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Arbitration is a way to resolve legal disputes without a trial. Bankrate explains.

What is arbitration?

Arbitration is a process for resolving legal disputes without going to trial. Both consumers of a company’s products or services as well as employees of that company may be compelled into mandatory arbitration proceedings when they file a complaint against the company. As arbitration becomes increasingly widespread, it has also become more controversial because it tends to favor the company at the expense of the claimant.

Deeper definition

When a consumer begins using a company’s product, she may not be aware that the terms of service contract she agreed to with the company has an arbitration clause. Such a clause gives power to the company to settle any claim by mandatory individual arbitration, which forces her and her lawyer to meet with a representative from the company and a nonbiased third party instead of going to trial.

Employees may have also agreed to arbitration in their employment contracts or even just as a matter of company policy.

Settling a dispute in arbitration effectively waives certain statutory rights of the claimant. Arbitration may make it impossible for a customer to sue the company that fraudulently sold him a product or service, or for an employee to sue her employer for violations of company policy or labor law. In recent years, arbitration has even been used to adjudicate racial discrimination and sexual harassment cases.

Because arbitration proceedings are confidential, they must be mediated on a case-by-case basis, which obviates the possibility of class-action lawsuits. Many people drop their case outright, often because they’re making claims for small amounts of money for which it wouldn’t make sense to hire a lawyer. Class-action lawsuits often expose patterns of illegal behavior, so arbitration can frequently be a boon to businesses with something to hide.

When a company takes a claimant into arbitration, they must negotiate on an arbitrator. While many companies pay the arbitrator’s costs, they sometimes stick the claimant with as much as 50 percent of the bill, even if she wins.

However, the victim often doesn’t come out ahead. The company frequently wins in arbitration, pays a greatly reduced penalty, or compels the claimant to settle. And because arbitration is almost always binding, there is little recourse for the claimant.

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Arbitration example

In 2015, it was found that 72 percent of banks required customers to agree to mandatory arbitration clauses. Around that time, more and more people became aware of Wells Fargo’s account fraud scandal, and there was a sharp uptick in claims against the bank. These were almost all settled in arbitration, which customers agreed to when they opened up their legitimate accounts. Level Playing Field, a nonprofit that tracks the usage of arbitration, determined that very few of the arbitration cases resulted in an award for the claimant, with Wells Fargo winning hundreds of thousands of dollars more than the sum collected by claimants.

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