Provisions requiring that the parties to an agreement must arbitrate all disputes rather than go before the court system are favored by employers and large companies, because arbitration proceedings generally protect such businesses from being subject to meaningful discovery of information and documents that may help to prove improper conduct. Arbitration proceedings also are not generally a matter of public record and not searchable in online databases.
In the 2011 case of AT&T Mobility v. Concepcion, the United States Supreme Court ruled that states may not ban arbitration agreements in consumer contracts. The case resulted from a class action filed on behalf of AT&T cell phone users whose accounts were charged sales tax on phones that they were supposed to receive for “free.” This type of conduct is a prime example of why class actions are necessary — to allow for the redress of multiple occasions of improper conduct in a context where no one person would find it worthwhile to hire an attorney. (What economically rational person would pay hourly attorney fees to recover a two-figure amount, no matter how unfair it was for the amount to have been charged in the first place? But put ten thousand such people together, and it becomes economically rational for an attorney to represent them as a class, in return for what is known as a contingent fee — a percentage of the amount recovered.) Despite the inherent and obvious unfairness of the situation, the Supreme Court held that a federal law known as the Federal Arbitration Act prohibits individual states from banning the type of arbitration provisions that AT&T compels its customers to agree to if they want to use its services.
Another area where arbitration agreements are frequently imposed by the party with the strongest bargaining power is that involving employment relationships. Employers are very concerned about being subject to review by a jury, and they often go to great lengths to avoid that by requiring new, and sometimes even existing, employees to sign agreements to arbitrate any disputes that may arise out of their employment. As with consumer relationships involving arbitration agreements, this prevents individuals from joining together if they have common complaints, and it takes away all right to a trial before a judge or jury. The Concepcion case means that states are not able to enact legislation prohibiting such arbitration agreements.
Employees should proceed with caution if any prospective (or existing) employer presents you with any agreement that includes a provision requiring arbitration of any disputes. Similarly, if you have a question about a consumer product or service, you should check your documentation to see if the vendor of the product or service has required you to agree to an arbitration provision when you first signed up for it. If you are an employer, you may want to consider including arbitration provisions in your offer letters or employment agreements to be able to control the forum and latitude for discovery of any claims an employee may try to assert against you. Steve Kunkle is happy to any questions that you may have about such matters.