The Judicial System May Be Bad, But The Privatized Judicial System Of Arbitration Is Worse

from the bad-news-all-around dept

Back in 2011, we wrote about a troubling ruling in the Supreme Court in AT&T Mobility v. Concepcion, the case which basically said that it’s perfectly fine for businesses to put in place “binding arbitration” clauses, that take away people’s rights to take a company to court over some sort of wrongdoing. As I noted at the time, ever since taking a series of classes on arbitration in college, I’ve been fascinated with the process, which sounds like a good idea. But it’s yet another case where theory and reality don’t necessarily match up.

The theory is that arbitration is a cheaper and more efficient way to deal with disputes between two private parties. Rather than submitting yourself to an overburdened, slow court system, with tons of rules and limtiations, you bring in a “neutral” arbitrator who can help go through both sides of the story and decide who is right. The problem is in the reality. In cases between businesses and individuals, businesses win nearly 97% of the time. Think about that for a second. It’s not hard to see why: arbitrators are usually chosen jointly by both parties, but the companies are the ones who are going to be going back for more arbitration over and over again, and if an arbitrator rules against them, they won’t even be on future lists at all. It doesn’t take a genius in game theory to recognize that the arbitrator will be under tremendous pressure to side with the company, and the stats support that.

This weekend, the NY Times took a deep dive into the mess that has become this private judicial system known as binding arbitration, demonstrating horror story after horror story of how the system has failed ordinary people to the benefit of large corporations. Basically, the fears I wrote about four and a half years ago have become true. As we noted at the time, we agree that the class action judicial system in the US is broken, but replacing it with private arbitration is quite clearly a much worse solution that would certainly lead to companies regularly being able to get away with horrific behavior, leaving individuals with basically no recourse.

The Times story further supports the idea that arbitrators are under pressure to side with companies, even getting a few to admit that:

But in interviews with The Times, more than three dozen arbitrators described how they felt beholden to companies. Beneath every decision, the arbitrators said, was the threat of losing business.

Victoria Pynchon, an arbitrator in Los Angeles, said plaintiffs had an inherent disadvantage. ?Why would an arbitrator cater to a person they will never see again?? she said.

The article is full of story after story after story of crazy things happening in arbitration situations that would never be allowed in real courts.

Behind closed doors, proceedings can devolve into legal free-for-alls. Companies have paid employees to testify in their favor. A hearing that lasted six hours cost the plaintiff $150,000. Arbitrations have been conducted in the conference rooms of lawyers representing the companies accused of wrongdoing.

Winners and losers are decided by a single arbitrator who is largely at liberty to determine how much evidence a plaintiff can present and how much the defense can withhold. To deliver favorable outcomes to companies, some arbitrators have twisted or outright disregarded the law, interviews and records show.

In one of the key examples (though there are many) in the article, this story is revealed:

For Ms. Pierce, the most astounding moment came when her lawyers asked Mr. Kalogredis to impose sanctions on the defense for breaking the rules of discovery and destroying evidence. He fined the defense $1,000 after investigating the matter, then billed Ms. Pierce $2,000 for the time it took him to look into it.

There’s a lot more craziness as you read through the article. Again, I’m no fan of class action lawsuits, generally speaking. The vast majority of them tend to be boondoggles to help lawyers cash out, rather than actually help the members of the class. But that problem can be dealt with in other ways rather than forcing people to give up their right to petition a court in a dispute through a “binding arbitration agreement” in a clickthrough terms of service no one actually reads.

As one lawyer in the article notes, the whole arbitration process is corrupt because it’s forced on people. If two parties willingly agree to go to arbitration, that’s one thing. But that’s not what’s happening.

And this is a problem that isn’t just about companies and individuals. As we’ve been discussing, trade agreements like the TPP and TTIP have a thing we’ve been calling corporate sovereignty, and which is officially called “Investor State Dispute Settlement” (ISDS). In reality, it’s just an “arbitration” system for disputes between companies and countries — where the arbitrators will often face the same pressures to side with the companies over the countries (at least one hopes that countries will have slightly more bargaining power). As the NY Times article details, companies have learned to play this game pretty well over the last few years, and they must be excited about the possibilities to do it on a wider scale:

Unfettered by strict judicial rules against conflicts of interest, companies can steer cases to friendly arbitrators. In turn, interviews and records show, some arbitrators cultivate close ties with companies to get business.

Some of the chumminess is subtler, as in the case of the arbitrator who went to a basketball game with the company?s lawyers the night before the proceedings began. (The company won.) Or that of the man overseeing an insurance case brought by Stephen R. Syson in Santa Barbara, Calif. During a break in proceedings, a dismayed Mr. Syson said he watched the arbitrator and defense lawyer return in matching silver sports cars after going to lunch together. (He lost.)

Other potential conflicts are more explicit. Arbitration records obtained by The Times showed that 41 arbitrators each handled 10 or more cases for one company between 2010 and 2014.

The court system is far, far, far from perfect. But a secretive, private judicial system that is rigged to companies? That’s much, much worse.

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Comments on “The Judicial System May Be Bad, But The Privatized Judicial System Of Arbitration Is Worse”

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TKnarr (profile) says:

Re: Re:

Random selection. You have a list of arbitrators, each party chooses 5 from the list (presumably based on their decision record and reputation). Then one is chosen at random to handle the case. Arbitrators have as much incentive to favor the individual as the company, and neither side can stack the deck in their favor. Neither side is allowed to reject the arbitrator after they’ve been chosen. I’d bet that arbitration suddenly becomes a lot less popular with companies.

andrew_duane (profile) says:

Re: What's the answer?

Maybe something akin to Jury Duty. Have a pool of arbitrators (possibly filled by the courts), and assign one randomly to each case as it is brought.
That removes the direct financial incentive of the company being the one “hiring” the arbitrator, and the arbitrator needing to encourage future business.

JoeCool (profile) says:

Re: Re: What's the answer?

Randomly drawn from a pool, but you NEED at least THREE arbitrators. If you have only one, they can make crazy decisions. With three, you have a chance the one crazy (bought) arbitrator doesn’t screw you over. That’s half the problem right now – you have a SINGLE PERSON deciding the fate of these poor folk. At the very least, it will cost the company twice as much to buy the arbitrators.

Anonymous Anonymous Coward says:

Re: Re: What's the answer?

Somehow direct payments from companies to arbiters needs to go away. Maybe the companies pay an arbitration tax and the arbiters get paid from the fund, and direct contact between arbiters and companies is prohibited, but better enforced than the oaths taken by public servants to uphold the constitution while they actually go about destroying it. Money, it really is the root of a whole lot of evil.

Uriel-238 (profile) says:

Re: Hail them as kings.

If we admitted that corporations ruled, then we could also admit that we were at their mercy.

Then we could admit that only they are in a position to respond to poverty, social injustice, decaying infrastructure, systemic injustice and so on.

An it would be their responsibility to do something about it, or know that the rest of us languish in misery while they live in luxury.

And it would mean that they would have no cause to cry foul when we knife them at night because they failed to act to better the common state.

Josh King (profile) says:

97% Win Rate?

Mike, the “97% win rate” for businesses in arbitration is a red herring. That statistic applies to suits brought by businesses – usually for collections (which is why businesses love arbitration; it makes collections actions much easier).

It’s not like consumers are suing to vindicate their rights and only succeeding 3% of the time; as the Public Citizen report indicates, consumers win those cases somewhere between one-third and two-thirds of the time.

Anonymous Coward says:

It’s almost as if corporations like to tilt the scale of justice so it always leans toward them. I was sold a broken laptop for about $1000. Without a class action lawsuit I would have had zero recourse in getting any semblance of justice. At the end of the lawsuit, several years later I got an out of date laptop and I had already long replaced the broken one. But the point is without class action the company gets away with zero punishment while me and thousands of other consumers like me who were ripped off get nothing. The biggest winners in my class action were probably the lawyers but at least there was some measure of justice meted out. Justice and fairness matter even if it doesn’t look as perfect as we would like to be.

Anonymous Coward says:

…forcing people to give up their right to petition a court in a dispute through a “binding arbitration agreement” in a clickthrough terms of service no one actually reads…

It’s not just internet terms of service that includes this. Check damn near every paper contract and damn near every insurance policy and you’ll likely find an arbitration clause.

Uriel-238 (profile) says:

A picture of a clock is right twice a day.

You can resolve any conflict of interest buy assuring both parties are dead.

You can also just have them each pay $1000 a ball and run it through a lottery ball machine.

There are many ways to make a legal system cheaper. But that doesn’t mean it’s more just.

Maybe rather than trying to circumvent our slow cumbersome justice system, we should fix our justice system to be less slow and cumbersome?

Whatever (profile) says:

” The problem is in the reality. In cases between businesses and individuals, businesses win nearly 97% of the time. “

Great story. The 97% number is quite misleading however, because it doesn’t reflect the question of merit. It would be more informative to see how many of the cases actually involved an actual problem that did not have a clear resolution within the contract, and how much was just someone pushing to get something the contract did now allow.

It would also be interesting to see what percentage of the disputes were resolved because the complainant didn’t actually show up or actively follow through on the cases.

I think that one of the big reasons why the arbitration system has such a high win for the companies is that it quickly and efficiently weeds out the stupidity, which might otherwise end up in a protracted legal action and finally an out of court settlement otherwise. Shortening the cycle generally means you get actual resolution and not a private deal.

Is it any surprise that the results are heavily tilted towards the party that wrote the contact terms to start with?

Uriel-238 (profile) says:

Re: I think the question of merit is one that would wreck any courtroom

Exactly how would you challenge the merit of a ruling?

In the US justice system we see a cornucopia of police perjury that isn’t prosecuted, we see a system ground down to plea-bargaining, posthumous reviews and acquittals of capital crime and a penal system refusing to review cases when new vindicating evidence is uncovered.

The US justice system is lousy with corruption and misconduct and yet it cannot be challenged except by the grace of those within it.

And by challenging the merits of a case by an external service, you’ll be raising the question as to its validity. Of course it is going to conclude that all its rulings are perfect, even though we have arbitrators who have essentially confessed to favoring returning clients in their adjudications.

Whatever (profile) says:

Re: Re: I think the question of merit is one that would wreck any courtroom

I think you are getting a wee bit confused here.

This isn’t a system to deal with police corruption, hard criminal acts, or anything like that. It’s a contract resolution system, one set up to bypass the insanely slow legal system and cut to the chase of getting resolution.

The biggest problem (I think) with the US legal system (and many others) is that there is a near endless number of ways to drag your feet, to appeal, to seek rulings for or against everything in the case, and so on. Yes, it’s good to have these options, but the system itself is slowed so badly by them that a good many cases either never make it in front of a judge, or one or the other party gives up and walks away licking their wounds and settling out of court. That isn’t a good system either, it’s based on who spends the most money and is most willing to wait out the insanely long, drawn out process, followed by an insane, long, and drawn appeals process.

it’s pretty reasonable to have a system that can handle, in a relatively short amount of time, disputes based on a signed contact.

Anonymous Coward says:

Re: Re: Re: I think the question of merit is one that would wreck any courtroom

Contract? … What contract?

All I did was purchase a music CD or a PC game or anything else that comes with clickwrap EULA bullshit claiming all sorts of things after the transaction takes place.

I thought a contract had to be agreed to by both parties prior to becoming enforceable.

Is this not correct?

Rekrul says:

This is just another step toward corporate ownership of the world. It shows how corrupt the SCOTUS is that they would hand this power to the corporations.

The only way to stop this is for people to be educated and to reject contracts containing arbitration clauses because the corporate-owned politicians sure as hell aren’t going to fix it.

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