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Beware of Mandatory Arbitration Agreements


Terms and Conditions Contracts. You know, the kind that we all "sign" almost daily by clicking "yes" when we shop online, sign up for a new credit card, download software, or enter into a cell phone service agreement. These contracts are usually thousands of words long and full of legal jargon that no one in his or her right mind would spend the time to read. These contracts usually always contain a mandatory arbitration agreement, meaning that you are waiving significant legal rights by clicking "yes" or signing your name to these agreements.

Mandatory arbitration agreements are clauses in contracts that require individuals settle disputes in privatized arbitration hearings instead of an impartial courtroom. As you can imagine, the arbitration process is slanted to favor the company in every possible way, including allowing the company to pick the person deciding the matter, dictate the rules of discovery, limit the amount of damages available regardless of the harm caused, and prohibit the right of appeal. According to the Federal Consumer Financial Protection Bureau (CFPB), tens of millions of consumers are subject to these “take it or leave it” agreements. More often than not, the consumer can’t negotiate or opt out of the agreement.

How do mandatory arbitration agreements hurt consumers?

The CFPB reported to Congress that mandatory arbitration agreements harm consumers. The comprehensive 728-page study (released March 10, 2015) revealed troubling findings. First, consumers are not always aware these agreements exist: “Over 75 percent – 3 out of 4 - of surveyed consumers did not know they were subject to an arbitration clause in their agreements with their financial service providers, and fewer than 7 percent of those covered by arbitration clauses realized that the clauses restricted their ability to sue in court.” ( CFPB). The agreements also prohibit class actions, which prevents combining consumer-rights claims to combat unlawful company-wide or industry-wide practices. (Go here to read the study’s other findings.)

Example: You sign up with a phone service provider, who charges you – and everyone else with this same plan - an unlawful $50 fee for some arbitrary reason. You want to dispute your respective charges, but the costs of doing so is much more than $50. This is a good opportunity for a class action. But you later find your contract and discover, buried on page 21 in 8-pt font, a clause prohibiting you and everyone else from filing a lawsuit. It is obviously hard to go without a phone so your only real option is to take your chances with the company’s appointed arbitrator, who is often handpicked by the company, the discovery is almost non-existent, and the damages are limited to the company's liking. Would you like your odds in that venue?

The CFPB will determine whether we need new rules to rein in mandatory arbitration agreements, according to The New York Times. Meanwhile, we can carefully read any paperwork – including the fine print - and make sure you agree before signing it, even though it may be tedious/ time-consuming. Look for a mandatory arbitration agreement and understand its consequences. Even as informed consumers, we can’t always predict future disputes before we obtain a product/service, so we sign the agreement because we have no choice given the need for these products and services. According to Forbes, “it’s amazing how many thousands of times we’ve signed away our rights as financial consumers and didn’t even know it.”

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