Supreme Court Decision on Arbitration May Destroy Class Action Lawsuit

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Class Action Lawsuit No Longer the Case

The U.S. Supreme Court recently ruled that merchants who object to having to accept American Express debit and credit cards must settle their dispute through arbitration, rather than banding together in a class action lawsuit. Some say the court’s 5-3 decision is a blow against class action lawsuits – long used by consumers to settle disputes with companies over their products or services.

Agreements to arbitrate rather than litigate are hard to avoid. If you have a credit card, bank account, cable, or telephone services, then you have probably agreed to settle your differences through arbitration, and forfeited the right to bring a lawsuit in state or federal court in the fine print of the contract you signed. Some companies are not asking consumers to sign a written document. Many companies now specify that if you break the seal on one of their cellophane-wrapped products, you have agreed to arbitration. It is almost impossible to opt out of an arbitration requirement although some companies give consumers 45 to 60 days to make the choice to opt out.

Why Do Businesses Prefer Arbitration?

Arbitration puts a case before an arbitrator instead of a judge or jury. Although arbitrators are often retired judges or lawyers, the dispute is handled outside of the court. An arbitrator’s ruling is binding and can be enforced. Arbitration is often speedier and less expensive than courtroom litigation.

Businesses prefer arbitration because of the privacy of the decisions and the smaller awards often made by arbitrators. Using data from reports filed by the American Arbitration Association (AAA) pursuant to California Code requirements, Cornell University examined the outcomes of employment arbitration. The study analyzed 3,945 arbitration cases, of which 1,213 were decided by an award after a hearing, filed and reaching disposition between January 1, 2003 and December 31, 2007. Key findings include:

  • The employee win rate amongst the cases was 21.4 percent – lower than employee win rates reported in employment litigation trials.
  • In cases won by employees, the median award amount was $36,500 and the mean was $109,858, substantially lower than the award amounts reported in employment litigation.
  • The average time of a case was 284.4 days for cases that settled, and 361.5 days for cases decided after a hearing.
  • Mean arbitration fees were $6,340 per case overall, $11,070 for cases disposed of by an award following a hearing, and in 97 percent of the cases, the employer paid 100 percent of the arbitration fees beyond a small filing fee, pursuant to AAA procedures.
  • In 82.4 percent of the cases, the employees involved made less than $100,000 per year; and the mean amount claimed was $844,814. Seventy-five percent of all claims were greater than $36,000.

Consumer advocates and plaintiff-oriented attorneys say that without class action arbitration, the high cost of pursuing individual complaints against a company would discourage claims.

Although consumers are bound by arbitration clauses, they do have recourse: an arbitration clause prevents consumers from filing a lawsuit, but does not prohibit consumers from filing a complaint with a government agency or the Better Business Bureau. It also does not prohibit one from making comments about their issues with the company or its products or services on social media such as Facebook, Twitter, a personal blog or a webpage.

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