A Funny Thing Happened on the Way to the Forum: Compulsory Consumer Arbitration

If your cell phone carrier, let’s say AT&T, sent you a phone bill for $10,000,1 what would your next move be? Perhaps the first one may be to re-evaluate those weekly calls to grandma. The second move would probably be a call to AT&T disputing the charges. Yet the one move you could not make is the move to the court room. This is because the contract you signed with AT&T has a compulsory arbitration clause. Like many companies,2 AT&T requires consumers to give up the right to the court house in order to use its services. Instead, your dispute must be heard in a closed arbitration, by an arbitration service selected by the company.

What is arbitration?

Arbitration is a form of private court. Instead of cases being heard in public before a judge and a jury, they are heard in private before an arbitrator (or a panel of arbitrators), appointed by one of several organizations that provide arbitration services. An arbitrator’s decision is usually confidential and immune to judicial review.

What is the problem?

Look, there is nothing fundamentally wrong with allowing parties to a contract to resolve their disputes outside of court. Advocates for arbitration will argue that it is more time and cost efficient than the civil court system. But there is a price to be paid for efficiency, namely the substantive and procedural protections3 offered by the court along with the transparency of a public proceeding.

If AT&T and General Motors want to do business together, but don’t want any disagreements made public, they may very well agree to favor efficiency over transparency. I bolded the word agree” because therein lies the rub. AT&T and General Motors are sophisticated business entities, capable of weighing the pros and cons of arbitration. They are also relative equals that can negotiate the individual terms of their arrangement in a true arms length deal.Consumers are different.

Agree to Disagree

The law accepts the lie that consumers “agree” to these arbitration clauses. But the truth is that the average consumer is scarcely aware they exist. Returning to our example, AT&T’s Terms of Service contain over 12,000 words. That’s roughly 25 typed, single-spaced pages. By itself, the arbitration clause is 1,600 words. Consumers don’t read that. And it is doubtful that they could understand much of it even if they did.4 Companies have these agreements written and reviewed by many lawyers. Consumers do not have that luxury.

Consider also that consumer contracts are offered on a take-it-or-leave-it basis. Go ahead, try to sign up for AT&T cell service, but request they strike the arbitration clause. Once you’re finished with that, do the same for Sprint, Verizon, and T-Mobile. I’ll wait.

*stares absent-mindedly out window*

Oh, you’re back. At this point you’ve probably realized that consumers only have two options: cell phone service with compulsory arbitration or no cell phone service.

The same is true for many other consumer services (think banking, credit cards, and car buying). If all the cell phone carriers agreed to charge the same amount for their services, you might think of words like “price-fixing” and “collusion.” Compulsory arbitration is less flashy, but can be much more insidious.

Don’t worry, I’ll pay

Let’s take a look at AT&T’s arbitration clause:

How Do I Resolve Disputes With AT&T from att.com

AT&T will pay the arbitrator—I suppose that is comforting? I mean, arbitration can be expensive.5 But when I’m watching football and I wonder if the refs have been paid off, I’m not talking about the adequacy of their salary. To be fair, requiring consumers to pay for an arbitrator is not usually any fairer. Most consumer complaints are for small amounts, making paying an arbitrator uneconomical. If only an impartial, tax-payer funded judge was available . . .

Come here often?

Like any bar, arbitration has its regulars. I doubt everyone yells “Norm”6 when AT&T walks in, but I’m betting it at least has its own mug at the counter. And like any bar, it is the regulars who keep the lights on. The consumer is the guy that comes in, orders water, and eats the free pretzels.

The point is that there is a significant incentive for the arbitration services and the arbitrators to keep the companies happy. AT&T drives a lot of business to the American Arbitration Association (and the associated arbitrators) by using it in their consumer contracts. If AT&T were to become unhappy with the results, AT&T might take its business elsewhere.

Final Words

Arbitration has a lot of merits. I can tell you that in my own experience it is usually cheaper and faster than litigating in court. But it also has downsides, particularly when entire industries have foreclosed the possibility of suit in court. Not only does the process appear unfair on the surface, but there is little way to test its fairness because decisions are private and often confidential.

Arbitration also has a chilling effect on the common law legal system. You see, our system of justice works by applying past precedent to new fact patterns. This ensures consistency and allows the law to adapt to new circumstances. By removing whole swaths of consumer disputes from the courthouse, compulsory arbitration prevents the law from growing and developing. Important legal questions are left unresolved, leaving room for uncertainty and doubt, and breeding conflict. Though arbitration may decrease the cost of resolving a single dispute, compulsory arbitration increases the overall cost to society.

The Alliance for Justice recently released a documentary on forced arbitration called “Lost in the Fine Print.” It is only 20 minutes long and available on YouTube. Take a look if you want to learn more.


1 If you’re really unlucky, you may receive a bill for $15 quadrillion. That probably sounds like a lot. Or it sounds like nothing because you don't recognize quadrillion as a number. In either event, it is more than the accumulated wealth of the world. Approximately 100 to 100,000 times more depending on how you count.

2 A sampling of companies that force consumers into compulsory arbitration can be found at:http://www.citizen.org/forced-arbitration-rogues-gallery

3 For instance, courts have rules regarding the discovery process. Basically, these rules control what information and documents the parties must exchange. In arbitration, this exchange is much more limited.

4 AT&T’s terms of service have a Flesch-Kincaid readability score of 20%. This means it is roughly equivalent to upper-graduate college work.

5 $300 or more per hour for an arbitrator is not uncommon.

6 Are Cheers references too dated?

Categories: Litigation