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Arbitration clauses: a rights giveaway

Binding arbitration, a little noticed clause in many agreements and contracts, strips consumers of their fundamental rights, including the right to sue individually or join a class-action suit if they have a problem with a company.

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Under binding arbitration, a consumer can be forced to pay thousands of dollars upfront to pursue a complaint, travel thousands of miles to a location of the company's choosing for the hearing, argue their case before an arbitrator who depends on the company for future business and surrender such basic legal weapons as the right to discovery and the right to appeal a decision.

In some cases, the clause allows the company to sue the consumer while denying the consumer the right to sue the company.

Labeled by the National Consumer Law Center as "astonishingly unfair and undemocratic," these clauses affect millions of consumers across the country. Corporations insert them into employment and home building contracts, in agreements for credit cards, computer software and hardware purchases, and many types of loans.

"Many people don't realize what they are signing when they sign a contract with a binding arbitration clause. People don't realize they are giving up their right to a trial and that there is no appeal. It is very different than litigation," says Celeste Hammond, who serves as an arbitrator in business cases and who is also a professor at John Marshall Law School in Chicago. "There is a reasonable basis for justifying arbitration when both parties consent, but consumers aren't consenting and I question whether it is appropriate."

Forced on consumers with little choice
Because binding arbitration clauses are so wide-ranging in contracts and agreements for services and products that you use every day, it's difficult to find an alternative. For example, virtually every credit card company in the country has a binding arbitration clause in its customer agreement, so if you want a credit card, you must agree to its terms.

You can find these clauses in agreements and contracts that cover, among others:

  • New and used car purchases, leases and warranties
  • Car, home equity and consumer loans
  • Employment
  • Home construction, repair, inspection and mortgage loans
  • Brokerage and banking agreements
  • Cell and landline phones
  • Health insurance, doctors, medical treatment
  • Hospital and nursing home admission and treatment
  • Computer hardware and software
  • Cable TV, video and DVD rentals
  • Gym memberships

"Pretty much any company that you make an agreement with before entering into a relationship is using these clauses," says Samantha Coulombe, a Civil Justice legal fellow with the Congress Watch division of Public Citizen (www.citizen.org), a consumer advocacy group. "The clauses are presented on a take-it-or-leave-it basis. It's hard to find a company that isn't going to have one of these clauses in their agreement."

Consumers in the dark about their true impact
Since consumers sign these clauses before entering into a relationship with a company, most don't realize what they are giving up if they do have a dispute. "There are literally tens of millions of consumers that are bound by binding arbitration clauses without knowing it," says Paul Bland, a lawyer with consumer advocacy group Trial Lawyers for Public Justice. He calls binding arbitration the biggest issue in consumer law today.

Next: "It costs $12,000 to $16,000 to go into arbitration. ..."
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