Category Archives: Forced Arbitration

Investor-State Dispute Settlements: New Tool to Circumvent the Courts

We’ve discussed forced arbitration issues a lot on our blog. It’s been a favorite topic of late because it is so relevant to today’s legal environment. We’ve explored the ways in which mandatory arbitration violates the rights of average citizens who have been harmed by large corporations. Barred from having their day in a traditional, public court with an unbiased jury determining the outcome of their case, those forced into arbitration are essentially being denied their Constitutional rights to due process and access to the public justice system.

A lot of people argue that, though a traditional trial by jury may not be completely flawless, it is still the best method of settling disputes that any society has ever devised. The American Judicature Society once eloquently stated that “because a jury consists of multiple people from diverse backgrounds, it can arrive at a better verdict than can one person acting alone.” Pretty simple, straightforward reasoning.

Unfortunately, many of the authors of a new Free Trade Agreement (FTA) between The United States of America and 12 other countries do not agree with the American Judicature Society on the clear-cut benefits and superiority of the traditional American court system. The trade deal is called the Trans-Pacific Partnership (TPP), and is the product of over 500 committee members, 85% of whom (according to Elizabeth Warren and Rosa DeLauro) are corporate executives and direct representatives of industry lobby groups for Big Business. Lots of problems with the TPP have already surfaced, and some have even gone so far as to call it a “criminal organization.”  The President wants to “fast-track” the bill by invoking trade promotion authority and rushing it through Congress. The TPP is also completely classified. Only members of Congress are allowed to see its contents and know all of its potential ramifications. In a free and open society, does that make sense? Shouldn’t all of us have the RIGHT to know the content of such important legislation before our elected representatives vote?

The TPP employs Investor-State Dispute Settlement (ISDS), a provision that, like forced arbitration clauses in a variety of domestic contracts between Big Businesses and individual consumers, takes disputes out of the public courtroom and puts them into the hands of private, secret “tribunals.” There is no appeal from the decisions made by the tribunals.

Senator Elizabeth Warren and other Democrats vehemently argue that the employment of ISDS will give huge multi-national corporations the ability to sue foreign governments for adopting and enacting trade regulations. Some of these same corporations have gone so far as to bring lawsuits against countries for raising their minimum wage. Phillip Morris sued two foreign countries after their governments implemented legislation to reduce their smoking rates. Their claim–these laws violated the rules set forth by similar Free Trade Agreements. Translation: Foreign countries may be forced to pay huge corporations large sums of money for passing laws to ensure the safety and health of their own citizens.

The pendulum swings both ways, though, folks. Foreign companies can also sue our government for actions they perceive to cause them to sustain economic harm. In the ‘90s, a large Canadian company called The Loewen Group, Inc. was charged in a lawsuit with running small cemeteries and funeral homes out of business throughout the United States in an unlawful and predatory manner. When a small, private funeral home brought suit against the company for improper business practices, a Mississippi jury ruled in the plaintiff’s favor, awarding $500 million. The Loewen Group appealed several times but lost in each instance. Facing bankruptcy, The Loewen Group then used the arbitral tribunal under the ISDS clause in the North American Free Trade Agreement (NAFTA) to sue the U.S. for $775 million, claiming the Mississippi court system discriminated against the company. The proceeding was ultimately dismissed, but only because The Loewen Group had lost its rights as a Canadian company after it was taken over by a U.S. Corporation. What was troublesome about those proceedings was the fact that the tribunal was asked to, and apparently believed it was empowered to challenge and evaluate the entire Mississippi trial proceedings.

Under the theories advanced by Loewen, almost any type of civil verdict or court rule imposing a requirement on a corporate defendant could be challenged as illegal. Such claims could overturn jury verdicts in products liability cases, such as cases involving defective cars or dangerous drugs and medical devices. The ISDS mechanism could even be used to attacks punitive damages awards in employment discrimination cases or actions based on consumer fraud. Because the definition of “foreign” corporation is broad, a large number of companies could use these provisions to undermine civil verdicts.

A few years ago, all across our country Toyotas started accelerating out of control, causing horrific car crashes and causing millions of dollars in damages. 89 deaths and 57 injuries were reported with a total of 6,200 complaints. Employees at Toyota were found in America’s state courts to be guilty of fraud by continuing to build faulty and dangerous cars when they knew they were defective and potentially deadly. The company was ordered to pay $1.2 billion to settle the claim.

If the TPP is passed, under the rules of ISDS Toyota could fashion a claim against the United States for damaging their business and seek to hold it accountable for their losses.

The President says this is just a hypothetical argument. But we think it’s too real to ignore.

It’s Time to End Forced Arbitration

ForceArbIn 2002, the Motor Vehicle Franchise Contract Arbitration Fairness Act was signed into law by President Bush. The Act was touted as the biggest win for the National Automobile Dealers Association (NADA) in at least 50 years because it put an end to forced arbitration between the members of NADA and auto manufacturers. The car dealers were tired of being manipulated and bullied by the much larger and more powerful auto manufacturers who systematically forced them into arbitration-a process that essentially strips usually much less powerful groups or individuals of their rights to sue in the American court system.

As Carl J. Chiappa and David Stoelting of Kirkpatrick & Lockhart LLP, wrote in the Franchise Law Journal in 2003, “The Act was necessary, according to the Committee Report, because of the disparity of bargaining power between motor vehicle dealers and manufacturers.”

Fast-forward 12 years and it has become astonishingly commonplace to find forced arbitration clauses in a variety of standard contracts that affect individual consumers buying or using everyday products-from cell phones to credit cards. Oftentimes, these arbitration clauses are deliberately hidden within contracts and are so complex that understanding them requires the aptitude of an advanced university student. Most consumers do not even realize they have given up many of their rights until something goes wrong with their product or service, and by then, it is already too late.

These forced arbitration clauses, just like those that affected the auto dealers, force consumers to handle their claims outside of court and usually only with the arbitration groups that the company in question prefers. In many instances, the individual consumers must pay to travel to other locations and are even held responsible for the arbitrator’s fees. Moreover, these arbitration clauses ban consumers from joining together in classes, forcing them to confront the company and its army of lawyers individually. The arbitrators do not need to follow the law, any other relevant precedents, or even the rules and regulations stipulated in the contracts. Furthermore, the arbitrators have final say and consumers cannot appeal their decisions.

If forced arbitration was deemed unacceptable for auto dealers across the United States over a decade ago, how is it possible that it is not only an acceptable but a very commonplace remedy today for ordinary, individual consumers? Auto dealers did not want to be bullied by the larger, more powerful manufacturers…and neither does the average citizen.

Unfortunately, in recent years, the Supreme Court has ruled in a series of significant cases, most notably AT&T Mobility LLC v. Concepcion(2011) and American Express Co. v. Italian Colors Restaurant(2013), that have upheld the validity of such forced arbitration clauses.

Despite these disturbing rulings, there is still hope for individual consumers.

In a survey that was initiated in 2012, the Consumer Financial Protection Bureau (CFPB) began researching not only the prevalence of forced arbitration clauses but also the effects they are having on consumers. The CFPB was created by Congress in the aftermath of the 2008 financial crisis when it became absolutely necessary to enhance the degree of accountability of American financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) authorized the CFPB to prohibit or limit arbitration clauses if they determine that is it is in the public interest and will further protect consumers. Preliminary analysis of the findings demonstrated that arbitration is neither an economical nor a convenient alternative for individual consumers. It also found that these arbitration agreements are even more prevalent than predicted, and that consumers do not appreciate having their options limited when seeking restitution for a number of potential grievances.

These discoveries are not at all surprising. The Executive Council of the AFL-CIO, the umbrella federation for U.S. unions representing approximately 12.5 million working individuals, stated on July 30 that shareholders and workers should not be forced into arbitration or any such system that limits their rights or their ability to join together in class action cases.

Likewise, President Obama, on July 31, issued an executive order banning companies with certain government contracts from using forced arbitration clauses with their own employees. Now, employees of companies who have entered into professional contracts with the government exceeding $1 million will have their fair day in the American court system when bringing charges against those companies regarding sexual assault, harassment or discrimination.

It’s starting to sound like the White House and the unions are on board with ending forced arbitration; and, it is time for the CFPB to recognize the unfairness of such lopsided schemes and protect the American consumer by banning this practice.