How a tiny law meant for merchants destroyed the class-action lawsuit
The list of the Trump administration's sins against working Americans is already long. But we will soon be able to add another item: protecting arbitration clauses.
These are legal mechanisms hidden in tons of worker and consumer contracts that essentially force people to settle disputes with businesses in private arbitration, rather than in court or other collective actions. They're a poisonous and ubiquitous practice in the American economy.
An upcoming Supreme Court case, National Labor Relations Board v. Murphy Oil, is all about whether a company can use arbitration clauses to force its employees to forego class-action lawsuits and the like. In 2012, the NLRB concluded these arbitration clauses violated labor law, prompting a legal fight that's split various appeals courts.
President Obama's Justice Department originally backed the NLRB's position. But as soon as President Trump took over, the DOJ switched sides. Conservatives already hold a five-seat majority on the court, so the Trump team's decision makes a favorable ruling for arbitration even more likely.
With Trump's signature, the GOP-dominated Congress also killed a federal regulation squashing arbitration clauses among government contractors. And rulings by the Consumer Financial Protection Bureau and other agencies, aiming to cut back on the use of arbitration, are also in jeopardy.
There's a lesson in how we got here. The history of arbitration clauses is a textbook example of how decades of careless or just haphazard decisions, driven by the slow pressure of the profit motive, can change innocuous policy into a weapon for big business.
It begins in 1925 with the passage of the Federal Arbitration Act (FAA). The law's scope was meant to be quite limited — lawmakers explicitly said it was only for "merchants" who were in a dispute. If two businesses had some sort of contractual disagreement, they could avoid the expense and inconvenience of taking one another to court. Instead, the FAA created a private process where the two companies could rely on an arbitrator to make legally-binding decisions. This is crucial to realize: The FAA was originally designed for arbitration between two institutions of equal power.
But companies began experimenting with arbitration clauses, and how far they could push their adoption, in the early 1990s. Corporate lawyers wanted to cut down on the amount of class-action lawsuits their clients faced. They realized they could put clauses into their consumer and employee contracts that forced people to essentially waive their rights to sue in a class-action lawsuit or labor dispute.
At first, courts pushed back, saying the clauses violated state law or other jurisprudence. In 2002, Discover tried to use arbitration as the only route for consumers to push back at unfair credit card fees, but the U.S. Supreme Court declined to hear the case.
At the same time, the Supreme Court itself had opened the door to broader interpretations when it determined in 1984 that the FAA established a "national policy favoring arbitration." The California Supreme Court ruled in 1992 that arbitration decisions have power even if they lead to "substantial injustice" and legally incorrect outcomes. In 2006, two different appeals court circuits further insulated arbitration decisions from legal review.
So the courts were coming around to companies' way of thinking. Finally, in 2010, the U.S. Supreme Court ruled 5-4 that AT&T could enforce an arbitration clause that was basically identical to what Discover tried to use in 2002. The best part? The lawyer arguing Discover's 2002 case was one John Roberts — the very same John Roberts who was chief justice when the Supreme Court ruled in AT&T's favor.
In fact, the conflicts of interest judges face in the modern arbitration system are appalling. Many of them enjoy lucrative side gigs as professional arbitrators. The salaries for U.S. district court judges are impressive, but they still pale in comparison to what people can earn in private legal practice. And the private firms that supply most professional arbitration services recruit heavily among U.S. judges.
Even more perversely, it's the companies facing arbitration that supply those private arbitration firms with future business. It's similar to what occurred in the run-up to the 2008 financial crisis, when the credit rating agencies that assessed the safety of mortgage-backed securities were paid by the banks who created those securities. Back when arbitration was primarily about conflicts between two different companies, this wasn't such a big deal, because both sides were equally likely to employ the firm again in the future. But now arbitration is mainly about conflicts between companies on one side and consumers and workers on the other.
That creates a fundamental imbalance of power. Class-action lawsuits and labor law procedures allow consumers and workers to band together into massive groups. That way they can collect damages that are big enough to actually change a company's behavior and attract the kind of legal talent that can actually win. En masse, ordinary people can wield resources and clout at least somewhat equal to big business. But arbitration clauses effectively allow companies to separate people out from the herd.
Individual Americans may get into an arbitration dispute once or twice in their lifetimes. Companies face them continually, and wield far more power than their opponent in each individual arbitration dispute. Employees and consumers are less likely to win than when they go to court, and even when they win, the damages awarded are much smaller. That makes companies unlikely to change their behavior even in defeat.
Not surprisingly, arbitration clauses are now ubiquitous in the U.S. economy. They apply to credit cards, rental cars, cable, mobile phones, student loans, nursing homes, and more. In the relationships between employers and workers, they're used in everything from the banking industry to fast food and retail. The National Employment Lawyers Association estimated that 30 million workers labor under the umbrella of arbitration clauses — and that was back in 2008.
Between 2010 and 2014, there were around 500 arbitration disputes involving $2,500 or less, according to an analysis by The New York Times. Among Verizon's 125 million customers, it faced 65 arbitrations over that time. Time-Warner dealt with only seven arbitrations out of 15 million customers.
Far from replacing class-action lawsuits as a viable alternative to righting corporate wrongs — as arbitration is often presented by its defenders — these clauses are simply stopping people from pushing back at all.