Consumer Contracts And Mandatory Arbitration Clauses

Have you read the contract you signed with your cell phone company? How about with your car dealer or your credit card company? If you had the time and patience to read the fine print in these contracts, you might be surprised to learn that, by signing the contract, you have waived your right to bring a lawsuit. Instead, you agreed to bring, individually, any claim you had in arbitration.

So what does this mean? Let’s assume you signed up for cell phone service and signed a lengthy contract. After a while the service offers you two free phones as a promotion and you take the offer. When your bill arrives the next month, you discover that the company has added approximately $35.00 in charges to your account in connection with its offer of two free phones. You call the company to complain, but they won’t remove the charges.

What the arbitration clause in your contract means is that you cannot go to court to recover the $35. The arbitration clause also says that you cannot band together with other persons to bring a class action in court. What the contract says you can do is file an individual claim before a private mediating service, such as the American Arbitration Association. This will require you pay certain fees and costs for the service. A single day of arbitration could cost hundreds of dollars. And then, a private mediator will decide your claim after hearing both sides. But, mediators don’t have to follow the law or apply the rules of evidence.

In other words, who would realistically bring a claim for $35 in arbitration or even in court for that matter given the costs and risks involved? No one, really. The end result in this instance is that your cell phone company gets to keep the $35 it charged you. Not only that, your cell phone company gets to keep the $35 that it charged to 300,000 other persons across the country who suffered the same $35 charge. That’s right, your cell phone company gets to keep the $10,500,000 in phantom charges.

You would think that this cannot be legal, but it is. Just a year ago, the Supreme Court, in a close 5-4 decision issued its opinion in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1761(2011) where the court ruled that these types of contract provisions are valid and enforceable. It used to be that companies could not get away with these overcharging schemes because the use of class actions provided an effective method to enforce the law and obtain recovery for all the victims. As one court famously said, “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.” Carnegie v. Household Int’l, Inc., 376 F.3d 656, 661 (7th Cir. 2004).

In response to the Supreme Court decision, a bill has been introduced in Congress by Senator Franken to ban forced arbitration in consumer contracts called the Arbitration Fairness Act Of 2011.