Forget the Sixth Amendment, which guarantees the “right to a speedy and public trial” in criminal matters. And who needs that ancient Seventh Amendment and its fancy “right of trial by jury.” The U.S. Treasury Department has concluded that American consumers can not be trusted to thoughtfully exercise these Constitutional rights — at least not when doing so might be an annoyance to the financial services sector.
This morning, the Treasury released a report [
PDF] criticizing the Consumer Financial Protection Bureau’s recently finalized rule that limits the use of forced arbitration in consumer financial services.
What Is Forced Arbitration?
Those who read Consumerist frequently are probably familiar with arbitration, but for those who aren’t, here’s a crash course: Go look at the contract/user agreement/terms of service for just about any company you do business with: your bank, credit card company, wireless provider, cable/broadband service, software, e-commerce, electronics, online services… There’s a very good chance that buried deep in that contract is a clause that does two things, neither of which are to your advantage.
First, it blocks you from suing that company in court. Instead, you must go through private — often confidential — arbitration. Second, these clauses almost always include a condition barring you from joining your complaint together with other customers who were wronged in the same way, even through arbitration.
So Company X can illegally overcharge 10 million customers, but rather than face a single class-action lawsuit representing all 10 million victims, Company X says it’s more convenient to face 10 million individual arbitration hearings.
The Reality
Except they know that this will never happen. Very few Americans know about or understand the basics of arbitration, so the odds of even a small percentage of those 10 million customers hiring an attorney and arbitrating a dispute is going to be small. Thus, rather than facing a single class-action representing 10 million customers, Company X might face 10 or 15 arbitration claims. And even though each of those few customers might go into arbitration with exactly the same evidence, it’s entirely possible that they could each result in a different decision by the arbitrator. What’s more, it’s likely that no one will know as many arbitration hearings include a gag order preventing the customer from saying anything publicly.
If the individual harm done to each customer is small, Company X might also face zero arbitration cases. After all, who is going to hire a lawyer and go through the arbitration process for a $1 overcharge? As federal appeals court Judge Richard Posner noted in
Carnegie v. Household Int’l, “only a lunatic or a fanatic sues for $30.”
