How Service Contracts Rob You of Your Rights (and What the CFPB Is Doing About It)

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While you’ve been pretending to read the fine print on everything from your cell phone contract to your Starbucks card, companies have been slipping in legalese that robs you of your rights. A little-understood but rapidly expanding practice called “mandatory arbitration” is replacing your right to sue a company in court — a right many of us probably never even realized was vanishing. 

On Tuesday, the Consumer Financial Protection Bureau announced an inquiry into arbitration clauses in contracts for financial products and services. These clauses have become ubiquitous and lurk in contracts and in the terms and conditions for all types of products and services, from credit cards to retirement account agreements to nursing home admission forms, and even show up in some employment contracts.

Consumers may not realize that they have waived their right to a trial because of an arbitration clause,” the CFPB says in its release about the inquiry.

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For the time being, however, even if people do realize that they’re being asked to sign away their right to a day in court, there’s little they can do about it. When you open a credit card, sign up for cell phone service or any other commercial activity, you don’t get to write the contract terms: the company does. In some cases, you don’t even have to sign a contract to give up your rights. The terms and conditions on the Starbucks website, for instance, says that customers are agreeing to arbitration automatically when they buy a gift card from the coffee giant.

So what is arbitration? It’s basically a substitute for a court case, but it’s skewed heavily in favor of the companies that mandate it. Instead of going in front of a judge, you present your side of the story to an arbitrator — one the company gets to pick. “Arbitration companies treat large corporations as their clients,” Public Citizen says. They don’t have to take legal precedent into account when deliberating, and their decisions aren’t made public. Public Citizen has calculated that 94% of all arbitration disputes get resolved in favor of the company. Unlike the court system, there’s no way to appeal a ruling.

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The proliferation of these clauses stems from a Supreme Court ruling last year which said, essentially, that companies can legally prohibit customers from joining forces and filing class-action lawsuits against them. Instead, companies could mandate that customers have to submit to arbitration if that’s what the contract says. Not surprisingly, companies have been rewriting their contracts to include these clauses at breakneck speed, say consumer advocates.

“The net effect of all this is American consumers’ right to hold a company accountable in the courts is basically gone,” says Harvey Rosenfield, of counsel with nonprofit group Consumer Watchdog.

At this point, the CFPB says specifically that it’s not looking to rein in or prohibit the use of arbitration or arbitration clauses. But it wants to get a handle on how prevalent they are and how they affect consumers. It’s also just focusing on financial contracts, but its findings could be useful for extrapolating how widely used these clauses are in other industries.

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