Pre-dispute Arbitration Agreements

Congress is currently considering legislation to make pre-dispute arbitration clauses unenforceable in many consumer transactions, such as employment, franchise and medical contracts. The problem with such clauses is that people do not understand the rights they are giving up at the time they sign them. Only after a dispute arises do most people take the time to consider whether they would be better off suing in court, which offers the advantages of much lower filing fees and a trial by jury, over filing an arbitration, which can offer speed and simpler procedure. Such legislation may have been prompted by federal court decisions which strongly favor the enforceability of pre-dispute arbitration clauses. These decisions contrast with the approach in California, for example, where such clauses are much more strictly scrutinized. (See my previous post on the Abramson case in which I persuaded a California Court of Appeal to throw out a one-sided arbitration clause.) The Democratic majority in Congress may now have the votes to pass what is viewed as “pro-consumer” legislation.

Opponents of such measures are always quick to point out the benefits of arbitration, mainly its streamlined procedures compared to litigation, and the resulting savings in attorneys’ fees. They will tell you that only trial lawyers (like me) favor lawsuits, because lawsuits benefit trial lawyers. What these opponents never explain is the need to force consumers to agree to arbitration in advance. If arbitration is really better for all parties (consumers and business) nothing prevents both sides from agreeing to arbitration at the time the dispute arises. But consumers who have both options frequently prefer to go to court, because the filing fees are much less, and because they want a jury (if only to scare the defendant into paying a better settlement), and because they may want the right to appeal, and other rights that are lost in arbitration. The possibility of increased legal fees is often not an issue for consumers, because lawyers are willing to accept cases they perceive as worthwhile on a contingent fee basis. Businesses, on the other hand, impose arbitration clauses because they know that they are generally better off with arbitration. Businesses are afraid of runaway jury verdicts, and they believe they will save legal fees in arbitration. So let’s be honest about this issue. Arbitration clauses would never exist in the form contracts that people often have to sign to open a brokerage account, or obtain a job, or have an operation, unless the businesses who draft such contracts believed they were better off with arbitration. If the consumer is also better off agreeing to arbitration, there is no need to force the consumer to sign an arbitration clause before any dispute arises, because the consumer can always agree to arbitrate later.

The real argument in favor of pre-dispute arbitration clauses is seldom made, because it is based on a more sophisticated understanding of economics, and it highlights the trade-offs that these clauses impose. The effect of a business requiring a consumer to give up the right to trial by jury is to enable the business to sell the product or service cheaper (or pocket more profit). Thus, a business which is not compelled to defend the occasional lawsuit by its employees may be able to pay higher salaries. A hospital might be able to charge less because patients have waived their right to sue the hospital. Thus, the real benefit to consumers who are forced to sign arbitration clauses is the cost savings they receive in the product or service, not the supposed benefits of arbitration in the event a dispute arises. It is seldom beneficial to give up your rights if you are planning to have a dispute. You only want to waive your right to trial by jury after you have fully considered the pros and cons of doing so, which you cannot do in advance of a dispute. Generally, only those consumers who never have a dispute will benefit if they give up their rights. So the real question is whether the sacrifice of rights for injured parties can be justified to provide a cost savings to everyone else.

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