Opinion

Conservatives Should Oppose Forced Arbitration

REUTERS/Jonathan Ernst

Dean Clancy Partner, Adams Auld LLC
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It’s long past time that conservatives wrested the banner of “consumerism” away from the so-called “consumer advocates,” those left-leaning types who typically promote mandates, price controls, and regulation as the solution to problems, for which the real remedies are individual liberty, market competition, and freedom of contract.

Consumerism, in short, should be pro-consumer, not pro-government.

One of the few areas in which the “consumer advocates” are actually on solid ground — and thus where conservatives can safely join forces with them, and steal some of their thunder — is the issue of pre-dispute mandatory arbitration clauses (emphasis: pre-dispute).

I’m referring to those fine-print items you find in most consumer agreements nowadays that waive your right to sue the company in case of a dispute. Instead, you agree to accept the results of binding arbitration. The clauses touch a host of services: rental cars, credit cards, prepaid cards, car loans, student loans, checking accounts, debit accounts, nursing-home admissions, software apps — the list goes on.

Currently two federal agencies (the Consumer Financial Protection Bureau and the Centers for Medicare and Medicaid Services), acting under congressional authorization, are moving to ban the controversial clauses in certain kinds of contracts. And a third agency (the Securities and Exchange Commission) has been authorized to do so.

Business interests are predictably lobbying to block the rules. Conservatives should take the other side. On this issue, the left is right and the right is wrong — or rather, the pro-business right is wrong. The pro-market right should join the consumer advocates in opposing pre-dispute mandatory arbitration as a violation of liberty and an infringement of the Seventh Amendment right to a civil jury trial.

Business interests love pre-dispute binding arbitration (emphasis: binding) because it reduces their exposure to potentially costly lawsuits. Litigation is certainly abused in this country. And, to be sure, binding arbitration can be a useful alternative to litigation, assuming the agreement is truly voluntary. But that means both parties have to know what they’re agreeing to and have the freedom to say no.

Nowadays arbitration is often imposed on a “take it or leave it” basis, before a dispute has arisen, without the consumer really understanding what “binding arbitration” entails, and before the full nature or extent of a possible injury can really be known. And it’s getting increasingly difficult for us to “take our business elsewhere,” because the clauses are being imposed universally. That’s because the Supreme Court, in cases like AT&T Mobility v. Concepcion (2010) and American Express v. Italian Colors Restaurant (2013) — cases that take it for granted that agreements are voluntary — has effectively overrruled state consumer-protection laws in this area. Competition and federalism aren’t doing their usual magic, because Uncle Sam is sitting on them.

The arbitration process itself, meanwhile, isn’t always perfect. It can be marred by bias, excessive secrecy, and disregard for the traditional rules of due process. The arbitrator’s reasoning, for example, is sometimes not revealed, and the decision itself is usually kept secret. Which is why forcing people into it is controversial. Meanwhile, the evidence for arbitration’s cost-saving benefits remains debatable.

Individuals should, of course, be free to make contracts for any lawful purpose. They should even be free to waive their constitutional rights — within reason, of course (no selling ourselves into slavery). Courts have traditionally thought it unreasonable to hold people to promises that effectively shut off their access to impartial justice. And arbitrators aren’t necessarily impartial; they’re usually, and understandably, biased in favor of the party who pays them, which is usually the company.

In the Federal Arbitration Act of 1925, Congress moved to tie the courts’ hands in this area, declaring pre-dispute mandatory arbitration clauses to be “valid, irrevocable, and enforceable, save upon such grounds as exist in law or equity for the revocation of any contract.” Unfortunately, that law, reinforced by the aforementioned judicial decisions, has led to a world in which arbitration clauses are ubiquitous and unavoidable, with no effective recourse for consumers under either federal or state law.

And those are just the policy problems. Even more important is the constitutional one.

The right to a jury trial is the only right mentioned twice in the Bill of Rights. The Fifth Amendment safeguards it in criminal cases, the Seventh in civil ones: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.” Those last three words are sweeping. Congress has very little room to carve out exceptions. Which makes the Federal Arbitration Act at best suspect, constitutionally speaking.

So what’s the proper remedy? Congress should repeal the Federal Arbitration Act or amend it to make pre-dispute mandatory arbitration agreements optional.

Congress has begun to do just that. In 2010 it banned forced-arbitration clauses outright in mortgages and real estate agreements and authorized their prohibition in consumer credit contracts (CFPB) and broker-customer contracts (SEC). Meanwhile, CMS is using its power to attach strings to federal dollars to ban them in Medicare-funded nursing home admissions.

Congress is on the right track. Involuntary agreements are unconscionable. Involuntary arbitration agreements run afoul of the Seventh Amendment. The pending rules are wins for liberty, the Constitution, and the freedom of contract.

On this one, conservatives should follow their pro-market and not their pro-business instincts — and start taking the banner of consumerism away from the so-called “consumer advocates.”

Dean F. Clancy, a tea party aligned former White House and congressional aide, and current partner at Adams Auld LLC, writes on U.S. health care, budget, and constitutional issues.  Follow him on Twitter: @DeanClancy.

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