If We Can’t End Mandatory Arbitration, Let’s Improve It

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There has been a lot of recent legislative action aimed at reining in forced arbitration clauses in consumer and employee contracts. Sherrod Brown’s Arbitration Fairness for Consumers Act (“Consumer Act”) aims to prohibit banks and other financial institutions from utilizing mandatory arbitration agreements against consumers by amending Title X of the Consumer Financial Protection Act of 2010. Also, the U.S. House recently passed a bill to end mandatory arbitration in workplace disputes, the Forced Arbitration Injustice Repeal Act (“FAIR Act”). The FAIR Act is designed to “restore fairness to the American justice system by reasserting an individual’s right to access the court system.”

These proposals are intended to level the playing field for consumers by eliminating compulsory arbitration, which, we agree, is a noble instinct. The only reason most people sign agreements with embedded mandatory arbitration clauses is because accepting such clauses has become essentially required for an individual to get a job they desire or to buy a product or service they want. Polls indicate that more than 80% of surveyed individuals in the US oppose binding arbitration, and more than 60% support the objectives of the FAIR Act. But to date, the Supreme Court has consistently held that mandatory arbitration agreements are legally enforceable, and the bills above are extremely unlikely to garner a single Republican vote in the Senate, which means they are likely dead-on-arrival.

So if a ban on mandatory arbitration isn’t in the cards, what can we do to improve the situation? One answer is a more piecemeal agenda aimed at curbing the most egregious abuses of forced arbitration. Limiting the scope of proposed reforms may facilitate the passage of bills that restructure mandatory pre-dispute arbitration agreements to minimize harms to consumers and employees.

One example is confidentiality. Many arbitration opponents believe that arbitration is inherently a confidential process, and that high power parties often compel arbitration because they want to keep sensitive information (including evidence that reveals their misdeeds) concealed.  Now it is true that arbitrations don’t generate published opinions that contribute to public law. But it is not correct to conclude that all information revealed in an arbitration is automatically confidential.

In her 2006 article, “Untangling the Privacy Paradox in Arbitration,” Prof. Amy J. Schmitz notes that “Arbitration is private but not confidential… Contracting parties often assume that arbitration’s privacy denies the public access to not only arbitration hearings, but also information revealed during the hearings.” Prof. Schmitz goes on to note that parties may accept arbitration agreements without contracting for confidentiality, which means that participants would remain free to share information about the proceedings.

Now we should note that it is not universally accepted that confidentiality is always bad for plaintiffs. Confidentiality has the potential to be both good and bad for either party in an arbitration. As noted in Arbitrate.com’s recent online colloquium “The Ethics of NDAs in Mediation and Arbitration,” when utilized ethically, confidentiality can enable both sides in a dispute to save money and keep sensitive information out of the public domain. 

So perhaps one reform to mandatory arbitration, short of an outright ban, would be to prevent the use of NDAs and confidentiality agreements to silence consumers and employees in conjunction with compulsory processes. That would preserve the right of the plaintiff to share information about the outcome achieved, which would bring transparency (and accountability) to the proceedings.

Many laws already prohibit, or at least attempt to restrict, the use of confidentiality agreements for sexual harassment and sexual misconduct disputes, so this approach isn’t entirely novel. And there are many benefits to arbitration that can advantage a consumer or employee as well (e.g. time to resolution, cost, and arbitrator expertise).

Also, prohibiting forced arbitration while continuing to allow non-disclosure agreements (specifically for sexual harassment and sexual misconduct disputes), would not get rid of the “secrecy” issue. Even if cases are settled in mediation or negotiation, NDAs and confidentiality agreements can still be a problem. So the core issue worth addressing may then be prohibiting overly broad confidentiality agreements rather than insisting on a total forced arbitration ban.

Also, if forced arbitration truly pushes employees into a secret and biased process, should the focus not then be on advocating for greater transparency in the proceedings, and more diversity among arbitrators and panels to mitigate potential bias in decisions? Ending forced arbitration does not erase the problems surrounding a secret and biased arbitration process, it merely masks the problem. If parties choose to proceed with arbitration rather than litigation on a voluntary post-dispute basis, those same concerns will remain.

Perhaps we should place more of a focus on educating the public on the benefits of arbitration, rather than continuing to allow misconceptions to linger in the news and media. Michelle Fischbach phrased it really well: “Put simply, agreeing to resolve a case outside of court is different than agreeing to silence.” How much of the general public is aware of the fact that litigation is often much more expensive than arbitration, and that corporations, businesses, and organizations often have more litigation resources than employees and consumers? If a plaintiff doesn’t have the financial resources to hire an attorney to represent them, they may be persuaded into an unfair settlement, or they may not have as beneficial of an outcome as they would have if their case had been handled through arbitration.

It should be noted that the shortcomings of forced arbitration go beyond confidentiality. Mandatory arbitration agreements can prevent employees from bringing their claims to court when their rights are violated. Employment disputes are less likely to succeed in arbitration than claims brought to court, and when successful, damages awards are typically higher in court. These outcomes also encourage attorneys to decline to represent individuals bound by mandatory arbitrations. Further, arbitration clauses may be constructed in a way to discourage consumers and employees from choosing to pursue their claim, typically through the use of substantial up-front costs (for example, corporations may require individuals to pay large fees just to initiate the arbitration process, travel to attend hearings, pay arbitrator’s fees, and more). The clauses can also be written in a way to limit remedies available, including prohibiting the award of damages over specific areas.  

But saying that the only option is to either a) allow abusive forced arbitration or b) ban it outright is to force a false binary choice that may serve to perpetuate the problem (as it already has for more than ten years). The best strategy may not be to insist on an outright ban for mandatory arbitration, but to pass reforms that address the shortcomings and make the system better. That may be a strategy more than 50 senators can get behind.