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Have We Lost A Constitutional Right In The Fine Print?

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Have We Lost A Constitutional Right In The Fine Print?

Business

Have We Lost A Constitutional Right In The Fine Print?

Have We Lost A Constitutional Right In The Fine Print?

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New York Times reporter Jessica Silver-Greenberg says many companies' contracts force consumers to settle complaints through arbitration instead of in court, and include bans on class action suits.

DAVE DAVIES, HOST:

This is FRESH AIR. I'm Dave Davies, in for Terry Gross, who has a couple of days off. Think for a moment, and you can probably remember a dozen times when you've signed a contract or clicked a box online, agreeing to a long list of terms you never read. Our guest, New York Times business reporter Jessica Silver-Greenberg, says embedded in many of those agreements for cell phones, rental cars, as well as employment contracts and countless other goods and services, are a few words which have dramatically altered consumers' ability to challenge deceptive business practices. Companies now require their customers to agree to pursue any complaint through a private arbitration process, rather than going to court. Also included in many of these clauses are bans on class action lawsuits where a large group of consumers could join together to pool resources and reveal a widespread pattern of illegal or deceptive practices. The right to require arbitration was ratified in a series of battles in the Supreme Court, which, Silver-Greenberg says, was engineered by a Wall Street coalition of credit card companies and retailers. Silver-Greenberg and her co-authors, reporters Michael Corkery and Robert Gebeloff reviewed thousands of court records and conducted hundreds of interviews for a three- part series which ran recently in The New York Times. I spoke to Jessica Silver-Greenberg on Tuesday.

Well, Jessica Silver-Greenberg, welcome to FRESH AIR. You write in this series that consumers of many products and services are agreeing within the text of these lengthy customer agreements to resolve any complaints through arbitration rather than lawsuits. Explain, first of all, what exactly is arbitration?

JESSICA SILVER-GREENBERG: So arbitration - I think the simplest way to think about it is it's a parallel system. So it's a parallel to court. So it's a private system where there is no judge, there is no jury, and the rules are set up slightly different - well, some would say very different - from court. Instead of a judge presiding over your case, you'll have what's called a neutral, an arbitrator - typically a retired judge or a lawyer who will decide the outcome of your case. And then there are all these kind of steps from there, but that's the basic setup. Arbitration was designed - in its ideal form, it was designed to really be a system where companies of equal bargaining power went to work out their disputes. So say they had a dispute over a widget, and they wanted - instead of a judge, they wanted the expert on widgets to preside over their case. Well, they could do that. They could avoid the sometimes costly and bureaucratic procedures in court and go to this alternative forum. But in that instance, it would be two entities that were agreeing to go. What we have in the consumer context and the employment context is far different.

DAVIES: Ideally, simpler, more straightforward - it's you, the responding party. You take it to a neutral person. They issue a decision, and it's binding, right?

SILVER-GREENBERG: It is binding. So one of the tricky things about arbitration - one of the things that came up a lot in our reporting - was that, regardless of how the process has gone, the decisions in arbitration - the decisions of the arbitrators - are virtually impossible to appeal. So judges have said when plaintiffs have gone in and asked them to overturn a decision they say is unfair by an arbitrator, they have said their hands are tied. And even in instances where an arbitrator's decision resulted in substantial injustice, they would still - a court said they would still be unable to overturn or revoke the arbitrator's decision.

DAVIES: You write in the series that many of these customer agreements include a clause that requires arbitration and specifically bans people from engaging in class action lawsuits for their grievances. Why is that so important?

SILVER-GREENBERG: Class action lawsuits, because they enable large groups of people that might be similarly affected to pool their resources, are really the only way that an individual can afford to go up against a deep-pocketed company with vast resources. It allows people to join together to prove their case. And these are cases that require often a lot of expert testimony, a lot of evidence, and so they would otherwise be prohibitively expensive to bring. The lawsuits are also really important when you were dealing with systemic issues, like wage theft, that affects many people in the same way. So we're not just talking about disputed fees or a checking account problem. We're also talking about discrimination that impacts, you know, hundreds of thousands of people and is a practice that can be changed because of a successful class action.

DAVIES: What's an example of a case like this?

SILVER-GREENBERG: So a particularly, I think, illustrative example is what were called the overdraft cases. So these were a group of class action lawsuits that were brought around 2009 against more than a dozen banks for allegations of reordering transactions. So what that looked like was - say I made two purchases. I bought a $500 stereo system and a $2 cup of coffee. The banks were accused of processing the most expensive - the largest transaction - that stereo system - first, even if I bought it after I bought the cup of coffee, and then withdrawing money to cover the cup of coffee. The idea was that the large purchase would make me overdraw my account, so then I would get an overdraft fee. So when I went to go pay for that $2 cup of coffee, it suddenly cost me $37 because I was also charged an overdraft fee of $35. And so the banks were accused of reordering all these transactions to maximize the amount of fees that they could get from overdraft. And the class actions resulted in, I think, more than a billion dollars in relief for customers. And so those are, I think, a particularly poignant example because if I have a $35 overdraft fee, I'm probably not going to take the time to file a lawsuit about it. But together with the analysis that was required to prove the case, these plaintiffs were able to prevail, and not only - it wasn't just about the money they got back. It was about changing the practices.

DAVIES: And in the - and if those disputes are instead confined to arbitration, all of the parties who might be affected by the practice, whether it's an employment practice or consumer practice - they don't even know because the arbitration is limited to a single individual.

SILVER-GREENBERG: Right. And even if that single individual were to prevail, which, frankly, a lot of times they don't, there would be no broader benefit. So individual lawsuits don't typically address systemic practices, and that's why, you know, there is a class action mechanism.

DAVIES: So you can individually go and fight for your $30 fee, and somebody in Indiana can, but the reality is they're not going to know about each other's fights. They're not going to come together on it, and it's a $30 matter.

SILVER-GREENBERG: Exactly. So you can individually fight, but you're going to have to fight in arbitration. So one of the kind of great fictions underpinning this debate for a long time was that arbitration was a substitute for class actions. So the argument was, hey, you don't need a class action. Don't worry. We're going to say you can't file a class action lawsuit because you can instead go for that $30 dispute. You can take it to arbitration, right? And here is a - you can do it on an individual basis, and you can go, and you can get it easily resolved.

What we did was we tried to see whether that was happening. You know, have class actions been replaced by an alternate system that may have been better, right? Are people happy with arbitration? Are they going, and are they getting more relief? And what we saw was - we looked at records of the largest arbitration providers in the country. And what you see is between 2014 and 2010, there was something like 500 arbitrations - individual arbitrations - for things like fees, so - for disputes that $2,500 or less. So the reality is that virtually no one is going, I mean, if you think that these clauses cover tens of millions of people.

DAVIES: Right. You gave some examples in the story of how many cases per individual companies. When you look at individual companies, like, how many arbitration cases pop up?

SILVER-GREENBERG: They're very, very small in number. So Verizon - huge company which has more than 125 million subscribers - faced 65 consumer arbitrations in the five-year period we analyzed. Time-Warner, which has 15 million customers, faced seven consumer arbitrations. So the numbers suggest that people just are not going to arbitration on an individual basis.

DAVIES: How far-reaching is this phenomenon? I mean, how - what kinds of providers of products and services are requiring arbitration rather than lawsuits in their customer agreements?

SILVER-GREENBERG: It's very wide reaching. So lawyers that we spoke to that provide advice and consulting services to huge companies - they say that it is malpractice to not include an arbitration clause in their clients' contracts with consumers. So that means that these clauses are - they're vast. So they can appear in anything from a cell phone contract, a cable contract, credit cards, checking accounts, rental cars, doctors forms, nursing homes, student loans. They're creeping into a variety of contracts, and it's because they're so effective for companies to insulate themselves from class actions and other legal threats.

DAVIES: And employment applications and contracts, also.

SILVER-GREENBERG: Oh, I - absolutely. Yes. That's a huge area where they show up, and one where millions of people are affected. So in retail service contracts - so retail workers, people who work in fast food, people who work in the banking industry and both kind of high-level positions and lower-level positions can be covered by these lcauses. So in the employment context, it's vast.

DAVIES: We're speaking with Jessica Silver-Greenberg. She's a reporter for The New York Times. We'll continue our conversation in just a moment. This is FRESH AIR.

(SOUNDBITE OF MUSIC)

DAVIES: This is FRESH AIR, and if you're just joining us, our guest is Jessica Silver-Greenberg. She's a business reporter for The New York Times who has completed a series along with two other reporters, Michael Corkery and Robert Gebeloff. It's about how arbitration clauses have proliferated in customer agreements for a lot of products, as well as employment contracts. Essentially, many, many consumers are being required to submit disputes to binding arbitration rather than seek relief in the courts. So for a lot of years - in fact, until pretty recently, you write - courts did not permit companies to deny access to the courts to their customers. These agreements which said, if you want our service, you have to agree to binding arbitration - this is a relatively recent phenomena, right?

SILVER-GREENBERG: Yes. So for years, what would happen was companies that tried to put arbitration clauses with class-action bans in them - in the fine print of their contracts - were told by judges that that just was not going to fly. So judges refused to routinely uphold these clauses because they said that they amounted to - one judge in California put it very starkly - a get out of jail free card. And the reason they said that was because...

DAVIES: For the companies, not the customers, right? (Laughter).

SILVER-GREENBERG: Yes, for the companies. And the reason they said that is because realistically, you need a class action in order to mount a legal challenge as an individual against a deep-pocketed company. So when these companies were putting in their arbitration clauses, hey, you guys can't file a class, you know, you can't join together as a group, judges said that that was the equivalent of saying, you can't bring a lawsuit at all.

DAVIES: Now, you write that the move to permit companies to block class-action lawsuits and require arbitration that that was engineered by a Wall Street-led coalition of credit card companies and retailers. Let's walk through this. How did this coalition come together?

SILVER-GREENBERG: So go back in time to the late '90s. And you have a lot of companies that are getting - that say they are just getting pummeled by class action after class action after class action. And these lawsuits, they say, are incredibly expensive for them because if they try to take them to - in front of a jury, they get killed, and if they sell them, that's also expensive. And so they said that they were paying out billions of dollars just to settle these lawsuits, some of which, they said, were just totally frivolous, meritless cases. And so lawyers working for these companies were scrambling to figure out a solution. How do you prevent these class-action lawsuits? And one lawyer, a man in Philadelphia, said he had an idea. He remembered back when he was a younger lawyer using an arbitration clause when he was helping a thrift, a savings and loan company. And so he wondered if his credit card company clients started taking those arbitration clauses and putting in a class-action waiver into those clauses, whether they could insulate themselves, protect themselves from those class actions. And so he started advising clients to do that. And then, around 1999, he starts meeting with lawyers and representatives of other companies. And they have a series of meetings that begin in July of 1999 and span for many years. And during those meetings, they talk about - they strategize about the ways that they can make sure that arbitration clauses are upheld by state court judges - that they're impervious to legal challenges. And they talk about the benefits of arbitration. And for that group, their victory, their real kind of coup, came in 2010 because you asked, you know, how did we end up from state court judges and lower court judges that said, hey, these class-action bans are unfair, to suddenly a world in which the judges are really powerless to overturn these clauses? And what happened was the Supreme Court.

DAVIES: One of the lawyers apparently involved in this was John Roberts, the current Chief Justice of the Court. But he was involved in this effort, you say, as an attorney. What was his role?

SILVER-GREENBERG: Yes, so he was working for Discover Bank in a case that Discover was trying to get the Supreme Court involved in. So what the cases was is Discover Bank was accused of charging unfair fees. And in this lawsuit, Discover tried to use an arbitration clause that banned class actions to derail the lawsuit. And a lower court had upheld the bank's class-action ban, but the state court of appeals, they negated it. They said that Discover was trying to grant itself - and the quote is - "a license to push the boundaries of good business practices to their furthest limits," again, by banning class actions. So Discover then petitioned the Supreme Court to intervene in this case, and representing them in that matter was John Roberts, Jr. You know, at the time he was a prominent corporate defense attorney, a very skilled appellate lawyer. And he drafts a brief to the Supreme Court. And he says that the California appeals court had overstepped its bounds - that they had fundamentally erred in violation of this Federal Arbitration Act, which is the kind of mother, father of all arbitration clauses. This is kind of where it all stems from. And he said that allowing consumers to bring a case as a class would violate the core purpose of this Federal Arbitration Act. Now, the Supreme Court declined to take the case. That was in 2002.

DAVIES: So in other words, Roberts and the companies failed to get what they wanted then.

SILVER-GREENBERG: Right. They wanted the Supreme Court to intervene. The Supreme Court did not intervene.

DAVIES: So - and the legal battles you describe at some length here, they're a little complicated. They involve this 1925 law, the Federal Arbitration Act.

SILVER-GREENBERG: Yes.

DAVIES: But the companies had been trying for a while to get the courts to approve of customer agreements and contracts which require arbitration and exclude class-action lawsuits. What made the difference? Why did they finally win?

SILVER-GREENBERG: They win because the Supreme Court in 2010 - so now, you know, John Roberts is now Chief Justice - and they take up this case that involves AT&T. And it's pretty much the same idea. You have state courts saying class-action bans are unfair. It again involves California and the California courts. And the California courts in this case involving AT&T that the Supreme Court is hearing had said class-action bans are unfair. They're unconscionable. And the Supreme Court in their decision basically said the Federal Arbitration Act, it beats out state law. So all the state court judges that were using state contract law to invalidate these arbitration clauses with class-action waivers, they suddenly lost that power. They lost the ability to use state law to do that because the Supreme Court said, no, the federal law wins out.

DAVIES: And a big difference was the Supreme Court had changed by then, right?

SILVER-GREENBERG: Yes. Yes, I mean, that's a huge difference in that John Roberts, when he was petitioning the court as a private lawyer in 2002, he was not there yet, right? He was not the Chief Justice. Then fast-forward to 2010 when they take on this AT&T case and he is. So that did change things.

DAVIES: Jessica Silver-Greenberg is a business reporter for The New York Times. Her three-part series on arbitration clauses and class-action lawsuits appeared recently in the paper. After a break, she'll take us inside the arbitration process and tell us how arbitrators are chosen and about the incentives that can affect their rulings on consumer disputes. I'm Dave Davies, and this is FRESH AIR.

(SOUNDBITE OF MUSIC)

DAVIES: This is FRESH AIR. I'm Dave Davies in for Terry Gross. We're speaking with New York Times reporter Jessica Silver-Greenberg about clauses in customer service agreements and employment contracts that limit consumer's options if they have a complaint. Thanks to recent court rulings companies can now require customers and employees to take disputes to a private arbitration process preventing them from pursuing class-action lawsuits. Silver-Greenberg and reporters Michael Corkery and Robert Gebeloff's three-part series on the issue appeared recently in The New York Times.

So once you're in arbitration, in theory, you have a wise person rendering a fair decision. Tell us how the arbitrators themselves are chosen, and are they genuinely impartial?

SILVER-GREENBERG: So when I began an arbitration there's a firm, an arbitration firm, that kind of oversees the whole thing. And they provide to both sides a list of potential arbitrators. And they are made up of retired judges and many, many, many, many, many corporate lawyers. And so each side gets a list of say five people and they can go through and cross out the people that they would object to hearing their cases. So that creates an incentive, a kind of skewed incentive as described by the arbitrators, where if they want to be picked to hear future cases, if they want to continue having business they say and said in interviews that they feel they need to be friendlier towards the companies because the companies are the ones that can offer them future cases, whereas the plaintiffs can't. The plaintiffs are going to be there probably once in their lives. Whereas the companies offer a repeat stream of cases. And they talk about arbitrators who had very plaintiff-friendly rulings. And the nightmare scenario, in one they said, was an arbitrator who ruled in favor of an employee and forced the employer to pay more than a million dollars in damages. And that arbitrator, the story goes, was never given another case again. So it's that kind of, you know, fear-based decision-making that comes into play.

DAVIES: I'd like you to take us through one case. And this - I think the complainant here was a woman named Debbie Brenner. And she had enrolled in a for-profit school near Phoenix that would train her to be a surgical assistant in operating rooms where she would learn the instruments. It's kind of a remarkable case. You want to just tell us what happened there?

SILVER-GREENBERG: Sure, so Deborah Brenner and a bunch of other students had gone to a school in Ariz. And it was a for-profit school that they had enrolled in. Tuition was about $24,000 a year. And they said, that when they enrolled, they were promised that their education would result in jobs at the end of - when they graduated. But when they actually enrolled in the school after taking out these loans, which were a big burden for them, they first of all, were alarmed at the quality of the education. So they said the classrooms despite, you know, having paid that $24,000 a year, they said they often arrived in classrooms to find that the mannequins - so the anatomical mannequins that they used to practice the surgical procedures. The mannequins would often be missing crucial organs. So in place of where a kidney should be, or a liver, they found an empty hole. And some of the more enterprising instructors tried to improvise. And one of them knitted, at home out of felt, organs to put in place of those. And sometimes they had to use photocopied pieces of paper that had the tools on them instead of the actual instruments. So they, you know, they didn't have that tactile ability.

DAVIES: So they were picking up a picture of a scalpel rather than a scalpel?

SILVER-GREENBERG: Yes, a picture of a scalpel rather than a scalpel. And then they went to graduate. So Debbie Brenner hoped that, you know, despite what seemed like the paltry surgical supplies, and the kind of sketchy education, that she would be able to get a job because she trained really hard and she thought that she'd be able to get an internship. But she finishes her coursework and she can't get an internship at all. And she ends up volunteering at a local hospital and someone takes her aside one day, she says, and kind of breaks the news. Which is they say look, Debbie, you know, we get that you're a hard worker, but you're never going to get a job because our hospital is very skeptical of all graduates of this program. And the reputation of the program is so bad that you're never going to get a job. And she becomes deeply depressed, and she spent all this money and she has an education she believes is worthless. So she sues - she ends up finding out that there are a bunch of other students just like her, and she and these other students form together and they bring a lawsuit against this school - which they say has defrauded them. And they try to go to court, but kind of predictably at this point they have an arbitration clause in their enrollment agreements and they have to go to arbitration. And they decide that they have such a strong case that they're going to go to arbitration. But things just get really bad once they go, really, really bad.

DAVIES: You write that she actually borrowed $12,000 to get the help she needed to pursue the arbitration, and they had some very powerful testimonies in the case from actually people who had worked at the company and others. What happened?

SILVER-GREENBERG: They did. They even had testimony that was helpful from people who had been brought in to support the school's case. So even this one administrator who said - she defended the quality of the education but she said - she talked about how she believed the students - she later said, you know, we're just being treated as dollar signs. There was just this machine, an enrollment machine which would take the student's tuitions and then kind of push them out with no real education. And what happened is that that they lost their case and the arbitrator in their case, which by the way is worth noting was held at the offices of the lawyers for the school, which, you know, I think felt to the students like that was not a fair - a kind of fair playing field. But they end up losing their case. And the arbitrator said to Debbie and the other students he said - he chastised them for not being savvier shoppers. He basically said you exercised about as much discretion as if - I think his quote was buying a Snickers bar at the local market. And he ruled against them, and because of the hardship that he said they inflicted on the school he forced them - he ruled that they would have to pay the school's attorney's fees. So that was the, you know, $300,000 - a little over that, that they had to pay - that they were ordered to pay to cover the school's attorneys.

DAVIES: We're speaking with Jessica Silver-Greenberg. She is a business writer for The New York Times. She's just finished a series with co-writers Michael Corkery and Robert Gebeloff. It deals with companies' use of arbitration clauses in customer agreements, which requires those with complaints to submit to binding arbitration rather than access the courts for those disputes.

Let's consider the other side of this argument. Those who think - who defend arbitration. One of the arguments on those - of those who oppose class-action lawsuits is that they are driven not really by consumers who are - who think they've been abused, but by lawyers who want to assemble a class and make a fortune. I mean, they cite - well, one case in your story where customers with televisions that had fuzzy pictures were part of a class-action lawsuit. They ended up getting coupons for $25 or $50 apiece for the merchant and the lawyers in the question got $22 million for the effort. Do these folks have a point?

SILVER-GREENBERG: Yeah, I mean, I think that - I think they do if you're just looking at class actions in terms of the amount of money that's involved. So two things - one, on the plaintiff's lawyer's fees. So any plaintiffs lawyers fees have to be - they don't happen in a vacuum. They have to be approved by a judge. So there is a level of review - independent review that's happening. And the other thing about class actions - and this was echoed by conservative legal scholars, including one who clerked for Justice Scalia, and what he said, this one professor, he said that attacking class actions for yielding small individual amounts is beside the point because class actions help lots of people get back a little bit of money. But they serve another function as well, which is they help address practices. So they help get rid of and change business practices that would otherwise go unchecked. So I think when we - the criticisms of class actions for just being, you know, a boon for plaintiffs lawyers again are a little - they're a little bit off point.

DAVIES: The Consumer Financial Protection Bureau that was created, you know, in the wake of the Wall Street collapse is now considering some type of action on these arbitration clauses, and they actually have proposed a rule, right?

SILVER-GREENBERG: Yes, it could be sweeping. So they outlined a proposed rule - so it's really wonky, but it's, like, the draft of an outline of a rule. I mean, I always get a little tongue-tied when I have to describe it. But what it - at its heart what it does is it would, if enacted, prevent the companies that the CFPB overseas from including class waivers in their arbitration clauses. So again, it would not get rid of arbitration. That's not the focus of the rule. It would simply get rid of the ability of companies to ban people from forming together as a class.

DAVIES: I wonder, since you published the series, what kind of reaction you've gotten and if you've, I don't know, learned things you didn't know.

SILVER-GREENBERG: We've gotten a lot of reaction. I'm not sure I really realized quite how - I mean, I knew these were extensive, but I started getting more examples from readers who found them in doctors' - doctors' contracts - all different kinds of doctors' contracts. One reader wrote in that there had been an arbitration clause just affixed to a product, so there was no contract. It had just been included in the bubble wrap of this product. So we've heard all different kinds of examples, which I find fascinating. But it's been a - I think people are surprised. I mean, I think there's been a lot of surprise that they signed away this right and people are signing away a constitutional right when they sign these clauses.

DAVIES: Jessica Silver-Greenberg, thanks so much for speaking with us.

SILVER-GREENBERG: Thank you.

DAVIES: Jessica Silver-Greenberg is a business reporter for The New York Times. Her three-part series on arbitration clauses in class-action lawsuits appeared recently in the paper. Coming up, jazz critic Kevin Whitehead reviews a posthumous release by trumpeter Kenny Wheeler and pianist John Taylor. This is FRESH AIR.

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