Mandatory arbitration deprives consumers of important options if a product is faulty or harmful. Here’s how to fight back.

 

In July 2018, Ronald Gorny woke up in his Chicago home and noticed a few small insects scurrying on his new upholstered headboard.

Gorny pulled back the sheets to find dozens of more bugs, all seemingly engorged with blood, according to a class-action lawsuit his lawyers filed against Wayfair, the online housewares company that sold him the headboard. A photo he snapped shows his finger stretching the headboard’s fabric to reveal a shiny, dark creature about the size of a pencil tip and what appears to be stains on the surrounding fabric.

An exterminator later confirmed that the insects were Cimex lectularius, commonly known as bed bugs, the complaint alleges and seemed to be coming from inside the headboard.

Gorny was not the first Wayfair customer to say bedding products had arrived infested with bed bugs. His lawyers, pointing to comments on the website Pissed Consumer, claim a “myriad” of other customers had also complained to the company. One Brooklyn, N.Y., woman even received an apologetic email from Wayfair CEO Niraj Shah in September 2016, almost two years before Gorny’s purchase.

Did Wayfair, as Gorny’s lawyers argue, knowingly sell products infested with bed bugs? Did it investigate the complaints or try to correct the problem? Gorny’s class-action lawsuit might have shed light on those questions—but the answers may never be known: At Wayfair’s request, a judge halted the suit in June 2019 and sent Gorny’s complaint to a closed-door, virtually unappealable proceeding known as arbitration.

Gorny, it turns out, had unknowingly signed on to this process by simply using wayfair.com, each page of which contains a link to its terms of use. There, about two-thirds of the way through 4,600 words of legalese, is what the judge called the relevant provision: “Any dispute between you and Wayfair . . . will be settled by binding arbitration.”

Citing pending legal matters, both a Wayfair spokesperson and a lawyer for Gorny declined to comment.

Whether you realize it or not, chances are you, too, have agreed to arbitration on dozens of occasions, forfeiting your right to take problems—even serious ones—with a product or service to court. Arbitration clauses like the one binding Gorny have spread rapidly through the consumer landscape in recent decades, first in the financial and telecom industries and more recently—as new Consumer Reports research shows—into the realm of consumer products.

The implications of this quiet invasion are enormous. For starters, individuals are far less likely to prevail when their grievances are heard in arbitration vs. court, research shows.

More pernicious: Because arbitration proceedings are private, and because arbitration clauses almost always forbid plaintiffs from joining together, companies can use arbitration to preemptively crush consumer challenges to their practices, no matter how predatory, discriminatory, unsafe—and even illegal—they may be.

 

Triggering the Avalanche

Mandatory arbitration was established on a national level in 1925 by the Federal Arbitration Act, largely as an efficient way for businesses to resolve conflicts with other businesses. Since the 1980s, however, courts have greatly expanded the ability of businesses to force arbitration in consumer and employment disputes, and a string of Supreme Court cases over the past decade have busted wide the arbitration floodgates. In the landmark 2011 decision AT&T Mobility v. Concepcion (PDF), for example, the court knocked down a California law that had tried to prevent arbitration clauses from restricting class-action lawsuits.

With that series of green lights, corporate attorneys started slipping the arbitration language into more consumer transactions, from buying an Amtrak ticket to sending a package by UPS. A 2019 study in the UC Davis Law Review Online (PDF) found that 81 of the 100 largest U.S. companies now use arbitration in their dealings with consumers.

Though arbitration clauses are common in financial and telecom services, they now also increasingly go into force when you simply buy a consumer product such as a dishwasher or TV. To get a sense of how often, CR looked at the top-selling brands in the 10 product categories receiving the most traffic on our website, plus two types of products designed for safety: bike helmets and child car seats.

The results were striking. Of the 117 brand/category combinations we examined, 71—more than half—incorporate arbitration clauses. When looking at only the most popular product categories, just over two-thirds had arbitration clauses.

And those figures probably understate arbitration’s reach. Manufacturers have invoked contractual language built into related transactions. Apple, for example, does not attach arbitration clauses to its iPhone sales but has forced arbitration onto its customers by invoking clauses that AT&T Mobility has in its mobile contracts.

Studies have shown that most consumers have no idea what they’ve agreed to arbitration. And the incursion of arbitration into the realm of products, in particular, may be under the radar. Though financial services customers expect to sign user agreements, “you don’t think of a washing machine as coming with a contract,” says Lauren Saunders, associate director of the National Consumer Law Center, a nonprofit group.

To be clear, you don’t have to sign anything—or even click “I agree” on a website—to be bound by arbitration. The clause can appear on product packaging or be buried deep in the warranties, user manuals, or—as with Gorny’s headboard—a website’s terms of use. Placing the clauses there, says Myriam Gilles, a law professor at the Benjamin N. Cardozo School of Law at Yeshiva University in New York City, is “intended to obscure the immensity of the rights being forfeited.”

Multiple courts have now ruled that even contracts one party did not see or have any choice but to sign are enforceable—decisions even some conservatives see as going too far. “The law has so evolved . . . that the sky’s the limit in how many arbitration clauses corporations are going to be able to ensnare consumers in,” says Brian Fitzpatrick, a law professor at Vanderbilt University in Nashville, Tenn., who is also a former clerk to Justice Antonin Scalia, author of the Concepcion decision.

 

Missing Safeguards

Companies tend to justify mandatory arbitration by claiming that it actually benefits consumers. “Arbitration is a fairer, faster, and cheaper way . . . to resolve disputes without ever having to set foot in a courtroom,” says Harold Kim, the president of the U.S. Chamber Institute for Legal Reform, a nonprofit organization.

The relatively informal proceedings of arbitration can indeed be faster and cheaper than going to court—but fairness is another matter.

Many of the safeguards built into the court system—the right to conduct “discovery” to establish basic facts, for example—are missing from arbitration. (It’s unlikely that in arbitration Gorny’s lawyers could demand all of Wayfair’s records of bed bug-related consumer complaints, as they could in a lawsuit.)

In addition, arbitrators aren’t obligated to follow legal precedent, and your right to appeal their decisions is extremely limited. Moreover, companies that arbitrate frequently are good at choosing arbitrators who tend to agree with their position, research shows. Plus, says CR senior policy counsel George Slover, “arbitrators have a built-in incentive to heed the interest of the company in hopes of repeat business.”

But the debate over the fairness of arbitration goes even deeper. For one thing, because arbitration is conducted in private and its outcome is typically kept under wraps, the underlying problem may be kept hidden.

That was the case with financial giant Wells Fargo, which between 2009 and 2016 notoriously opened some 3.5 million bogus bank and credit card accounts in the names of real customers. Beginning in 2013, customers tried to sue Wells Fargo, but because of arbitration clauses buried in the bank’s fine print, they were forced into confidential settlements. As a result, the bank’s practices remained hidden until press reports surfaced, leading to a government investigation and, ultimately, a huge financial settlement for harmed consumers.

A related problem has to do with how arbitration often prevents plaintiffs from jointly litigating grievances, a development that could lead to the end of class-action lawsuits. “It is not an overstatement to say that if the Concepcion decision is not overruled by the Supreme Court or overturned by Congress, then class-action lawsuits could be all but dead in a decade or less,” wrote Vanderbilt professor Fitzpatrick in his book “The Conservative Case for Class Actions” (University of Chicago Press, 2019).

In some cases, consumers can still bring cases in small claims courts. But without class actions, they have little power to hold corporations accountable for wrongdoing. After all, the potential financial recovery of an individual claim rarely merits the time, energy, and cost of pursuing it. As a result, many consumer advocates believe arbitration is little more than a get-out-of-jail-free card for companies. “The only objective of forced, predispute, class-banning arbitration clauses” is to deter small-dollar claims, says professor Gilles at Cardozo law school.

That plan seems to be paying off. An estimated 825 million consumer arbitration agreements were in force in 2018. Yet only about 7,000 arbitration cases are actually heard each year, according to a 2019 study by researchers at the University of California, Davis, School of Law (PDF).

 

The Case of Moldy Washers

Why do individual cases matter if they are often small? Because one function of civil lawsuits is deterrence—the idea that the risk of a sizable judgment from many small lawsuits combined into one prevents companies from doing questionable things to increase profits and pushes them to quickly fix problems when they arise. “The lion’s share of academic studies has found that . . . class-action lawsuits deter misconduct,” says Vanderbilt professor Fitzpatrick. “Deterrence is reason enough to keep class actions.”

Take the case of front-loading washing machines. They became popular in the mid-1990s because of their impressive performance and energy efficiency. But owners soon began complaining of mold buildup, foul smells, and ruined laundry. It turned out that the rubber gaskets around the doors trapped moisture, among other problems. Class actions involving millions of washers followed, and by 2017 Bosch, Electrolux, LG, and others settled. Whirlpool, for example, agreed to give owners at least $50 or a 20 percent rebate on a new machine, and up to $500 for repair or replacement.

Arguably even more important were changes to the marketplace motivated by the class actions. Though the problem hasn’t been eradicated, several problematic washers have been taken off the market or redesigned to be less susceptible to mold. Many now come with self-cleaning cycles.

But here’s the catch: Those companies now impose arbitration provisions. The clause added by Whirlpool, for example, says it “applies to any and all claims, disputes, or controversies of any nature whatsoever that You may raise against Whirlpool and/or its Affiliated Entities.”

So what would happen if the mold problem emerged today? For one thing, it would be hard to find a lawyer. Jonathan Selbin, lead counsel in the LG and Whirlpool suits, says it’s “highly unlikely” he would sign on to cases with such a broadly written clause in place. In fact, before taking new cases he now always asks whether an arbitration clause is in effect. “It’s become a threshold inquiry right up there with whether the problem is real,” he says. And without a lawyer consumers rarely prevail: Just 6 percent of people who represent themselves in arbitration win, research shows.

 

How to Protect Yourself

Arbitration, in some cases, can be a good option for consumers, provided they understand the trade-offs and can deliberately choose arbitration over the court system after a dispute arises, says CR’s Slover. What advocates object to is requiring consumers to agree to arbitra­tion before buying a product or service, and long before a dispute has arisen.

The federal Forced Arbitration Injustice Repeal (FAIR) Act, passed by the House in September 2019 and now in the Senate, would ban predispute forced arbitration, including provisions that prevent people from joining class actions. In the meantime, is there anything you can do? It’s not always easy, but here are some steps to try:

Check to see whether companies use arbitration. Though this information is often buried, CR has done the hard work for you for some popular products. In other cases, look for arbitration language on your own. The clauses often lurk in links at the bottom of a company’s website under headings such as “terms of use” or “legal terms and conditions.” Search for “arbitration” and “dispute” using the “find” function. Also check the user agreements that most of us agree to when we purchase a product online or otherwise interact with a company’s digital offerings.

Don’t let down your guard when shopping offline, either. Companies put arbitration clauses in owner’s manuals and warranty materials, and on the product packaging itself.

Try to choose products from companies that don’t use arbitration. If you’re choosing between two products similar in quality and price, use arbitration as a tiebreaker. For example, Evenflo and Graco both offer top-rated convertible child car seats for about $100­—but Graco’s come with a mandatory arbitration clause. (The company did not respond when asked why it has that provision while most other car-seat makers that we looked at don’t.)

Opt-out when you can. Some companies allow consumers to opt-out of arbitration, such as the mattress maker Simmons Beautyrest. But act fast and read the instructions carefully. Companies often require you to take the step within 30 days of purchase and to use specific language.

Complain. Use social media to contact the CEO, customer service, and other consumers. In a handful of cases, doing so prompted companies to reverse course on arbitration. For example, in 2014 food giant General Mills dropped arbitration requirements that the company said applied even to people who simply downloaded coupons, after a wave of consumer outrage and media coverage. “We’ve listened,” the company wrote in a blog post in April of that year. “And we’re changing our legal terms back.”

Negotiate using the legal leverage you have. If you have a dispute and find you’re bound by an arbitration clause, know that many companies try to settle disputes informally before beginning arbitration or defending small claims cases in court. In fact, some companies may make an offer before you begin legal action.

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