Policy Essay

Arbitration as Wealth Transfer

Arbitration as Wealth Transfer

Deepak Gupta & Lina Khan

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Over the last few decades, the Supreme Court has steadily expanded the reach of forced arbitration clauses—clauses that companies embed in the fine print of standard-form contracts to deny consumers and workers the right to band together to sue those corporations in court. While the Court’s decisions that set this trend in motion trace back to the 1980s, the real game changers have been more recent: 2010’s Rent-A-Center v. Jackson, holding that arbitration clauses must be enforced even when they are part of an illegal contract; 2011’s AT&T Mobility v. Concepcion, granting companies the unfettered right to enforce clauses that ban class actions; and 2013’s American Express Co. v. Italian Colors Restaurant, requiring enforcement even when doing so has the practical effect of completely precluding redress under a law enacted by Congress.

The ramifications of the Court’s arbitration jurisprudence are now clear. As predicted, companies across sectors have modified their contracts with employees and consumers to include these terms, blocking access to courts should disputes arise. Cases that previously would have been litigated and publicly recorded are now either diverted to a private arbitrator or not brought at all. Practically, this means that businesses can sidestep swaths of law. In the words of one federal judge, this trend is “among the most profound shifts in our legal history.”

Despite the gravity of these changes, forced arbitration has attracted relatively little public attention until recently. One obstacle is that few Americans are even aware of the clauses that govern a growing number of contractual relationships in their lives. Another is that arbitration—as a legal issue at the intersection of contract law, civil procedure, and federalism—can seem abstract and esoteric. Yet when the public is informed about this private system of justice, its opinion is clear: a poll of likely voters in the 2016 election found that a whopping 75% supported the right of bank customers to take complaints to court, rather than being forced into private arbitration.

There is reason to think the issue has reached a turning point. Recognizing that forced arbitration now functions as a “legal lockout,” government agencies have been moving to prohibit or limit the use of these clauses in form contracts. In recent years, the Department of Agriculture has limited the ability of meat processing companies to force arbitration on poultry farmers, the Department of Defense has prohibited lenders from including forced arbitration clauses in contracts with military service members, and the Department of Transportation has disallowed airlines from mandating arbitration in disputes with passengers. In the last year alone, the Centers for Medicare & Medicaid Services (CMS) moved to regulate the use of mandatory arbitration in nursing home contracts, the Department of Education drafted a rule to end forced arbitration in college enrollment agreements, and the Department of Labor finalized regulations requiring that retirement advisors allow clients to bring class action suits. Perhaps most significantly, in May 2016 the Consumer Financial Protection Bureau (CFPB) proposed a rule to eliminate arbitration clauses that include class action bans. Although the move falls short of banning forced arbitration in consumer finance entirely, it would mark a vital first step in restoring consumer rights in a major market—one where information asymmetries and the general imbalance of power are most severe. Critically, the CFPB’s rule would also require companies to disclose arbitration outcomes, effectively creating a public record of how consumers fare.

These efforts have marked a crucial opening for reform. But they face challenges on two fronts. First, corporate interests are heavily attacking these rules, marshaling resources both to weaken regulations directly and to mount challenges in court. Second, the Trump Administration may roll back regulations implemented by agencies under President Obama or fail to implement regulations that would have been promulgated. While the details of Trump’s position on arbitration are still unknown, several moves by the Administration suggest that it may undo or stall efforts to curb forced arbitration. Ensuring that these efforts withstand attack will require close public attention and strong pressure. As we saw with the Federal Communication Commission’s net neutrality rules under the Obama Administration, forceful public engagement on a regulatory issue can be decisive, emboldening officials to adopt strong rules even in the face of heavy corporate lobbying and attack.

Given the pressing need for public attention, this Essay offers a fresh way to understand and talk about forced arbitration: as a wealth transfer. It argues that the rise and prevalence of forced arbitration clauses should be understood as both an outcome of and contributor to economic inequality, and that the national conversation about economic inequality should therefore include the debate over forced arbitration. Given the extreme levels of inequality in the United States—with the richest 0.1% of the country now holding the same share of national wealth as the bottom 90%—the connection between arbitration and inequality is worth exploring in depth. Here, we examine this connection in three areas: antitrust, consumer protection, and wage-and-hour law. More generally, this Essay seeks to draw attention to the distributive features and effects of civil procedure. While there is growing recognition that changes in areas of substantive law (banking law, for instance, or tax law) may contribute to inequality, less attention is paid to the role of procedural law. Those interested in addressing extreme wealth distribution should recognize procedures—including arbitration—as both a site and source of inequality.

The connection between inequality and arbitration exists, on the one hand, because many industries today are highly consolidated. Concentration at the firm level has handed a relatively small number of companies outsized influence over the contractual terms that govern most transactions. This same consolidation has further tilted the balance of power away from workers and consumers, rendering them largely captive to whatever contractual terms businesses choose to impose. On the other hand this connection also exists because, as this Essay sketches out, arbitration has regressive effects. By both suppressing claims and yielding outcomes less favorable to workers and consumers, arbitration most likely transfers wealth upwards.

We follow in a long line of scholarship that recognizes our legal system as a mechanism of transferring wealth. Legal scholars Guido Calabresi and Richard Posner have discussed the distributive effects of tort law. Building on this idea, the business community has created an entire movement premised on the idea that tort law indefensibly transfers wealth from small business owners to trial lawyers. Although research estimating the actual effects of tort law on local economies is limited, “[t]he risks of tort liability allegedly include the unjustified transfer of wealth and the deterrence of valuable economic activity.”

Scholars have similarly noted redistributive effects beyond tort law. When Congress passed the Copyright Term Extension Act—extending copyright protection on existing copyrightable material by twenty years—experts described the law as a wealth transfer from individual users to large, rights-holding companies. Scholars have also argued that curbing unjust wealth transfers was a primary aim of the Sherman Antitrust Act. Others have even identified legal uncertainty writ large as transferring wealth from poor to rich.

This tradition is less developed in areas of procedural law. While the unequal effects of our civil procedure system on low-income and indigent litigants are acknowledged, rarely are changes to civil procedure itself framed as wealth transfers. Identifying the distributional effects of civil procedure not only clarifies the stakes of cases like Concepcion, but also may help draw public attention to issues that are by nature dry, obscure, and technical.

Deepak Gupta is founding principal of Gupta Wessler PLLC, an appellate litigation boutique in Washington, DC, with an emphasis on workers’ and consumers’ rights, class actions, and constitutional law. He represented the respondents before the Supreme Court in two cases discussed in this Essay—AT&T Mobility v. Concepion and American Express Co. v. Italian Colors Restaurant—and served as a senior official at the Consumer Financial Protection Bureau.

Lina Khan is a legal fellow with the Open Markets Program at New America and an Associate Research Scholar at Yale Law School. She graduated from Yale Law School in 2017.

Cite this article:

Deepak Gupta & Lina Khan

,

Arbitration as Wealth Transfer

, 35 Yale L. & Pol'y Rev. 499 (2017).