May 16, Progressive Party with Sen. Schumer Get tickets

Senators Must Ask Gorsuch If He Will Force Americans into Arbitration

An upper corner of the Napa County Courthouse displays structural damage after an earthquake in Napa, California.

If you recently purchased a Snuggie, bought a new cellphone, or opened a bank account, you may have seen an arbitration clause—or not. These agreements—a folded paper in the product box, fine print at the bottom of a credit card contract, or hidden terms in the agreement you click through to download an app—determine what happens when a problem arises. Usually, they bar a consumer from taking the company to court as an individual or as a group in favor of arbitration: a private justice system in which an arbitrator, hired by the company, makes decisions individually for each dispute.

This is perfectly legal under the Federal Arbitration Act, or FAA, a 1925 law designed to encourage businesses to resolve complaints with one other outside of court. Arbitration can be a fair and neutral dispute process for similarly situated parties; baseball players and owners, for example, have long used such a system to resolve salary disputes. But over the past three decades, the U.S. Supreme Court has ruled that mandatory arbitration is acceptable in countless situations where the parties are clearly not equal, giving corporations a leg up over the consumers and workers they have victimized. All indications suggest that if confirmed, Judge Neil Gorsuch would exacerbate that dangerous trend.

As part of his confirmation as a Supreme Court justice beginning on March 20, the Senate must ask Judge Gorsuch about his views on arbitration to determine whether he will put big business ahead of Americans’ constitutional right to a trial by jury. This is particularly crucial if he is viewed—as some have argued—as the natural successor to Justice Antonin Scalia, who spearheaded the Court’s shift to favoring arbitration.

Arbitration lets corporations bypass the justice system

Proponents of arbitration frame it as an alternative to class actions, in which a group of victims who have been harmed by the same wrongdoing sue collectively. Supporters claim arbitration can be more efficient for individuals. Even if that were true, arbitration has significant downsides. Proceedings are bound by the arbitration agreement authored by the company. Victims and their representatives have fewer options for making a case and are less likely to receive a fair hearing. Because arbitration agreements can define the scope of discovery, companies have often already barred consumers from any meaningful exploration of evidence. And arbitrators’ decisions generally cannot be appealed.

Deliberations and decisions are private, so even if one victim succeeds in receiving compensation, others will not know of that outcome, potentially discouraging them from pursuing action and denying them any guarantee of obtaining a similar result. Class actions, by contrast, take place in the public eye, according to laws that apply equally to all parties, and are resolved by a judge or jury. While arbitration may be a valid option in some cases, it is not a superior option—and it should never be the only option.

Forced arbitration deprives Americans of their constitutional right to go to court

It may be tempting to view arbitration as a choice of venue for workers and consumers. Granted, most people are not thinking about how they intend to legally resolve disputes when they start a job or buy something—and may not be able to pick a different product or job that would not limit their legal rights.

Former Fox News anchor Gretchen Carlson, for example, did not anticipate a need to litigate sexual harassment in the workplace when she signed an arbitration agreement that later prevented her from taking her employer to court. Only because the arbitration agreement did not extend to other Fox employees was Carlson able to bring a harassment suit against the alleged perpetrator directly.

Many employers use arbitration agreements to prevent employees from reporting wrongdoing, suing for wage violations, or contesting wrongful termination—and even to block those injured on the job from seeking justice. Employment lawyers have estimated that as many as one in three nonunion employees is subject to an arbitration clause—and more workers nationwide may be subject to arbitration than belong to a union.

Meanwhile, some corporations who prey on vulnerable consumers, such as for-profit colleges and payday lenders, sneak an arbitration clause into virtually every consumer contract. And culprits are deploying these agreements in increasingly creative ways.

After Wells Fargo employees opened as many as 2 million new accounts in customers’ names without their knowledge, the bank successfully argued that these unwilling account holders were still bound by the arbitration clauses corresponding to their original accounts. In a case currently before the U.S. Supreme Court, Kindred Nursing Centers Limited Partnership v. Clark, the daughters of two nursing home residents whose deaths they blame on the facility are arguing that admission papers conferring powers of attorney could not be used to bind their parents to arbitration agreements and deny legal process.

Far from a legitimate, voluntary dispute resolution mechanism, arbitration has become a corporate “get out of jail free card” that lets companies cut corners with impunity. When an electronic device begins injuring consumers, nursing homes are caught abusing patients, and banks destroy consumers’ finances to meet a quota, forced arbitration agreements allow these bad actors to dodge legal accountability, minimize costs, and escape public scrutiny.

Efforts to curb arbitration are under attack

The Supreme Court has made a habit of deferring to arbitration agreements. In an opinion authored by Justice Scalia, the Court found that arbitrators hold exclusive authority to decide arbitrability, even when the dispute surrounds whether the agreement is unconscionable. This means that only an arbitrator can determine what goes to court, rather than a judge. The Supreme Court has also held that the FAA overrides state laws that maintain victims’ class action rights.

Meanwhile, Congress has been proactively pro-arbitration. While members of Congress have long introduced reform bills such as the recently reintroduced Arbitration Fairness Act to restore arbitration to its 1925 origins as a voluntary, business-to-business dispute mechanism, these efforts have been unsuccessful. By contrast, bills to limit the use of class actions—the most common alternative to individual arbitration—have moved rapidly.

Recognizing arbitration’s advance in the other two branches of government, Obama administration agencies issued regulations curtailing forced arbitration in 2016. These included final rules to block colleges receiving federal funding and federally funded nursing homes from mandating arbitration. Congress already eliminated a rule this month restricting the use of mandatory arbitration for defense contractors pursuing civil rights or sexual harassment claims against employers. And all that the avowedly anti-regulatory Trump administration may have to do to kill the nursing home rule, which was stayed pending the resolution of a challenge, is cease defending it in court.

An independent agency, the Consumer Financial Protection Bureau, or CFPB, proposed and is now finalizing a rule to regulate arbitration in consumer financial contracts. While the rule would not end forced arbitration, it would require financial companies to give consumers the option to participate in class action suits, and it mandates the collection of data on individual arbitration that will help policymakers going forward. But Congress could strike this rule as well.

Judge Gorsuch will tighten arbitration’s hold on Americans

The Supreme Court will next face an issue relevant to arbitration this fall, when it hears three cases surrounding class action waivers in arbitration agreements as a consolidated case. The issue at the heart of the cases is whether the National Labor Relations Act, or NLRA, bars these waivers. Judge Gorsuch’s record suggests that he is likely to tilt the Court to favor permitting waivers. Gorsuch dissented in a case in which the majority found that the National Labor Relations Board, or NLRB, had authority to issue a regulation under the NLRA, taking a stance hostile to the NLRB consistent with his general aversion to deferring to agencies.

Judge Gorsuch did state in another case that the FAA’s “heavy hand in favor of arbitration” requires a contractual agreement and urged arbitration “not … foisted on the parties at all costs.” But there and elsewhere, Gorsuch has consistently upheld arbitration even in flawed contracts. He felt so strongly about forcing arbitration in a case involving six conflicting arbitration agreements that he dissented. Although he concedes that the terms are unclear, Gorsuch’s dissent concludes, rather coldly, “I just don’t see … how we might rightly rescue [the plaintiff] from the consequences of his choice.”

Judge Gorsuch has also previously found that only signatories to arbitration agreements may be involved in arbitration, a position that would limit class actions—auguring well for corporations that wish to enforce class action waivers. Gorsuch’s prior ruling on the NLRA, his aversion to deferring to agencies, and his affirmation of the FAA and arbitration suggest his confirmation would mean that the Court will continue permitting forced arbitration to spread.

Senators must press Judge Gorsuch on arbitration during his hearing next week. If he does believe that limits on the FAA’s “heavy hand” exist, he should be willing to define and describe them. Otherwise, more and more Americans will find themselves unfairly locked out of the courthouse by companies that would rather sweep abuses under the rug than face a judge and jury.

Joe Valenti is the Director of Consumer Finance at the Center for American Progress. Rebecca Buckwalter-Poza is a Fellow at the Center.