Executive Summary

Executive Summary

According to United States law, the Federal Arbitration Act (FAA) is a statute, or written law, that applies to the transaction of conflicting parties in matters of interstate commerce. This act was first enacted in 1925 to ensure the validity and enforcement of arbitration arguments. Unfortunately, the application of the FAA to various arbitration agreements has been the subject of numerous lawsuits. Employers and businesses were initially using this method to avoid the judicial system, but instead are using it as a way to cheat their consumers.

Many consumers agree to binding mandatory arbitration clauses unaware of the repercussions that exist. Consumers are given an ultimatum in which their basic rights are absent throughout the argument mainly because of the mandatory arbitrations "take it or leave it" approach. As a result, consumers are faced to lower profit gain than expected.

This problem can easily be alleviated on the state and federal level through the implementations of the National Consumer Law Center's (NCLC) policy. This policy contains five separate laws in which problems of transparency with corporations may be solved. In addition, with the help of the Revised Uniform Arbitration Act (RUAA), corporations may be subject to intensified scrutiny by the judicial system.

There are many issues and practices in the business world today that undermine consumer rights and take advantage of consumers. Recently, there has been a new wave of unethical business practices that have emerged to the forefront of consumer issues. This new wave comes in the form of the mandatory binding arbitration clause. Arbitration is the method of resolving a dispute where two parties present their individual sides of a complaint to a neutral arbitrator, who then weighs the facts and decides the dispute. Mandatory binding arbitration is when a company requires a consumer to agree to submit any dispute that may arise to binding arbitration prior to completing a transaction with the company (Scarpino, 2002). This is a problem for consumers because consumers are required to give up their rights to sue and to participate in a class action lawsuit or to appeal.

Background

Today's emerging problem with mandatory binding arbitration has a long history. By the way that laws were written years ago, the problem of mandatory arbitration had began to effect consumers. In 1925, Congress enacted the Federal Arbitration Act in response to the reluctance of American courts to enforce commercial arbitration agreements (Scarpino, 2002). The Federal Arbitration Act provided that a written agreement to arbitrate, in any contract involving commerce, shall be "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract" (Scarpino, 2002). During the time period after the creation of the Federal Arbitration Act, the Supreme Court interpreted the Federal Arbitration Act to require that a challenge to the entire contract to be made in arbitration.

Because of the way the Federal Arbitration Act is written, the courts have interpreted the Federal Arbitration Act to cover almost all consumer contracts. Over the next couple of decades, the Supreme Court revised its interpretation of the Federal Arbitration Act, adopting a stance that was more in favor of arbitration. The Supreme Courts interpretation of the Federal Arbitration Act has been criticized by many people. Critics of mandatory binding arbitration feel that the Federal Arbitration Act was meant only to be applicable to contracts between businesses and not be extended to use in consumer contracts. Also, critics have stated that the Supreme Court's support of arbitration has created inequities between arbitral and judicial processes, and these inequities have limited the rights of consumers as well as contradicted the notion of freedom of contract (Scarpino, 2002).

Problem

The issue of mandatory binding arbitration affects all consumers, who are involved with a contract in the purchase of some good or service. On the service, arbitration clauses look rather harmless. Most of the time, are not even recognized by consumers and consumers are often unaware they have agreed to a mandatory binding arbitration clause. Many mandatory binding arbitration clauses are hidden in the fine print of contracts. Binding mandatory arbitration clauses have become a serious problem because they are unethical and are achieving their intended purpose of undermining consumer protection, civil rights and other laws that level the playing field between big businesses and consumers. The consumer is left with no choice but to waive off their rights because these clauses are presented in a take it or leave it fashion.

Concerning consumers and arbitration clauses, there are several unique characteristics that make it hard for consumers to prevail in a mandatory arbitration hearing with a big business. Here is a list of these characteristics:

* High Costs: A claimant must pay filing fees to initiate a case. These fees often do not cover the arbitrator's hourly fee. These fees must be deposited in advance, and always amount to thousands of dollars. Because the claimant has usually sustained a serious loss in the dispute with the business, most consumers cannot afford the cost and drop their case (Public Citizen, 2005).

* Bias: Arbitration providers are organized to serve businesses. Their marketing is targeted entirely at businesses and their panel of arbitrators is primarily businesses executives and their lawyers. Since only businesses are repeat users of an arbitrator, there is a disincentive for arbitrators to rule in favor for consumers if he expects further retentions (Public Citizen, 2005).

* Limited Discovery: In arbitration, discovery is a privilege, not a right, and many businesses draft arbitration clauses that restrict the amount of evidence a claimant can obtain (Public Citizen, 2005).

* Prohibition of Class Actions: Nearly every arbitration clause prohibits participation in class action lawsuits. Class actions are the only effective remedy for wide-scale scams that rip-off consumers in small amounts (Public Citizen, 2005).

* Inconvenient Venues: Arbitration clauses often require that hearings be held in a location inconvenient to the claimant. Individuals may have to bear the cost of long distance travel to have their case heard (Public Citizen, 2005).

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