Contract Clauses Keeping Cases Out of Court Loved by Companies, Not by Customers

by Mark Friedman  on Monday, Jun. 9, 2014 12:00 am  

Attorney David Couch of Little Rock said the number of lawsuits forced into arbitration is on the rise. | (Photo of Couch by Jason Burt; Fayetteville Health and Rehab Center courtesy Google Street View)

One of the reasons companies want their disputes hammered out in arbitration is because the awards are usually less than they would be in a court proceeding, said Couch, the Arkansas plaintiff’s attorney.

A 2013 study by Aon Risk Solutions of Chicago, a global provider of risk management, insurance and reinsurance brokerage, found that nursing home claims with arbitration agreements in place are 16 percent cheaper than complaints without the agreements.

“The average total cost of an outcome subject to an arbitration agreement is $155,000 while the average cost of a non-arbitrated outcome is $184,000,” the report said.

While plaintiffs’ attorneys complain, the business community supports the use of arbitration, said Matthew D. Webb, senior vice president for legal reform policy at the U.S. Chamber Institute for Legal Reform in Washington, which is an affiliate of the U.S. Chamber of Commerce.

“The business community, for the most part, we believe that arbitration tends to be a simpler, fairer, faster way of dealing with disputes,” Webb said. “All the major data out there says that arbitration is as effective for consumers to vindicate their rights as the courts system.”

Webb said trial attorneys are against mandatory arbitration contracts because they can’t file class-action litigation against companies when the clauses are in place.

He said that if a case is certified as a class action and the plaintiffs settle or win the case, the plaintiff’s attorneys often receive the bulk of the awards and “consumers, generally speaking, get the short end of the stick.”

Arbitration History

In 1925, the Federal Arbitration Act became law “to make written agreements to arbitrate certain disputes, including those arising out of contracts, enforceable in the courts,” according to a Dec. 12 statement by Richard Cordray of the Consumer Financial Protection Bureau of Washington. “Rather than obtaining a legal judgment from a court, parties to an arbitration agreement would be bound by an arbitration award, which could be confirmed, but generally not reviewed or overturned, by a court.”

Poynter, the Little Rock attorney, said the law sought to allow parties that were in equal bargaining positions to contract for arbitration. But around 2000, companies began introducing mandatory arbitration agreements into consumer contracts as a way to settle potential consumer disputes.

A blow to plaintiff’s attorneys came in 2011, when the U.S. Supreme Court ruled in a 5-to-4 decision against a California law that said a company couldn’t have an arbitration provision “that says you cannot join with other customers’ claims or as a class,” Poynter said. The Supreme Court said California’s law violated the Federal Arbitration Act and “states can’t have carte blanche rules that prevent arbitration,” Poynter said. “Defendants, since that opinion of the Supreme Court, have … stretched that ruling to the nth degree” to get the disputes into arbitration.

Poynter said the ruling “insulates the companies from liabilities” because consumers won’t go to the trouble of complaining for a $5 dispute when they can’t join their complaint with other consumers who might have been injured.



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