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Get Out of Jail Free – Forced Arbitration

Companies Band Together to Require Forced Arbitration as a Way to Avoid Liability

The New York Times recently investigated the increasing use of arbitration clauses placed in consumer contracts by credit card issuers, cell phone providers, financial institutions and other large companies.   “From birth to death, the use of arbitration has crept into nearly every corner of Americans’ lives, encompassing moments like having a baby, going to school, getting a job, buying a car, and placing a parent in a nursing home,” the Times observed.  It found that “by inserting individual arbitration clauses into a soaring number of consumer and employment contracts, companies … devised a way to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices”.

Some state court judges have called the class action bans a “get out of jail free” card, because it is almost impossible for one individual to take on a corporation with its vast resources.

Corporations claim that class actions are not needed because arbitration allows an individual with a claim to resolve their grievance easily.  The Times found, however, that this is not the case.  “Once blocked from going to court as a group, most people drop[] their claims entirely.”

More and more companies are using forced arbitration as a standard business practice.  In forced arbitration, a company will not sell a consumer a product or service unless that consumer agrees to arbitrate any dispute that may arise.  The consumer must waive their right to sue, to participate in a class action lawsuit, and to appeal. There is no judge or jury, but rather, an arbitration panel — that may be composed of industry representatives — reviews the facts.  The forced arbitration is mandatory and the decision is binding.

How did this happen?  According to the Times, in July 1999, a meeting took place in New York.  In attendance where corporate legal teams from Bank of America, Chase, Citigroup, Sears, Toyota, and General Electric.  At this meeting and at follow up meetings, the participants discussed arbitration clauses as a “means to an end,” with the goal to kill class actions.  Thereafter, companies started inserting these clauses into their standard consumer contracts.  But when some state and federal district courts refused to enforce them, these companies took the issue to the U.S. Supreme Court, which in a series of decisions has backed the companies’ efforts to enforce these clauses against consumers who often do not even know that they signed such an agreement.

Last year, the attorneys general from 16 states drafted a letter to the Consumer Financial Protection Bureau warning that “unlawful business practices” could thrive with the spread of class-action bans in favor or arbitration clauses.  Last month, the CFPB took action and started the process to stop financial institutions from banning class actions.

To view more information on arbitration clauses:


See also

If you have any questions, please contact Goldman Scarlato & Penny attorneys Paul Scarlato at [email protected] or Mark Goldman at [email protected]



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