By Claude Harrington
What do companies such as Yahoo, Nordstrom, and Papa John’s have in common? In order to work for these companies, along with many other top employers, an employee must sign what is called an arbitration agreement. This clause requires all disputes to be settled outside of the courts in an alternative dispute resolution setting (e.g. arbitration).
To many, this may appear to be a very minor detail that has no real consequences. However, what happens if, as an employee, you wish to bring sexual harassment charges or claims of racial bias against the firm? Instead of suing and having a judge and jury of her peers determine the merits of her case, she is forced to take her case to an arbitrator. Given that these arbitrators are often hired and paid by the corporation in question, it is not difficult to observe that there is something a little unsettling about such an arrangement. Yet, what might be particularly uneasy about such a requirement is that signing onto it is contingent upon employment.
For people thinking that they can avoid such contracts by either choosing to work elsewhere (even though more and more general counsels are advising corporations to institute the arbitration clause) or successfully negotiating the terms of this contract with their employer because they are such valued employees should be cautious. If someone uses Amazon, Netflix, Kaiser Permanente, Microsoft, Verizon Wireless, or Wells Fargo, consumers must once again sign away their right to sue, except this time it is in the terms of condition or service (“Forced Arbitration Rogues Gallery”). So should a corporation that contains this clause cause drastic damage to a consumer, that consumer must attempt to argue for a remedy against not only the corporation in question, but also, practically, the arbitrator, given the non-neutrality at which she enters this dispute. According to the Consumer Financial Protection Bureau, the corporation will win such disputes 93% of the time (“Eliminating Forced Arbitration”).
These arbitration clauses are particularly dangerous for two other reasons: the inability to appeal and no right to discovery. So, should a consumer in one of these contracts wish to essentially seek another opinion, as is possible if the case went through the judicial court system, that consumer would not be able to do so. Therefore, whatever the arbitrator rules is the ultimate decision and cannot be overturned. However, what may be more of a detriment during arbitration is that there is no right to discovery. If a sexual discrimination suit took place in the courts, the litigant would have the right to pursue company information that could show trends of sexual discrimination like information regarding previous promotions or terminations. Without having access to that information, that employee has to prove she was discriminated against without being able to access that employer’s e-mails, phone records, or anything else that could potentially show that the employer acted in a sexist manner. Such a practice essentially turns the case into a “he said, she said” and it is very tough to ascertain a favorable ruling where the burden of proof is the preponderance of the evidence in such civil cases.
Although these arbitration clauses clearly are detrimental to consumers and employees, it is important to note the reason why corporations adopted this policy and why they are allowed to continue using these contracts. During the 1990’s and early 2000’s, consumers sued corporations a lot. According to the National Center for State Courts, of the 12 courts that were studied, 40% of cases were consumers suing a business, and those consumers won 67% of the time (Svensson). Although most of these suits resulted in very small winnings for the litigant, many other “victims” would make a similar claim and the case would eventually turn into a class action lawsuit that would cost the corporation millions. By utilizing arbitration clauses, they have been able to prevent many class actions from arising. This is the result of what rulings in arbitration usually being sealed from the public and many corporations will include that there can be no class action as a part of their arbitration clause.
Given that history, it makes sense as to why corporations sought a solution to an understandable problem. Yet, was this solution legal in the first place? In order for a contract to be legal, it cannot be considered abusive. A key characteristic of abusive contracts is that they are “unconscionable,” which according to attorney and legal library editor Ken LaMance includes “duress, undue influence, or unequal bargaining power” (LaMance). Given this definition, it appears clear that employee and consumer contracts violate at least one of these constraints. A strong argument could be made that these terms of service and employee contracts contain undue influence. Undue influence is an act that impedes an individual’s rational thought and includes: “exhortations, importuning, insinuations, flattery, trickery, and deception…” (“Undue Influence”). Given that most job offers include some sort of recruitment or courting process, it is quite plausible that some form of flattery. Terms of service, on the other hand, appear to contain forms of exhortation and importunity given that if someone attempts to not agree, it will either not allow you to use the product or pop-up again on the screen.
A more prominent example of how employee contracts and terms of conditions are abusive is the unequal bargaining power. It appears that employee contracts would definitely be subject to such a dichotomy of power given that the corporation is the one who is offering the job and has plenty of options to choose from when deciding whom to hire. Certain opponents might argue that there is no unequal bargaining power when it pertains to terms of service contracts because if this consumer does not want to agree to use the product, she can choose their competitor. Unfortunately, forced arbitration appears to be relatively ubiquitous within industries. For instance, every major company in the wireless phone provider, cable or dish network, and television streaming industries contains forced arbitration clauses (“Forced Arbitration Rogues Gallery”). Therefore, if a consumer wants to use a product, she is either bound to choosing from one of the companies that has a forced arbitration clause or not using the product at all. Very few people would argue that no choice is a form of choice at all.
The example that the law library editor and practicing attorney LaMance offers for a contract that might be abusive given its unequal bargaining power is if “an older or more experienced party may enter into negotiations with a less experienced party. If they use their experience to their advantage and take advantage of the other party’s lack of knowledge…” (LaMance). This appears to be evident in both employee contracts and terms of service agreements. Corporations already have general counsels and other law firms drafting these contracts on their behalf. Yet, consumers and employees are not always privy (nor can they always afford) to consult an attorney on every agreement. Also, if consumers and employees were to read the entire agreement and read the arbitration clause, it is unlikely that they would know the potential harms of signing away their right to trial, why that clause is in the document, and that they would likely lose the potential dispute. Therefore, it appears that corporations not only have greater access to attorneys, but also a greater expertise pertaining to legal matters. This means that corporations are orchestrating contracts that are abusive due to their unequal bargaining power.
If corporations are making abusive contracts and utilizing their power to entail forced arbitration clauses within them, then it is troubling as to why legal action has not been taken against these types of contracts. This is because of the benefit corporations provide to society. The argument essentially follows: given that corporations “invest significantly more,” “are far better placed to capture economies of scale and scope,” and “offer what the United States needs the most: jobs,” corporations are allowed to create these inequities because they are more important than people in the first place (Hufbauer and Vieiro).
Yet, there appears to be an issue with the claim that corporations provide different advantages than people, given that legally, they are considered people. Citizens United v. Federal Election Commission and Burwell v. Hobby Lobby are recent Supreme Court cases that have expanded and solidified the interpretation of corporate personhood to becoming synonymous with being a person. Corporations now have the right to free speech and the right to free exercise, rights that used to be reserved for human beings. Yet, as Susanna Ripken, leading legal scholar on corporate personhood from Chapman University’s Fowler School of Law, notes the recent creation in her article featured in the Fordham Journal of Corporate and Financial Law of how currently, “corporations are multi-dimensional people” (Ripken). Such an interpretation has led many to either be in support or opposition of this ruling. However, if corporations are people, should they be allowed to have forced arbitration clauses within their contracts?
In order to answer this question, it is necessary to imagine a situation where two people would enter into an agreement with one another and see if forced arbitration would be allowed in these circumstances. One instance where two people enter into a contract with one another could be a marriage, and more specifically, a pre-nuptial agreement. A pre-nuptial agreement is a contract that couples, who are about to get married, can sign. These arrangements can “keep finances safe, protect each (partner) from debts, and define who gets what if (there is a) divorce” (“Prenuptial Agreements). Pre-nuptial agreements can also contain language that requires arbitration.
Therefore, it appears that arbitration clauses are acceptable within any sort of contract and are fine for corporations to use. Yet, it appears odd to say a couple that loves one another and would mutually seek arbitration within their pre-nuptial agreement is the same as a corporation who require arbitration to settle disputes between their employees and their customers. This difference could stem from employee contracts and terms of conditions are abusive contracts while pre-nuptial agreements are not. Although someone could think of abusive examples when someone might want to utilize a pre-nuptial agreement, according to FindLaw, pre-nuptial agreements cannot be unconscionable or have one party “clearly prosper” (“Top 10 Reasons…”). Employment contracts and terms of service can be viewed as a prerequisite for enjoying the benefit of either that job or product. Pre-nuptial agreements are, however, much more rare (only 3% according to a Harris Interactive study) and cannot be used as a threat to calling off the wedding should the other party not sign or else it is an invalid contract (Tanaka). Yet, if a couple were at odds about having a pre-nuptial agreement and a party member chose to not sign it and find a new spouse, the chances are quite unlikely that that new person would also require a pre-nuptial agreement, which adds to that party member’s ability to choose within the scenario.
Also, both parties can draft up the language in the pre-nuptial agreement with their respective attorneys (which is required in some states) and there is no requirement that an arbitration clause even be present within the agreement. Therefore, when people enter into contracts with one another, they cannot be abusive at all nor can the ensuing arbitration clearly favor one party in the arrangement. Since people cannot utilize abusive contracts, corporations should be held to the same standard given their new legal definition of being a person.
Corporations have probably utilized abusive relationships for quite some time. However, the greatest showing of that abuse is by adding arbitration clauses to its employee contracts and terms of conditions for its products. If a corporation was not considered a person, the argument of it offering greater services than people and therefore needed greater protection might have sufficed. However, given that corporations are people, according to the Supreme Court, it is no longer permissible for corporations to enjoy the benefits of drafting abusive contracts against their fellow man. So if corporations wish to revoke their personhood, they could possibly utilize arbitration clauses within their different contracts. But given that corporations are people, they should learn that sometimes you cannot have your cake and eat it too.
- “Eliminating Forced Arbitration.” Alliance for Justice. Alliance for Justice, n.d. Web.
29 October 2015.
- “Forced Arbitration Rogues Gallery.” Public Citizen. Public Citizen, n.d. Web. 26
- Hufbauer, Gary and Martin Vieiro. “Big Business is Good for America.” The Council
on Foreign Relations. Foreign Affairs, 2 November 2011. Web. 30 October 2015.
- LaMance, Ken. “Abusive Contracts.” Legal Match. Legal Match, 21 January 2014.
Web. 31 October 2015.
- “Prenuptial Agreements: What the Law Allows.” Nolo. Nolo, n.d. Web. 29 October
- Ripken, Susanna. “Corporations are People Too.” Fordham Journal of Corporate and
Financial Law 15 (2009): 97. Web. 1 November 2015.
- Svensson, Peter. “In Small Claims Court, Consumers Win Against Huge Companies.”
Huffington Post. Huffington Post, 4 May 2012. Web. 1 November 2015.
- Tanaka, Sannette. “The Growing Popularity of the Prenup.” Wall Street Journal. Wall
Street Journal, 31 October 2013. Web. 31 October 2015.
- “Top 10 Reasons a Premarital Agreement May be Invalid.” FindLaw. FindLaw, n.d.
Web. 31 October 2015.
- “Undue Influence.” Free Dictionary. Legal Dictionary, n.d. Web. 31 October 2015.