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Mandatory Arbitration Clauses: Why You Should Be Wary of the Fine Print 

We’ve all skimmed through documents and added our signature without reading or even glancing at the fine print. The tedious work it takes to read and fully comprehend fine print can be mind-numbing. But what’s hidden there? If it includes a mandatory arbitration clause, you may be signing away your right to bring up a grievance in a judicial court.

Once signed, a mandatory arbitration clause forfeits the signers’ right to pursue claims against the other party in court, meaning if a worker’s rights are violated through discrimination or harassment, they can submit to arbitration procedures but cannot sue. Research shows that mandatory arbitration drastically favors employers over employees.

Both arbitration and judicial court come down to multiple parties presenting their grievances to a third party. In the case of arbitration, the arbitrator can be any person that the parties have designated, but it is usually a lawyer. There is no judge, court reporter, or jury. Arbitration is not public like court cases, leaving the two parties with no obligation to release information.

Why Should Employees and Consumers Be Cautious When Signing a Contract?

As an employee or consumer, you have probably signed a mandatory arbitration clause without even knowing it. These clauses tend to favor employers over employees and as such are increasing in popularity among companies. 2018 research found that more than 55% of workers in the U.S. were subject to mandatory arbitration. Until recently, this included employees of Google.

In 2018, Google paid out a $90m exit package to Android founder, Andy Rubin after credible sexual assault claims were made against him. Google employees were unhappy with what seemed like a reward for bad behavior. To show their disappointment, Google employees all over the world walked out. This act caused Google and other large companies including Facebook to drop forced arbitration as a common practice.

With the recent #MeToo movement and Time’s Up campaign, mandatory arbitration in the workplace has been called into question. In many cases, mandatory arbitration prohibits employees from bringing sexual harassment claims to court. However, in 2018, the NY Senate passed a bill that barred mandatory arbitration clauses in sexual harassment settlements.

Mandatory arbitration clauses also may be proven to be invalid in other instances as well. Though, according to a 2006 Supreme Court ruling, even if a contract is invalid under state or federal law, certain provisions within the contract can still be valid and may be enforced, including cases of mandatory arbitration.

Some states have attempted to prohibit or limit mandatory arbitration agreements. In October of 2019, Governor Gavin Newsom of California signed a new law that restricts employers from compelling workers into arbitration for state discrimination claims or labor code claims. This does not impact clauses that were signed before the law took effect on January 1st of this year. Whether or not the mandate will be challenged under federal law remains to be known.

Why Mandatory Arbitration Favors Companies

There are several reasons why mandatory arbitration clauses favor companies over the individual. For instance, when signing the clause there is no negotiation of terms. Employees usually find arbitration clauses in their onboarding paperwork.

When they do come across an arbitration clause in regard to employment, they face two choices, sign and become employed or refuse to sign and lose the job offer. The same goes for consumers. Arbitration is typically hidden in the text that must be clicked through and when there is no chance of revising it. These clauses are usually written by the company themselves and thus tend to highly favor the company over the employee or consumer.

In 2018, the Supreme Court ruled arbitration could be used by companies to prevent employees from filing class-action or collective-action lawsuits against their employers. This provides great protection to companies because losing a class-action lawsuit can have serious financial repercussions as well as other consequences.

A 2015 study found that employees are 35.7% less likely to win in arbitration than in a judicial court case. This is because court cases are usually more thorough and may move more slowly. Arbitration does not take into account personal testimonies, depositions, or interrogatories. Unlike a court case, it is very difficult to appeal a decision made in arbitration. The process can be binding or non-binding—but most mandatory arbitration is binding and offers a very narrow chance of appeal.

Is Arbitration Less Costly?

Arbitration tends to be less costly than litigation—at least for companies. However, this is not always the case for employees and consumers. To initiate arbitration, an individual must pay a substantial fee. They will then have to pay their share of the arbitrator’s hourly charges, any travel fees necessary to attend the arbitration, and ultimately whatever is decided by the arbitrator. As a result, it can be a costly affair.

Case Example

Mandatory arbitration favored Ernst Young in the case of Stephanie Sutherland. Ms. Sutherland was hired as a staff member to Ernst & Young with a fixed annual salary of $55,000. After being terminated in 2009, Ms. Sutherland had accrued 151 hours of overtime which resulted in $1,867 in overtime pay. She attempted to file a class-action lawsuit to recover this overtime pay for herself as well as another current and former employee of the company.

Because she had signed a mandatory mediation/arbitration agreement, she was required to use Ernst & Young’s alternative dispute resolution program—the Common Ground Program. This program had specified that all disputes cannot be taken to court but must be solved in arbitration on an individual basis. Ms. Sutherfield argued that arbitrating her claim on an individual basis could cost her nearly $200,000 in attorney fees, expert testimony, and other costs. All this to recover less than $2,000 in unpaid overtime. She also argued that she was unemployed and had substantial student debt, so she could not afford to arbitrate on an individual basis. When her case was taken to lower court, it was ruled that the class-action waiver did not apply because it was violating her rights under the Fair Labor Standards Act. However, when the U.S. Court of Appeals reversed the ruling. Ms. Sutherland did not have the right to dispute her claims in court or arbitration on a collective basis. Under the federal statute, her right to argue her grievance in a court or as a class-action suit was eliminated. She did not receive her overtime pay.

The Dangers of the Fine Print

Mandatory arbitration is often hidden deep in the fine print of consumer or employee contracts. These clauses are routinely signed with a quick skim or without reading them at all. Because a signature is often required for purchase or employment, not much consideration is given. If you are not careful, the fine print can hurt you.

A majority of the time, mandatory arbitration requires the consumer or employee to forfeit their right to take a claim to court, while still giving that same right to the company. As an employee or consumer, this not only eliminates your right to sue but leaves you vulnerable to a lawsuit.

Additionally, within mandatory arbitration clauses, there are often restrictions on how individuals can argue their side of a case. An example of this may become apparent in obtaining necessary evidence because the parties are required to follow state and federal rules for evidence as they would be in a judicial court. Depending on the particulars in the arbitration clause, individuals may not be able to argue their side, obtain necessary evidence, and build a liable case.

Before you sign on the dotted line, be wary of mandatory arbitration clauses. You may be signing away your right to bring up a grievance in court or in a class-action suit. Though there is action being taken in certain states to protect the individual from forced arbitration, many still find themselves trapped. The bottom line is read before you sign.

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Mary Elizabeth Hammond is a writer at Filevine, the operating core for legal professionals. Filevine’s software helps firms get more done with less effort and frees them to focus fully on the needs of their clients.