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CFPB Study Proves Forced Arbitration Harms Consumers; Agency Should Prohibit the Practice Wherever It Can

03/20/2015 01:28 pm ET | Updated May 20, 2015

For the past six months, Alliance for Justice staff have been crisscrossing the country telling the stories of three everyday Americans caught up in a practice called forced arbitration. Alan Carlson, Nicole Mitchell, and Debbie Brenner are featured in our short documentary, Lost in the Fine Print.

The film shows what happens when consumers and employees are prevented from standing up for their rights in court and instead forced to go before an arbitrator hired by the very company that wronged them. And it shows that much of the time, forced arbitration clauses mean not that disputes get resolved by an arbitrator rather than a judge or jury but that those disputes never go anywhere at all.

Now there is a new mass of additional evidence.

The Consumer Financial Protection Bureau has released a 728-page study of what happens to consumers when companies use forced arbitration to rig the game.

For starters, the overwhelming majority of Americans don't even know they've signed away their rights. That's by design. Forced arbitration clauses are buried in the fine print of those long, complex "terms of service" we all agree to in order to obtain a loan or a credit card, open a bank account, or purchase cellphone service. They're even in the terms of service we click to use online services like Spotify, Netflix and Instagram. CFPB found that only 7 percent of Americans subject to those terms know they've given up their right to take a company that wrongs them to court.

As Alliance for Justice notes in a letter to the CFPB:

Important rights are now being lost in the fine print of contracts that consumers never read, let alone understand. Forced arbitration clauses tend to be the most complex part of financial product contracts, the least readable, and they are written at a higher grade level than the rest of the agreements.

After examining sample cases that went to arbitration and cases that went to court, here's what else CFPB found:

  • Faced with this rigged system and the simple fact that the costs, in both time and money, are likely to be greater than the amount of money involved, very few consumers even try to take a case to arbitration.

  • Companies almost always were represented by counsel, while consumers had to go it alone 40 percent of the time.
  • Other findings were aptly summed up by Sheryl Harris, a consumer columnist for the Cleveland Plain Dealer. She writes:

    • Consumers forced into arbitration routinely win less, pay more and have less chance of getting companies to stop unfair practices.
    • Consumers aren't lawsuit happy. They rarely consider suing. Most just want to close accounts if things go wrong.
    • Arbitration favored business. In the study period, arbitrators awarded consumers a combined total of400,000 and ordered them to pay2.8 million.

    The study also found no evidence that forced arbitration lowers the costs of goods and services for consumers -- contrary to the claims of businesses that tout forced arbitration.

    Among the biggest harms of forced arbitration, CFPB found, was that arbitration agreements force consumers to go it alone instead of banding together to stand up for their rights.

    As Harris wrote, "Class-action suits help consumers right wrongs. In a five-year period, 160 million consumers were eligible for $2.7 billion in cash or other relief through class-action lawsuits."

    And there's a benefit that goes beyond damages paid to those already wronged. Class-action settlements usually require companies to change their business practices so consumers won't be harmed in the future.

    CFPB was required to conduct this study under the Dodd-Frank Wall Street Reform Act. That law also gives CFPB the authority to prohibit forced arbitration clauses in consumer financial products if it finds that such a prohibition would be in the public interest. The report adds to the overwhelming body of evidence that such a prohibition is vital to ensure companies will be held accountable when they harm everyday Americans.

    Alliance for Justice commends the CFPB for issuing this excellent study. We urge the CFPB to take the next step and prohibit forced arbitration wherever it has the authority to do so. As we note in our letter, "nothing short of a complete prohibition on forced arbitration clauses in all consumer products will give consumers the protection they deserve."

    We're urging all Americans to join us by signing this petition to the CFPB.