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

Laurel Johnson had no idea when she signed the papers admitting her 89-year-old father into the Fayetteville Health & Rehabilitation Center that she had also agreed to settle any disputes with the nursing home in arbitration rather than in court.

Cases such as Johnson’s are becoming more common as companies eagerly add language to contracts and terms of agreements that require any disputes that arise to be handled in arbitration. Once there, the complaint is decided by an arbitrator rather than in the courts with a judge or jury deciding the case, a procedure that one proponent described as “simpler, fairer, faster.”

“It’s a horrible, horrible problem,” said attorney David Couch of Little Rock, who represents Johnson.

After Johnson’s father, Joseph Johnson, died less than six months after admission, she accused the nursing home of medical malpractice and filed a lawsuit in Washington County Circuit Court.

As that case was winding its way through the state court system, Northport Health Services of Arkansas LLC, the legal name for the nursing home, filed its own lawsuit in federal court in Fayetteville to have her case sent to arbitration.

The nursing home argued that tucked in the stack of more than 30 pages of the admission agreement papers Laurel Johnson signed was a section dealing with disputes. The admission papers said that instead of going to court with a complaint, Johnson agreed to go through arbitration, according to Northport’s complaint.

U.S. District Court Judge Jimm Hendren agreed with the nursing home on Sept. 20 and ordered Johnson’s allegations to be settled in arbitration. The arbitration is set for October and will be handled by the mediation and arbitration company JAMS of Irvine, California.

Couch said Johnson’s case is not uncommon and the number of cases that are forced into arbitration is on the rise, but it’s difficult to know exactly how many because arbitration proceedings aren’t public.

And arbitration agreements are being inserted in everything from cellphone contracts to credit card documents.

“Almost everything that you can buy as a consumer is going to end up with a consumer forced arbitration clause,” said Scott Poynter, an attorney at the Little Rock office of Emerson Poynter LLP who represents plaintiffs in class-action cases. “Consumers are buried in a morass of legalese that they have no idea what they’re giving up. They don’t know that they’re giving up rights to a jury.”

Poynter is one of the attorneys representing consumers in a class-action case against Alltel Corp. of Little Rock, which was sold in 2009 to Verizon Wireless for $28.1 billion.

In Poynter’s case, Alltel is trying to compel arbitration for some of the class members and has appealed to the Arkansas Supreme Court, which heard arguments on May 29. A ruling is expected soon, Poynter said.

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.

U.S. Sen. Al Franken, D-Minnesota, introduced legislation that would eliminate the ability to have forced arbitration in cases involving consumer, antitrust and labor issues. The Arbitration Fairness Act is currently in committee, where it will have powerful opposition.

“It’s really a pro-trial lawyer piece of legislation that will do little of anything to actually help consumers,” said Webb of the U.S. Chamber Institute for Legal Reform.

A Customer Backlash

Meanwhile, companies are continuing to use the “fine print of the contract to opt out of civil rights, anti-trust and workplace safety laws,” said Michelle Schwartz, director of Justice Programs for the Alliance for Justice of Washington, a national association of more than 100 organizations and which works for open federal courts.

Consumers, though, are starting to fight back.

In a high-profile case earlier this year, General Mills, the manufacturer of Cheerios and other foods, revised its legal terms to add mandatory arbitration agreements for consumers — even for those who downloaded coupons for its cereals. General Mills quickly reversed itself after consumers objected to the change.

“Those terms — and our intentions — were widely misread, causing concern among customers,” Kristie Foster, director of external communications for General Mills, said in an April 19 message posted on the company’s website. “We rarely have disputes with consumers — and arbitration would have simply streamlined how complaints are handled. Many companies do the same, and we felt it would be helpful.”

Nursing Homes

Couch, the plaintiff’s attorney who is involved in the nursing home case, said he’s seen more nursing homes add mandatory arbitration agreements to admission papers. And the nursing home requires the signature “in order for your loved one to get admitted to the facility,” he said.

Then if a patient is injured and tries to sue, the nursing home will push to get the case moved into arbitration, he said. “And you’re faced with trying to beat [the admission papers] because it’s considered a contract,” Couch said.

That’s usually an uphill battle, but there are a few defenses — for example, if the person who signed the papers didn’t have power of attorney.

Failing to read every word in a document because of its length is not a defense. “We’re all assumed to have read and understood our contracts when we sign them,” said Brian Brooks, a plaintiff’s attorney in Greenbrier. “That’s a legal principle that exists. … In most cases, it makes sense. You don’t want people to be able to run away from your contracts.”

Judge Hendren, ruling in the Northport case, agreed, saying that “one cannot simultaneously claim the benefits of a contract and avoid its burdens.”

Arbitration Concerns

Schwartz, at the Alliance for Justice, said she doesn’t have a problem with arbitration — just the part that forces people into it. She said that if arbitration is such a fair and attractive system, parties shouldn’t be dragged into it but should be able to choose it after a dispute arises.

When people are online, they are faced with “these click-through contracts” with no place to object if there is a mandatory arbitration clause, she said. “To say that that’s a contract is really outrageous,” Schwartz said.

But Webb said arbitration is better for the consumer than going in front of a judge or jury.

In arbitration, it’s “much less formalistic than going to court,” he said. “It can be done over the phone; it can be done on documents back and forth.”

Schwartz maintains that the arbitration system is tilted toward businesses and against consumers.

But some disagree.

“I don’t think that there’s any data to support that,” said Thomas Liptak, managing partner at Kenney Shelton Liptak Nowak LLP of Buffalo, New York. Liptak is the vice-chair of the Defense Research Institute’s Alternative Dispute Resolution Committee of Chicago.

He said there is no evidence to show that arbitration is more or less fair than going to court.

Schwartz said she’s pushing for more consumer education. Once consumers “learn about forced arbitration, they are outraged.” She said if consumers take a stand as was done in the General Mills case, it could make a difference, possibly leading to removal of the arbitration clauses from consumer contracts.

Webb said consumers are savvy enough to read the contracts and know what they are getting into before they agree to buy the product or service.

“Most companies are moving toward fairly conspicuous arbitration provisions in their consumer contracts,” Webb said. “So that basically takes that red herring argument off the table that the plaintiffs’ bar likes to use.”

Liptak also agreed that consumers know what they are getting into, but he offered this advice: “Before you enter into a contract, with anybody, under any circumstance, you better read the contract.”