JPMorgan Chase is notifying more than 40 million credit card holders that from now on they’ll have to arbitrate any disputes, forgoing the option of filing a lawsuit or joining class-action suits.
Although an opt-out is possible (but difficult), this places Chase alongside many other businesses insisting arbitration is a better alternative for consumers than litigation.
“Arbitration is often faster, less expensive and provides better outcomes for our customers,” said Mary Jane Rogers, a Chase spokeswoman.
Just one problem, though.
A recent academic study confirms what consumer advocates have been saying for years: Mandatory arbitration is a rigged system — rigged, that is, in favor of businesses.
“The whole game is stacked against us,” said Amit Seru, a finance professor at Stanford University’s Graduate School of Business and a coauthor of the study.
Researchers analyzed almost 9,000 arbitration cases involving financial firms.
They found that companies routinely pick arbitrators with track records of making industry-friendly decisions. They also found that arbitrators know that the more they rule in favor of businesses, the greater the likelihood they’ll be tapped for future cases (and future paychecks).
“This is not like having judges, who get paid the same no matter what happens,” Seru told me. With arbitration, “you only get paid if you’re selected as an arbitrator. They have incentives to slant toward the business side, because they know that those who don’t do so won’t get picked.”
Gregor Matvos, a finance professor at the University of Texas at Austin and another coauthor of the study, said mandatory arbitration clearly gives one side an advantage over the other.
“We would like to assume with arbitration that both parties are on an equal footing,” he said. “That is wrong.”
The study adds significant heft to long-standing criticism of forced arbitration as a sneaky tool for preventing consumers from sticking up for their rights.
Even if you don’t recall ever signing an arbitration agreement, trust me, you have.
These suckers are routinely inserted in the fine print of contracts you tacitly agree to, or click your acceptance of, when you receive service from a wide array of industries, including telecom companies, credit card issuers, health insurers and providers, electronics makers and others.
There’s a good chance your employer made you agree to an arbitration clause as a condition of your being hired.
Not only do these provisions prevent you from filing a lawsuit in the event of a grievance, they block you from joining with others in class-action suits, thus denying you access to the single most powerful recourse open to consumers and employees.
“When many individual consumers are wronged by a company, it’s often not worth the time and expense for any one consumer to hire a lawyer to help them get their money back,” said Emily Rusch, executive director of the California Public Interest Research Group.
“As a result, few consumers take action, and the company has little reason to change its behavior,” she said.
The researchers based their findings on data from the Financial Industry Regulatory Authority, a.k.a. Finra, a not-for-profit organization authorized by Congress to oversee the dealings of financial firms.
They found that professional arbitrators whose past rulings generally favored businesses are about 40% more likely to be chosen by companies than arbitrators who have shown themselves to be more sympathetic (and generous) to consumers.
They also found that if arbitrators had been chosen at random, the average monetary award to consumers would have been $50,000 higher.
A key advantage enjoyed by businesses is that they have far more experience at arbitration than consumers, the researchers found. The average financial firm involved in the study had 81 past arbitration cases under its belt. The average non-financial firm, such as a wireless-phone company, had 133 cases.
The average consumer, by contrast, had never before arbitrated a complaint.
As a result, the researchers said, businesses have a much better sense of which arbitrators will be predisposed to industry-friendly outcomes, whereas consumers have no idea what to expect.
And arbitrators aren’t dumb. They get paid about $300 for a four-hour hearing, plus expenses. Thus, the more cases they get picked for, the more money they make.
Arbitrators therefore have a strong incentive to make potential clients — that is, businesses — as happy as possible.
“The forced arbitration system is simply rigged,” said Christine Hines, legislative director for the National Assn. of Consumer Advocates.
“Corporations use their fine-print contracts to make it even harder to get justice by removing our basic right to choose to get our complaints heard before an impartial judge and jury, forcing us into a private arbitration system that they control,” she said. “Then they choose and hire the private firms that will hear their cases.”
Stanford’s Seru called this a “systemic problem.”
“If you look at the data across many, many years, you see a pattern that is biased against consumers and in favor of firms.”
The Trump administration has steadily weakened the ability of the Consumer Financial Protection Bureau to oversee financial firms, including the industry’s use of arbitration clauses on contracts.
The conservative majority of the U.S. Supreme Court has upheld forced arbitration as a perfectly kosher business practice. Republican lawmakers, at the behest of their corporate patrons, have fought to defend it.
But Democrats keep trying to overhaul the system. A package of bills was introduced in February aimed at ending mandatory arbitration in all consumer, worker, civil rights and antitrust disputes.
It would still be an option for dispute resolution, if all concerned desire it. But people would have the right to seek a court ruling.
“Forced arbitration is unfair, unjust and un-American, because one of the principles of our American democracy is everybody gets their day in court,” said Sen. Richard Blumenthal (D-Conn.), introducing the Forced Arbitration Injustice Repeal, or FAIR, Act. “This bill is about affording every individual their day in court.”
The legislation is supported by dozens of consumer, labor and civil rights groups, including the Consumer Federation of America, the National Employment Law Project and the NAACP.
If you’re a Chase cardholder, the company will allow you to opt out of forced arbitration. The catch is that you have to do so in writing, via snail mail, within 60 says of receiving the bank’s notice — conditions Chase knows will keep most people from exercising their rights.
Don’t let that deter you. Send opt-out letters to P.O. Box 15298, Wilmington, DE 19850-5298.
My sense, as ever, is that if arbitration is so great — as businesses insist — it shouldn’t be mandatory. It should sell itself.
The latest research reveals that forced arbitration is patently unfair.
And if it was businesses who were being put at a disadvantage, you can be sure they, and sympathetic lawmakers, would do everything in their power to fix things.