Reopening the Courtroom Doors: A Proposal for an FCC Prohibition of Mandatory Arbitration Clauses

• Author: John C. Ferrell
• Position: J.D. Candidate, Capital University Law School, 2018; B.A., The Ohio State University, 2011. I would like to thank Professor Margaret M. Cordray for introducing me to this important issue and providing invaluable guidance throughout the process of writing this Comment. I would also like to thank Professor Scott A. Anderson for teaching me the...
• Pages: 159-189

REOPENING THE COURTROOM DOORS: A PROPOSAL FOR AN FCC PROHIBITION OF MANDATORY ARBITRATION CLAUSES JOHN C. FERRELL * I. INTRODUCTION In recent years, many businesses have begun including mandatory arbitration clauses 1 in their agreements with customers. 2 These agreements expressly prohibit consumers from bringing their claims in court (with the exception of small claims court) and instead require the consumer to submit to binding arbitration by a neutral decision-maker. 3 They appear in contracts for a wide variety of consumer products and services, including car leases, credit cards, checking accounts, insurance, student loans, and Copyright © 2018, John C. Ferrell. * J.D. Candidate, Capital University Law School, 2018; B.A., The Ohio State University, 2011. I would like to thank Professor Margaret M. Cordray for introducing me to this important issue and providing invaluable guidance throughout the process of writing this Comment. I would also like to thank Professor Scott A. Anderson for teaching me the art of legal analysis and writing and for consistently pushing me to improve this skill. Lastly, I would like to thank my wife Leslie for her constant encouragement since day one of law school. 1 Although the term “arbitration clause” has a broad meaning, for purposes of this Comment, the term “mandatory arbitration clause” will be used to refer to a particular type of arbitration agreement. The term will refer to clauses contained in the standard un-negotiated Terms & Conditions for a consumer product or service that requires the consumer to resolve all disputes through binding arbitration. The term will not include agreements to arbitrate that are entered after a dispute arises, nor will it include arbitration agreements in negotiated contracts between sophisticated individuals or entities. 2 Mandy Walker, The Arbitration Clause Hidden in Many Consumer Contracts , CONSUMER REPS., http://www.consumerreports.org/cro/shopping/the-arbitration-clause-hidden-in-many-consumer-contracts [https://perma.cc/HMQ2-2YUQ]. 3 E.g., Verizon Wireless Customer Agreement , VERIZON WIRELESS, https://www.verizonwireless.com/legal/notices/customer-agreement [https://perma.cc/2327-SBZR] (“YOU AND VERIZON BOTH AGREE TO RESOLVE DISPUTES ONLY BY ARBITRATION OR IN SMALL CLAIMS COURT. YOU UNDERSTAND THAT BY THIS AGREEMENT YOU ARE GIVING UP THE RIGHT TO BRING A CLAIM IN COURT OR IN FRONT OF A JURY.”). 160 CAPITAL UNIVERSITY LAW REVIEW [46:159 cell phone and internet service. 4 Businesses often successfully invoke arbitration clauses to force into private arbitration claims that were initially brought against them in court. 5 As a result, when consumers are harmed by the unlawful actions of these businesses, they find the courtroom doors closed. The Wells Fargo “sham account” scandal exemplifies the broad reach of mandatory arbitration clauses. 6 This scandal involved Wells Fargo employees using customers’ personal information to create fake accounts, for which fees were charged to customers, in an effort to meet sales goals. 7 When Wells Fargo customers attempted to hold the bank accountable for the actions of its employees, they found the courtroom doors closed. 8 Although the customers’ lawsuits involved fake accounts the customers never agreed to open, many courts nevertheless forced the claims into arbitration because the account agreements for their legitimate accounts included mandatory arbitration clauses. 9 Many consumers are unaware that they give up the right to sue in court by taking actions as simple as downloading an app, 10 clicking “I agree” on a website, 11 receiving a bill in the mail, 12 or merely purchasing a product. 13 4 Walker, supra note 2. 5 E.g. , Southland Corp. v. Keating, 465 U.S. 1, 4 (1984). 6 See Michael Corkery & Stacy Cowley, Wells Fargo Killing Sham Account Suits by Using Arbitration , N.Y. TIMES, http://www.nytimes.com/2016/12/06/business/dealbook/ wells-fargo-killing-sham-account-suits-by-using-arbitration.html?mwrsm&_r=0 [https://perma.cc/425V-YPZF]. 7 Id. 8 Id. 9 Id. After a large public outcry, Wells Fargo agreed to allow one of the numerous class action lawsuits arising from this incident to proceed in court. Dena Aubin, Wells Fargo Withdraws Arbitration Bid in Unauthorized Accounts Lawsuit , REUTERS LEGAL, Jan. 4, 2018, 1/4/18 REUTERS LEGAL 23:16:06 (Westlaw). 10 U.S. Terms of Use , UBER § 1, https://www.uber.com/legal/terms/us/ [https://perma .cc/5FMX-54AZ] (“By accessing or using the Services, you confirm your agreement to be bound by these Terms.”); Id. § 2 (“By agreeing to the Terms, you agree that you are required to resolve any claim that you may have against Uber on an individual basis in arbitration, as set forth in this Arbitration Agreement.”). 11 Myriam Gilles, Opting Out of Liability: The Forthcoming, Near-Total Demise of the Modern Class Action , 104 MICH.L.REV. 373, 427 (2005). 12 Marsh v. First USA Bank, 103 F. Supp. 2d 909, 916 (N.D. Tex. 2000). 2018] REOPENING THE COURTROOM DOORS 161 Even if consumers were aware, they would be relatively powerless to change the situation. 14 Most agreements between sophisticated businesses and consumers are “adhesion contracts” presented to consumers on a “take-it-or-leave-it” basis. 15 This means that even if a consumer understood the meaning of an arbitration clause, the consumer’s only option would be to find a different seller or service provider, many of which include arbitration clauses in their own customer agreements. 16 Despite these problems, courts regularly enforce arbitration clauses. 17 The recent favorable legal treatment the Supreme Court of the United States has given to the use of arbitration clauses has further encouraged businesses to include them in agreements with their customers. 18 Arguably, businesses benefit the most from mandatory arbitration clauses because such clauses prevent consumers from filing class action lawsuits. 19 Most mandatory arbitration clauses provide that all claims other than those in small claims court must be resolved through arbitration. 20 Therefore, under most mandatory arbitration clauses, any putative class action suit must be resolved through arbitration. 21 However, most mandatory arbitration clauses also expressly prohibit class 13 Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1148–49 (7th Cir. 1997) (holding that a purchaser of software is bound by legal terms enclosed with the product that is shipped to the purchaser). 14 Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction , 96 HARV. L. REV. 1173, 1176–77 (1983). 15 Id. at 1177. 16 Walker, supra note 2. 17 E.g. , Hill , 105 F.3d at 1151. 18 A recent series of articles by the New York Times characterized this as a “privatization of the justice system” and highlighted some of its more disturbing components. Jessica Silver-Greenberg & Robert Gebeloff, Arbitration Everywhere, Stacking the Deck of Justice , N.Y. TIMES (Oct. 31, 2015), http://www.nytimes.com/2015/11 /01/business/dealbook/arbitration-everywhere-stacking-the-deck-of-justice.html?_r=0 [https://perma.cc/9EXN-Y5HE]; Jessica Silver-Greenberg & Michael Corkery, In Arbitration, a “Privatization of the Justice System ,” N.Y. TIMES (Nov. 1, 2015), http://www.nytimes.com/2015/11/02/business/dealbook/in-arbitration-a-privatization-ofthe-justice-system.html?_r=0 [https://perma.cc/GF6R-QLM5]. 19 Silver-Greenberg & Gebeloff, supra note 18. 20 E.g. , Verizon Wireless Customer Agreement , supra note 3. 21 Silver-Greenberg & Gebeloff, supra note 18. 162 CAPITAL UNIVERSITY LAW REVIEW [46:159 arbitration. 22 A recent study found that courts enforced these limitations in most cases. 23 By barring class action lawsuits in the courtroom and class arbitration outside the courtroom, a business effectively insulates itself from all class action liability. 24 The ability to avoid class action liability is extremely valuable to businesses. 25 Indeed, the threat of a class action suit is often a major factor that motivates businesses to change certain practices. 26 By eliminating the threat of class action liability, businesses are free to continue certain unlawful practices with relative impunity. 27 Another advantage businesses gain from the use of arbitration comes from the “repeat player” effect. 28 Businesses who repeatedly use the same arbitrator tend to receive more favorable arbitration decisions. 29 One possible explanation for this phenomenon is the strong incentive of arbitrators to render favorable decisions for the businesses that employ them. 30 Many arbitration clauses provide that the business will choose the arbitrator. 31 Despite the fact that arbitrators are meant to be “third-party neutrals,” 32 many arbitrators consider the businesses who hire them to be 22 E.g., Verizon Wireless Customer Agreement , supra note 3 (“THIS AGREEMENT DOESN’T ALLOW CLASS OR COLLECTIVE ARBITRATIONS EVEN IF THE AAA OR BBB PROCEDURES OR RULES WOULD. . . . NO CLASS OR REPRESENTATIVE OR PRIVATE ATTORNEY GENERAL THEORIES OF LIABILITY OR PRAYERS FOR RELIEF MAY BE MAINTAINED IN ANY ARBITRATION HELD UNDER THIS AGREEMENT.”). 23 Out of 1,179 class actions filed between 2010 and 2014 where businesses sought to compel arbitration, courts required individual arbitration in 80% of those cases. Silver-Greenberg & Gebeloff, supra note 18. 24 Id. 25 See discussion infra Section IV.B.2. 26 DEBORAH R. HENSLER ET. AL., CLASS ACTION DILEMMAS: PURSUING PUBLIC GOALS FOR PRIVATE GAIN 119 (2000); see also Gilles, supra note 11, at 378 (“I take it as beyond dispute that the threat of class action liability plays a vital role in deterring corporate wrongdoing.”). 27 Vasquez-Lopez v. Beneficial Or., Inc., 152 P.3d 940, 951 (Or. Ct. App. 2007). 28 PUB. CITIZEN, THE ARBITRATION DEBATE TRAP 25 (2008), http://www.citizen.org /documents/ArbitrationDebateTrap%28Final%29.pdf [https://perma.cc/57KV-38WB]. 29 Id. 30 Id. 31 Id. 32 See MODEL RULES OF PROF’L CONDUCT r. 1.12 (AM.BAR ASS’N 1983). 2018] REOPENING THE COURTROOM DOORS 163...