Arbitrating Against Corporate Power Just Got More Expensive
In contracts ranging from credit cards to employment terms, arbitration agreements force consumers and workers to pursue corporate accountability via private arbitration rather than the court system. That arbitration process just got way more expensive.
This month, the American Arbitration Association, the largest private provider of arbitration services in the world, raised its fees for individuals filing a mass arbitration case seeking monetary damages or contract relief from a company. (SimpleImages / Getty Images)
From credit card terms of service to employment contracts, millions of people are trapped in agreements that only allow them to challenge corporate abuse through a private system of arbitration rather than in a court of law. Now, the biggest player in that private system has posted a twenty-five-fold increase in its filing fee — a move that experts say could prevent consumers and workers from holding corporations accountable.
On January 15, the American Arbitration Association (AAA), the largest private provider of arbitration services in the world, quietly raised its fees for individuals filing a mass arbitration case seeking monetary damages or contract relief from a company from $125 to $3,125.
The move comes amid regulatory efforts to rein in the rise of the arbitration industry, which critics say oftentimes forces consumers and workers into contracts that prevent class-action lawsuits and bars them from seeking a trial by jury.
The massive expansion of what is effectively a privately administered tax by AAA — whose revenues have roughly doubled to nearly $150 million in the past ten years — could further limit relief for consumers and employees, experts say.
“What’s happening now is that the price to even initiate these types of mass arbitration cases is incredibly high,” Katie Van Dyck, senior legal counsel at the American Economic Liberties Project, told us. “[AAA’s fee change] is shifting the cost towards consumers who are already trapped in these forced arbitration agreements and sent into really expensive processes that generally favor corporations.”
Mass arbitrations cases are similar to class-action lawsuits, but are handled through a private process that experts say benefits corporations rather than the consumers and employees who are trapped in them.
Arbitration agreements are often forced on consumers and workers without their knowledge and are hidden in the fine print attached to agreements governing workplaces and transactions. These agreements limit how an employee or consumer can dispute a corporate decision. They essentially prohibit people from going to a jury trial, forcing them instead into a process overseen by a third-party arbitrator.
Consumers may file arbitration cases against companies for price-fixing, defective products, or issues with services they’ve purchased. Employees may file arbitration cases against their employers for wage theft, contractual disputes, and other reasons. Arbitration agreements can carry high fees for both parties, and both groups have to pay the fees before an arbitration case can begin.
The new nonrefundable fee of $3,125 will apply to all mass arbitration cases with twenty-five or more claimants and when the representation for the claimants is “consistent or coordinated across cases,” AAA announced in a press release on January 15.
AAA did not respond to direct questions regarding the new fee change, but pointed to a press release outlining the new changes.
The press release states that the new fee changes are being implemented in response to the “increasing number of mass arbitration cases since 2018, primarily driven by arbitration clauses in consumer-business and employee-employer contracts.”
AAA says the new $3,125 fee will help ensure “integrity” of future cases and will “enhance the accuracy of filings and pleadings, thereby reducing delays and complexities. Parties must now affirm that the information provided for each case is true and correct, addressing concerns about the submission of incorrect case filings.”
AAA’s main competitor — JAMS, formerly known as Judicial Arbitration and Mediation Services, Inc. — charges $250 for cases involving consumers.
“More People Climb Mount Everest . . . Than Win”
Thirty years ago, arbitration cases between people and a company were exceedingly rare.
But that began to change in the early 2000s — when corporations realized that forced arbitrations could be used to circumvent costly and damaging class-action lawsuits.
According to the New York Times, “the move to block class actions was engineered by a Wall Street–led coalition of credit card companies and retailers.” Among the early proponents of the move was corporate lawyer John Roberts — who would go on to become chief justice of the Supreme Court when it issued rulings in 2011 and 2013 that allowed contracts to ban class actions in favor of arbitration agreements.
Since then, arbitration agreements have become so commonplace that more than sixty million workers across the country are now under one. These agreements often carry a confidentiality clause, so when many workers file a case against their employers, many of their coworkers have no idea, the Labor Department noted in a March 2023 blog post.
“What was once a relatively rare employer practice that only affected about 2% of workers in the early 1990s has grown to include 56% of all non-union private sector employees and 65% of employees making less than $13 per hour,” the Labor Department wrote.
Arbitration agreements have also become ubiquitous in the consumer realm. In 2015, a federal report found that more than half of all credit card contracts included arbitration clauses, covering as many as eighty million people. A coinciding survey of credit card users found that three-quarters didn’t know whether they were subject to an arbitration agreement — and less than 7 percent of those who were covered by such a clause understood that it limited their ability to sue.
The arbitration industry itself appears rigged in favor of big business. While arbitrators for a given case are supposed to be chosen at random, a 2018 study found that companies often find ways to select pro-business arbitrators who are more likely to rule in their favor. According to researchers, if the system was actually truly random, consumers on average would be getting $50,000 more in arbitration awards.
For workers and consumers, the rise of arbitration has been disastrous. One study cited by the Labor Department estimates that the rise in arbitration agreements has resulted in workers filing 98 percent fewer wage theft and other unfair labor claims than workers not under arbitration agreements. And consumer regulators found that credit card companies with arbitration agreements in their contracts have used such clauses to block class-action lawsuits 65 percent of the time.
The problem is getting worse. The American Association for Justice, a lobbying group for plaintiff’s lawyers, found that forced arbitration cases increased during the pandemic, while consumer win rates decreased.
“Just 577 Americans won a monetary award in forced arbitration in 2020, a win rate of 4.1% — below the five-year-average win rate of 5.3%,” noted the report. “More people climb Mount Everest in a year (and they have a better success rate) than win their consumer arbitration case.”
The state of affairs has led the Labor Department to sue companies that force their employees into exploitative situations.
In January 2023, the Labor Department was able to force an Arizona company to pay $5.75 million in back wages to its employees who were misclassified as independent contractors. The company tried to force the department into an arbitration case on the matter, but a federal court ruled that the Labor Department has the authority to recover unpaid wages and that the case could be handled in the courts rather than in arbitration.
The Labor Department won a similar ruling in 2021, when a New York federal judge ruled that employee arbitration agreements do not apply to federal regulators who did not sign arbitration agreements, thus allowing regulators to pursue wage theft claims in court.
“An Unjustified Attack on Arbitration”
While the Consumer Financial Protection Bureau (CFPB) is charged with safeguarding consumers against abusive practices, the agency has limited ability to help people trapped in arbitration agreements. In 2017, President Donald Trump signed legislation overturning a CFPB rule banning forced arbitration clauses in certain financial contracts. The shift made it much more difficult for consumers to pursue class-action lawsuits against companies.
Recently lawyers for consumers and workers have attempted to turn the table on the rise of arbitrations agreements by pursuing mass arbitration cases similar to class-action lawsuits.
In a high-profile case from 2018, more than 12,500 Uber drivers filed arbitration cases against Uber for alleged wage violations. Uber, the tech-forward taxi company, initially refused to pay the arbitration fees for all the cases, but later agreed to pay more than $146 million to settle wage disputes eventually filed by more than sixty thousand drivers.
Problems with arbitration agreements are now so common that in January 2023, the CFPB proposed establishing a registry of common terms found in potentially exploitative contracts that waive legal protection for consumers.
“Some companies seek to censor their customers and strip them of their rights by inserting fine print into non-negotiable contracts,” CFPB director Rohit Chopra said in a press release. “The CFPB is proposing a registry of these contract clauses to find out where people are unable to speak up when they’ve been harmed.”
The US Chamber of Commerce, a historically pro-business and anti–consumer advocacy group, called the proposal “an unjustified attack on arbitration and violates the law.”
Echoing other proponents of arbitration clauses, the chamber claimed that arbitration was a less-expensive way for consumers to seek justice than pursuing costly lawsuits. But the new AAA fees could suggest otherwise.
According to Goodwin Procter, one of the largest law firms in the world that specializes in a broad range of topics, the new fee changes will help ensure case integrity and force lawyers to vet their clients’ claims before filing arbitration cases. But the megafirm admits the changes will also benefit businesses.
“The new fee schedule significantly lowers case-initiation fees for businesses and shifts costs to individual claimants,” Goodwin Procter wrote in response to AAA’s fee change. “It is clear . . . that the AAA’s update has reallocated the costs and burdens associated with mass arbitrations, which the mass arbitration model previously sought to avoid.”