Part I of this story, Corporations nailed shut the courtroom door: forced arbitration steals your rights and money, was published yesterday. Following the introduction, it presents the history of arbitration laws, how the Supreme Court has invented new history and law in this area, and the risks, drawbacks and increasing pervasiveness of forced arbitration for individuals.
In the second part of the ACS' paper, Arbitration as Wealth Transfer, authors Deepak Gupta and Lina Khan dive into the mechanisms of wealth transfer via arbitration.
Part II — How to make out like a bandit
There's a reason I use the word "bandit" in the title above. Bandits take your money by force, using the coercion of the threat of violence. Corporations seldom resort to armed robbery but they nevertheless use coercion. When mandatory arbitration clauses are included in just about every consumer agreement and many employment contracts, the individual has little choice but to comply.
To fail to do so, to reject the agreement, precludes buying necessary products and goods; foregoing needed services like internet, cell phones, banking, mortgages and credit cards; dispensing with treatment from physicians and hospitals; and forlornly turning down even a low-paying McJob. Indeed, customers routinely unwittingly accept forced arbitration clauses: the agreement, software license or warranty is sealed inside the product's package, impossible to read and assent to prior to making the purchase.
Accepting the agreement, which you must do in order to purchase the products and services or gain employment, means forfeiting rights you otherwise have under the law. You automatically are relegated to a shadowy, unaccountable legal system that is parallel to, but largely outside of, our state and federal courts. You become subject to justice, so-called, which has been bought and paid for by and for the benefit of the powerful and the wealthy.
That kind of unprincipled justice permits corporations to steal from their customers, their employees and society as a whole in three ways, according to Gupta and Khan.
Thievery #1 — Customers
In Part I, we saw how arbitration allows corporations to securely get away with fraud and theft, from consumers as well as employees, simply by forcing them into its rigged system. The costs and risks, as individuals prohibited from banding together in class actions, ensure that most relatively minor offenses will go unpunished and unremediated. Stealing $5 monthly from tens of thousands of bank customers, in the form of phony or erroneous charges, adds up quickly; it's well worth the negligible risk of losing a single arbitration case and having to refund a hundred bucks to one person.
So, the first way corporations use forced arbitration to steal might be called "forced passivity." When the deck is so heavily stacked against an aggrieved customer or employee and the amount involved is not overly great, the individual is likely to simply give up, retreating to passive acceptance of a loss that cannot be reclaimed. It might look like chump change, amounts like $10 or $50 at a time, but multiplied by thousands or even millions of incidents, it becomes a significant source of profits.
Between 2008 and 2012, before the Supreme Court condoned virtually absolute bans on consumer class actions, such lawsuits just in financial services alone yielded 2.6 billion dollars in redress for injured consumers. Moreover, they had an enduring benefit, potentially saving consumers many billions more, because the settlements made businesses change their bad behavior. [1]
Just on fraudulent overdraft fees alone, 28 million customers received cash settlements due to class actions. On the other hand, the Consumer Financial Protection Bureau (CFPB) looked at the results of arbitration, where voluntarily (through opt-out of class actions) or via forced arbitration customers fought arbitration cases against banks on their own and found that one could literally count the number who won using only fingers and toes.
Note again that the above dealt only with the consumer finance industry. When we include all of the other kinds of claims (defective merchandise, failure to provide promised services, and so on), we can reasonably assume that there were many more billions of dollars of adjudicated redress each year from class actions which now will remain in the coffers of corporations rather than rightfully being returned to the pockets of consumers.
Thievery #2 — Workers
Wage theft is just as profitable for corporations as consumer theft, if not more so. Stealing time, as in not paying an employee for certain tasks, is just as much theft as taking cash out of his or her wallet. An employee is even more vulnerable to plundering than a customer; challenging the ripoff might result in losing a much needed job.
Consider a situation where a large restaurant chain makes morning employees prep the kitchen, cutting up lettuce and tomatoes, slicing cheese, heating the grill and so on before punching their time cards the moment the doors open for business. Perhaps it makes the late shift employees clock out when the doors close but they must clean the kitchen, wash the floors, and empty the trash before they leave. To a low wage employee, stealing 30 minutes of every workday, without pay, makes a difference in his standard of living. The chain pockets those amounts, saving millions every year in unpaid wages.
Because employment contracts can force arbitration in lieu of state administrative hearings (such as a Wage & Labor Commission) and ban class actions, the employee has no real recourse. It will cost him to initiate the arbitration, money he probably does not have to spare on the gamble that he might win (or even worse, have to pay the high arbitration fees of his employer if he loses). The Supreme Court has essentially given corporations a free pass to exploit and rob their workers by paying illegal sub-minimum wages, demanding off-the-clock labor, and withholding illegal deductions (for example, for arriving late or causing breakage).
Gupta and Khan note that wage theft involves enormous amounts annually and result in a court-ordained gift to the 1%:
Experts estimate the sum of wages stolen nationally to be as high as $50 billion a year, “a transfer from low-income employees to business owners that worsens income inequality.”
… wage theft is prevalent across sectors—including retail, restaurants and grocery stores, domestic work, manufacturing, construction, janitorial, security, dry cleaning, laundry, car washes, and nail salons. [1]
As with consumer claims, studies show that win/loss ratios, amounts awarded, and number of claims filed are dramatically and negatively impacted by forced arbitration and bans against class actions. Also, as would be expected, the lack of publicity, public outrage, and legal judgments and sanctions from lawsuits encourage bad actors to continue their illegal and unfair practices.
So that's transfer of roughly another $50 billion per year from the 99% to the 1%.
Thievery #3 — Antitrust abuses
Congress, despite its failings at times, has often shown great wisdom. One pearl has been its encouragement in sundry legislation to harness the power and will of the citizenry in upholding the law. One obvious example has been whistleblower protection laws; a less understood example, relevant to this discussion, has been antitrust legislation.
Our legislative branch gave private citizens and small businesses incentive to thwart unfair and illegal monopolies that exploited them. Antitrust laws grant private parties the right to sue offenders, rather than depending on the government to do so, and award successful litigants triple damages.
Such power in hands of the common folk was too dangerous for the corporatocracy to bear. Rather than attack the pertinent laws directly, corporations use forced arbitration to shelter themselves from antitrust suits.
An antitrust suit is extremely complex and expensive. Among other things, the plaintiff must present conclusive analyses of the markets and economics to prove that the defendant has the requisite clout and has used it in an unfair manner. A mom-and-pop business can't afford to assemble a winning case against the juggernaut that abuses it, so pooling resources with similar small businesses in a class action is the sole possible method to seek justice.
That's exactly what occurred in a recent, and infamous, case in 2013, American Express v. Italian Colors Restaurant. The restaurant banded together with other retail establishments to pursue a claim that American Express used monopolistic clout to force them to pay excessive fees for debit card use in order to accept AmEx credit cards from customers.
The Supreme Court struck down their suit on the basis that they signed a contract that forced arbitration of all disputes. The majority noted that even if said contract contained unenforceable or illegal provisions, and was signed under economic duress from a monopolistic entity, the contract terms requiring arbitration were still valid. Moreover, they acknowledged that forced arbitration and banning class actions would remove all possibility of redress from a monopolistic corporation but that justice was to be waived in favor of the absoluteness of contracts, to the exclusion of any other considerations.
Richard Frankel, law professor at Drexel University, points out the insulting indifference displayed by the Court's majority as it yanked away the last legal lifeline from injured parties:
What makes this case different from other cases, is that the merchants didn't just assert it would be more expensive for them to have individual arbitrations, they had documented proof that individual arbitration would not be an option. [3]
Justice Elena Kagan wrote a scathing dissent that neatly summed up the majority's cavalier attitude toward permitting illegal and unethical behavior by economic behemoths:
Amex has insulated itself from antitrust liability—even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.
And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad. [2]
Providing carte blanche to monopolistic abuses only encourages more thievery. Because state and federal prosecutors often start or develop antitrust cases by using information from the public records of trials initiated by private parties, this Court decision makes it less likely that corporations will face criminal or civil charges by government agencies.
That means corporate offenders will not just continue to pillage and plunder but that they will be emboldened to ramp up their thievery. The ACS authors summarize the effect of this evisceration of trustbusting lawsuits:
Most obviously, monopolistic and oligopolistic firms often hike consumer prices. For example, a host of studies documents how consolidation across the healthcare industry has enabled hospitals, health insurers, and pharmaceutical companies to charge consumers more for the same goods and services. Businesses also use their dominance to suppress workers’ wages. [1]
The economic effects on middle, working and poor classes are nearly impossible to calculate. An extra dollar when filling a prescription drug, a few dollars of stolen wages every day, an extra dime or quarter every time a credit card is used: there are unlimited chances for monopolistic businesses to fleece the public and smaller business, confident that they can squelch any public revelations or attempts to recover the damages by relying on their rigged, secretive arbitration system which places them outside of, and above, the laws of the land.
Summing it all up
The cumulative cost of these ripoffs—consumer, worker and antitrust—is probably well north of a hundred billion dollars per year. That means that, on average, at least $300 of wealth is extracted from every man, woman and child in the country annually and retained by the already wealthy and powerful. For a family of four, an additional $1200 in pocket is a significant sum. Year after year, such sums could be saved and used to send a child to college, to pay off debts, to buy a home or to start a new business.
In reality, the amounts are likely to be much higher and as corporations embrace their newly found license to thieve with impunity the amounts and frequency of illicit behavior will grow over time.
Those sums are stolen and retained by corporations and the wealthy class, leaving the rest of America that much poorer, without any means to seek justice and frustrated by what they correctly perceive as a pervasive system set up to deny them their due rights and just rewards. When an angry customer or worker thinks "they're out to get me," he's actually quite right. He just doesn't know exactly how they do it and get away with it.
In Part III tomorrow, I will wrap things up with a look at possible ways out of the morass and offer some closing thoughts about the societal implications of these legal and economic shifts.
[1] Arbitration as Wealth Transfer by Deepak Gupta and Lina Khan, American Constitution Society for Law and Policy
[2] American Express Co., et al. v. Italian Colors Restaurant, dissenting opinion by Justice Kagan, IIT Chicago-Kent College of Law
[3] The Problem with the Supreme Court's AmEx Decision, Class Action, and You by Philip Bump, The Wire