How Companies Take Away Your Right to Sue

March 25th 2015

Donny Shaw

If you’re like most people, you don’t have time to actually read the fine print when you sign up for a new service with a phone company or a bank. So, you're probably not aware that if you have a dispute with the company, you've probably been signing away your right to sue and have the case heard by a judge or jury in a courtroom. That's according to new findings from the Consumer Financial Protection Bureau (CFPB).

Banks, private student loan companies, mobile wireless companies, credit card companies, and other types of consumer finance businesses are increasingly inserting mandatory arbitration clauses into their contracts. That means if you have an issue with your service or an unfounded charge appears on your bill, the company can block your case from going to court and require that the issue is resolved through private arbitration, a process that generally favors the corporation over the consumer.

The report found mandatory arbitration clauses in huge swaths of the markets they looked at—53 percent of the credit card market, 44 percent of insured checking account deposits, 86 percent of private student loans, and 99.9 percent of the mobile wireless market.

In the private student loan market, six of the seven largest private student lenders included mandatory arbitration clauses in their contracts. The report notes that neither Federal Direct Loans nor Federal Perkins loans require borrowers to sign mandatory arbitration clauses. 

It also found that people have no idea that they’ve signed away their rights. Three out of four consumers don’t know if they’ve agreed to a mandatory arbitration clause or not, the report found. And, of consumers with mandatory arbitration clauses in their credit card contracts, only seven percent knew that they could not sue their credit card company in court.

These clauses are often used to prevent class action lawsuits.

Class action lawsuits, where groups of consumers pool resources to collectively sue a company, are a common and effective way for people to challenge abuses by big companies. According to the CFPB, mandatory arbitration is being used by companies specifically to avoid these kinds of lawsuits. “By design, arbitration clauses can be used to block class actions in court,” the CFPB states in a summary of its findings. “The CFPB found that it is uncommon for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to block class actions.”

While mandatory arbitration saves financial companies millions of dollars each year, the report found that these savings are not necessarily being passed onto consumers. The CFPB studied companies that eliminated mandatory arbitration clauses from their contracts and “found no statistically significant evidence that the companies [...] increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clause.”

Conflict of interest.

Private arbitrators may be motivated to rule in favor of the corporation that referred the case (and against the consumer) because, after all, the corporation is essentially hiring the arbitrator. An unfriendly arbitrator may have a hard time getting repeat business. The stats back this up: In 2007, Public Citizen, a public interest advocacy group in Washington, studied 34,000 arbitration cases and found that consumers lost 94 percent of the time. 

Luckily, there are people working to stop the forced arbitration boom. Public Citizen released a statement in response to the report urging the CFPB to enact regulations to ban the clauses. “Big Banks and financial predators are using fine-print terms in contracts as an effective license to steal,” they said, “To protect consumers, the CFPB must follow up its groundbreaking study with action: a rule taking away the banks’ right to steal and ending forced arbitration.”

In Congress, Sen. Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.) are planning to re-introduce legislation they have proposed in the past to strip companies of their ability to force these clauses on consumers and other entities they do business with. The Arbitration Fairness Act would invalidate contracts that require arbitration for all consumer, employment, civil rights, or antitrust complaints, but it would still allow arbitration to be pursued in cases where both parties agree that is their preference.