chief Justice John Roberts for unfounded ad hominem abuse. (If you believe the criticism well-founded, then I assume you await with bated breath the necessary investigation into all cases where justices have voted consistently with views they expressed prior to taking the bench.)

  4. The Times, to its credit, does not impose an arbitration clause on its subscribers. Its terms of use do, however, include two other clauses to which many scholars who study adhesive contracts would object: a disclaimer of warranties and a forum selection provision that requires all complaints to be filed in a state or federal court in New York.

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:
Stephen L Carter at scarter01@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net