These startups have more in common than being relative newcomers in the tech world. Like their more senior counterparts, including AOL, Microsoft, Netfllix, and PayPal, each of these newer firms also require their customers to consent to arbitration as a condition for using their products and services.
As such, they are part of the growing ranks of businesses--tech, or otherwise--using private mediation and settlement to resolve disputes, as opposed to the bigger, public forum of a trial by jury and judge. The consequences of adopting arbitration are not always beneficial, however.
For consumers, the tactic may be viewed as a cheap way to stack the deck against them, as arbitrators are frequently viewed as partisan and representing the interests of the companies themselves with which consumers have complaints. Businesses that adopt arbitration agreements might also get burned. While you may be able to settle some disputes more quickly and cheaply than in court, in some instances, you may risk alienating your customers. Additionally, you might prefer the traditional legal system, which allows for appeals, should you not like the way things shake out in arbitration.
What’s more, critics say, if consumers win in such processes, they are likely to get far less in financial damages than they might in court. Further, arbitration clauses are typically used in tandem with other legal clauses that prevent consumers from banding together in class actions.
Such concerns about arbitration are not idle. Businesses rarely will sign arbitration agreements with one another, says the National Association of Consumer Advocates.
Meanwhile, in more than 1,700 federal class actions filed between 2005 and 2014, defendants relied on such clauses to try to force arbitration, the New York Times reported last week. Those numbers have doubled since 2010. There were more than 250 such cases in 2014, compared to fewer than 100 in 2005. And in some industries in particular, like banking, arbitration clauses are particularly prevlevant. The Consumer Financial Protection Bureau, which is proposing new regulations that would limit the practice, said in a 2013 report that 90 percent of bank contracts governing credit card and checking accounts contain arbitration clauses.
So before you jump on the bandwagon, here are five things to consider.
1. It may not be cheaper.
It may be true that arbitration is less time consuming and costly than battling things out in court, where packed state and federal court dockets--plus procedural maneuvering--can force cases to stretch on for years. But that’s not always what ocurrs, says Scott Vernick, a partner at Fox Rothschild in Philadelphia. By the time you’ve chosen the arbitrator, prepared the case and argued it with arbitration lawyers, who also charge by the hour, there may be no difference, Vernick says.
2. Keep it small.
Make sure you use arbitration for amounts of money you don’t mind losing, Vernick says. That’s because in most cases you don’t get the right to appeal. If large amounts of money are at stake, such as for intellectual property infringement on the next hot tech item, you probably want the greater flexibility of court.
3. Keep it fair.
Given consumer concern that arbitration may not be as balanced as a court proceeding, write into your agreement that you’ll use arbitrators known for impartiality, legal experts say. Some organizations that may be more impartial include JAMS, formerly known as Judicial Arbitration and Mediation Serivces, the CPR Institute for Dispute Resolution, and the American Arbitration Association. These groups allow you to choose a panel of arbitrators, as well as individuals, for dispute resolution. (Generally speaking, most arbitrators are either practicing attorneys or former judges.)
Some arbitration services can also provide you with lists of arbitrators in your area who might specialize in the subject matter of your case, says Mark Haddad, a partner who leads the Supreme Court and appellate practice at Sidley Austin, in Los Angeles. What’s more, your agreement could stipulate that both parties will have a say in who will lead the proceedings.
4. Structure an appeal process.
Some arbitration forums such as CPR and AAA increasingly allow for an appeals process. While some state arbitration laws may forbid appeals, except where a process has blatantly miscarried, some arbitration forums have nevertheless added an additional appeal level for decisions. “You can agree in advance to arbitrate the dispute, but each party can appeal the decision,” Haddad says.
5. Empower the consumer.
Don’t link your arbitration clause to one that prevents a class action. “I would be reluctant to take away the right of people to participate in class action lawsuits,” says Neal Hartman, a senior lecturer and head of the managerial communications group at MIT Sloan School of Management, who adds that such a move could damage your standing and your brand. “There are plenty of examples where a class action win for consumers has improved the reputation and image of an industry.”
One example is the 2011 class action settlement with Bank of America for $400 million that resulted in all banks processing debit card transactions in real time. Previously, many financial intitutions debited transactions in highest to lowest order, which resulted in excessive overdraft fees for consumers, Hartman says.