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Binding Arbitration Agreements: Protecting Big Business More Important Than Protecting Americans

In late October, Senate Republicans voted to overturn a rule that would prevent banks and big financial institutions from blocking class action lawsuits. The rule, set to go into effect in 2019, would’ve forced banks and credit card companies to do away with arbitration clauses embedded in lengthy agreements between a financial institution and the consumer.

Wells Fargo Scandal: Why Class Actions Are Necessary
With last year’s Wells Fargo scandal still fresh in Americans’ minds, overturning the block on class action lawsuits is unwelcome news. Wells Fargo employees were discovered to have opened over 3.5 million fake accounts and to have enrolled consumers in their auto bill-pay program without their consent. Close to 200,000 customers also paid fines on these fake accounts.  As part of a class action settlement, Wells Fargo must pay $142,000,000 back to consumers whose names were used to open fake bank and credit card accounts.

According to CNN Money, Wells Fargo admitted this past July that they had also sold unnecessary car insurance to 570,000 customers, causing them to pay for coverage they didn’t need. 20,000 of these customers had their car repossessed as a result.

Wells Fargo was allowed to get away with opening fake accounts due to their savvy use of something called a binding arbitration clause. The bank included the clause in all of its customer agreements, forcing Wells Fargo clients who discovered the bank’s deceit to be pushed into closeted, secretive agreements instead of a public trial in a court of law. In a September 2016 LA Times article on the topic, reporter Michael Hiltzik wrote “In the category of adding insult to injury — or perhaps piling one injury on top of another — Wells Fargo is an expert. Nothing demonstrates that more than the bank’s insistence on forcing the victims of its vast fake-account scam into binding arbitration, a system in which customers are at an overwhelming disadvantage.”

It is well known by attorneys and big businesses that binding arbitration agreements drastically limit the financial liability for deliberately deceiving, injuring, abusing, or neglecting someone that would otherwise have the ability to take you to court. By having consumers sign an arbitration agreement, businesses are protecting themselves while putting Americans at a distinct disadvantage. Studies show the majority of arbitration agreements end up with a more favorable outcome for the party being accused of misconduct. On top of the ethical questions it raises about the fairness of allowing large corporations to get away with potentially illegal business practices, arbitration agreements also force consumers, patients, and nursing home residents to sign away their 7th amendment right to trial by jury.

However, despite Wells Fargo’s use of arbitration agreements in consumer contracts, eventually the number of complaints over fake accounts piled up, causing a federal judge to override the corporation’s use of the agreement in favor of a class action lawsuit. It was likely this that caused the U.S. Chamber of Commerce to put the pressure on House and Senate Republicans to spring into action to overturn the rule that would prevent banks and creditors from using arbitration clauses in consumer agreements.

Studies Show Lawsuit Fear Not a Real Concern for Small Businesses
With most job creation happening as a result of the growth of small businesses in our country, lawmakers should be most concerned about the roadblocks these small business owners are facing. According to the Center for Justice and Democracy (CJ&D), a non-profit legal organization run by New York Law School, surveys from top small business industry groups almost never mention fear of lawsuits as a concern. Here were some of their findings from surveys and studies conducted this year by small business organizations.

  1. National Federation of Independent Business (NFIB) – When asked to rank 75 various issues potentially affecting their business, members ranked fear of lawsuits 68th.  Concerns over internet reliability ranked higher.
  2. U.S. Chamber of Commerce – 1,000 small businesses owners and operators were asked what issues worried them. Not one person mentioned lawsuits.
  3. National Association of Manufacturers (NAM) – According to the Centers for Justice and Democracy, “Respondents were “given the opportunity to submit other challenges affecting their business aside from the choices given in the survey question.”  Lawsuits were not mentioned among the 13 sample comments included in the report.”

If nothing seems to indicate that small businesses are fearful of lawsuits, then why has it become such a priority for the government to overturn a rule that would prevent financial institutions from using arbitration agreements? It is likely more of the ‘business as usual’ mentality we see in politics: big donors and big banks with a lot to lose are bending the ears of those in power. The worry that plagues many (including the handful of Republicans that voted against overturning the ban) is that binding arbitration will creep into more industries, making arbitration agreements the new normal.

If banks who have a history of deceiving and defrauding consumers are allowed to still force customers to sign agreements not to sue, where else will these agreements pop up? It seems the acceptance of binding arbitration is the new trend. Late last year, a federal judge blocked a rule that would have prevented nursing homes from requiring binding arbitration agreements in their admission paperwork. Since then, the government declared they would not pursue the matter, forcing vulnerable nursing home residents to sign the agreements or find another place to live.

Is all bad behavior now to be swept under the rug or negotiated behind closed doors without the rest of the public knowing? It seems like a slippery slope. And there’s nowhere to go but down from here.