With a clause in complex contracts that few people take the time to read, corporations have insulated themselves from lawsuits.
On Page 5 of a credit-card contract used by American Express, beneath an explainer on interest rates and late fees, past the details about annual membership, is a clause most customers probably miss. If cardholders have a problem with their account, American Express explains, the company “may elect to resolve any claim by individual arbitration.”
Those nine words are at the center of a far-reaching power play orchestrated by U.S. corporations, an investigation by The New York Times has found.
By inserting individual-arbitration clauses into a soaring number of consumer and employment contracts, companies such as American Express devised a way to circumvent the courts and bar people from joining in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices.
In the past few years, it has become increasingly difficult to apply for a credit card, use a cellphone, get cable or Internet service, or shop online without agreeing to private arbitration. The same applies to getting a job, renting a car or placing a relative in a nursing home.
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Among the class actions thrown out because of the clauses was one brought by Time Warner customers over charges they said mysteriously appeared on their bills, and another against a travel-booking website accused of conspiring to fix hotel prices. A top executive at Goldman Sachs who sued on behalf of bankers claiming sex discrimination was also blocked, as were African-American employees at Taco Bell restaurants who said they were denied promotions, forced to work the worst shifts and subjected to degrading comments.
Some state judges have called the class-action bans a “get-out-of-jail-free” card, because it is nearly impossible for one individual to take on a corporation with vast resources.
Patricia Rowe, of Greenville, S.C., learned this firsthand when she initiated a class action against AT&T. Rowe, who was challenging a $600 fee for canceling her phone service, was among more than 900 AT&T customers in three states who complained about excessive charges, state records show. When the case was thrown out last year, she was forced to give up and pay the $600. Fighting AT&T on her own in arbitration, she said, would have cost far more.
Heading off challenges
By banning class actions, companies have essentially disabled consumer challenges to practices such as predatory lending, wage theft and discrimination, court records show.
“This is among the most profound shifts in our legal history,” William Young, a federal judge in Boston who was appointed by President Reagan, said in an interview. “Ominously, business has a good chance of opting out of the legal system altogether and misbehaving without reproach.”
More than a decade in the making, the move to block class actions was engineered by a Wall Street-led coalition of credit-card companies and retailers, according to interviews with coalition members and court records. Strategizing from law offices on Park Avenue and in Washington, members of the group came up with a plan to insulate themselves from the costly lawsuits.
Their work culminated in two Supreme Court rulings, in 2011 and 2013, that enshrined the use of class-action bans in contracts. The decisions drew little attention outside legal circles, even though they upended decades of jurisprudence put in place to protect consumers and employees.
Corporations said class actions were not needed because arbitration enabled individuals to resolve their grievances easily. But court and arbitration records show the opposite has happened: Once blocked from going to court as a group, most people dropped their claims entirely.
The New York Times investigation was based on thousands of court records and interviews with hundreds of lawyers, corporate executives, judges, arbitrators and plaintiffs in 35 states.
Since no government agency tracks class actions, The Times examined federal cases filed between 2010 and 2014. Of 1,179 class actions that companies sought to push into arbitration, judges ruled in their favor in four of every five cases.
In 2014 alone, judges upheld class-action bans in 134 of 162 cases.
Some of the lawsuits involved small banking fees, including one brought by Citibank customers who said they were duped into buying insurance they were never eligible to use. Fees like this, multiplied over millions of customers, amount to billions of dollars in profits for companies.
The numbers provide only part of the picture, since they do not capture the people who were dissuaded from filing class actions.
A spokeswoman for American Express said that in the past few years, banking regulators have examined the company’s business practices, largely obviating the need for class actions.
The regulators “have required significant remediations and large fines to address issues they found, with very little loss in value to the consumer,” said the spokeswoman, Marina Norville.
Law-enforcement officials, however, say they have lost an essential tool for uncovering patterns of corporate abuse. In a letter last year to the Consumer Financial Protection Bureau, attorneys general in 16 states warned that “unlawful business practices” could flourish with the proliferation of class-action bans. In October, the bureau outlined rules to prevent financial firms from banning class actions. The U.S. Chamber of Commerce quickly acted to stop the move.
Andrew Pincus, a law partner at Mayer Brown in Washington who has represented companies that use arbitration, said class actions yielded little relief for plaintiffs. “Arbitration provides a way for people to hold companies accountable without spending a lot of money,” Pincus said. “It’s a system that can work.”
Support for that assertion has been anecdotal, since there is no central database of arbitrations. But by assembling records from arbitration firms across the country, The New York Times found that between 2010 and 2014, only 505 consumers went to arbitration over a dispute of $2,500 or less.
Verizon, which has more than 125 million subscribers, faced 65 consumer arbitrations in those five years, the data show. Time Warner Cable, which has 15 million customers, faced seven.
One federal judge remarked in an opinion that “only a lunatic or a fanatic sues for $30.”
Companies noted in interviews that arbitration incentivized them to resolve many customer disputes informally. Matthew Kilgore, of Rohnert Park, Calif., had no such luck. The bread-truck driver had dreamed of being a helicopter pilot. At 28, after his first daughter was born, he enrolled at Silver State Helicopters, a for-profit school in Oakland, taking out a $55,950 loan from KeyBank to pay for the program.
Less than halfway into training, Kilgore got a call from his flight instructor, who said Silver State was bankrupt. He drove to Oakland and found the school’s doors padlocked.
KeyBank and Student Loan Xpress, the school’s preferred lenders, demanded that students pay back their loans for degrees they never received. About 2,700 students, including Kilgore, joined in class actions against the two lenders, accusing them of ignoring financial signs that the school was in trouble.
Student Loan Xpress, whose contracts did not have an arbitration clause, agreed to settle and forgave more than $100 million in loans. KeyBank, whose contracts did, used the clause to get Kilgore’s lawsuit dismissed in 2013.
KeyBank declined to comment on Kilgore’s case, but said the bank had forgiven a portion of many students’ loans. Kilgore has not been able to pay back his loan, which with interest has swelled to $110,000. With his credit ruined, he and his wife cannot buy a house.
Blaming the lawyers
The Supreme Court’s rulings amounted to a legal coup for the corporate lawyers who figured out how to twin arbitration clauses with class-action bans. The lawyers represented clients that had paid billions of dollars to resolve class actions over the years.
The lawsuits, companies said, were driven by plaintiffs’ lawyers who stood to make millions of dollars. They said they had no choice but to settle even those cases that were without merit.
“These lawsuits were not about protecting consumers but about plaintiffs’ lawyers,” said Duncan MacDonald, a former general counsel for Citibank who was part of the group. “These were nuclear weapons aimed at companies.”
Consumer advocates disagreed. A class action, they argued, allowed people who lost small amounts of money to join together to seek relief. Others exposed wrongdoing, including a case against auto dealers who charged minority customers higher interest rates on car loans.
The consequences of arbitration clauses can be seen beyond the financial sector. Even lawsuits that would not have been brought by a class have been forced out of the courts, according to the investigation.
Taking Wall Street’s lead, businesses — including obstetrics practices, private schools and funeral homes — have used arbitration clauses to shield themselves from liability, interviews and arbitration and court records show.
The sharp shift away from the civil-justice system has barely registered with Americans. F. Paul Bland Jr., executive director of Public Justice, a national consumer-advocacy group, attributed this to the tangle of bans in clauses added to contracts that no one reads in the first place. “Corporations are allowed to strip people of their constitutional right to go to court,” Bland said. “Imagine the reaction if you took away people’s Second Amendment right to own a gun.”