Forced Arbitration

Scale_of_justice_2_newYou may have noticed that the majority of consumer contracts and consumer terms of service documents now require arbitration to resolve disputes. These are in almost every contract or terms of service you sign like when you take out a credit card, buy a new washer or open a new bank account. Arbitration is now included in most telco and ISP terms of service that customers must sign before buying a new service.

Arbitration is a process that has been used in the business world and in the telecom world for many years. With arbitration two parties in a contract submit their dispute to one or more impartial persons for a final and binding decision, known as an award. These awards are made in writing and are generally final and binding on the parties in the case. Most contracts between carriers use arbitration because it’s a faster and less costly way for two carriers to resolve a dispute. Arbitration works well between companies that voluntarily agree to abide by a decision made by an arbitrator. Disputes are resolved more quickly than with a normal law suit and since it’s binding the two sides can move forward without having to worry about appeals.

But forcing arbitration on consumers when they buy products or services is a very different situation because the two parties are not equal. Consumers are forced to agree to binding arbitration by checking a box on a computer screen or in signing a receipt to accept a product. This is a very different relationship than one between two commercial companies since the consumer has limited rights to start with and the agreements people must sign constrict their rights even more.

Commissioner Mignon Clyburn has taken the position that forced arbitration is bad for consumers. There is also a movement in Congress with a bill proposed by Patrick Leahy and Al Franken to end the practice. They all argue that the arbitration process is heavily biased in favor of the big companies, like ISPs, that force arbitration.

And they are right. An individual consumer of broadband or cable service isn’t going to invoke a very costly arbitration process to resolve a billing dispute. It’s hard to imagine that would ever happen. And so the practical impact of forced arbitration is that big companies can overbill or abuse customers with no fear of having to make things right.

In the telephone world consumers used to be protected by tariffs that were on file with regulators. Those tariffs contained a lot of rules about how customer complaints would be resolved. For the most part the rules were not too heavily biased in either direction, and so the mere presence of the rules generally meant that a customer could reach an agreement with a telco over a dispute without having to go to a higher level. But if necessary the customer could complain to the state regulatory Commission. Most states had a few hundred such complaints per year and these generally led to a forced conversation between the telco and the customer to reach a resolution.

But tariffs are largely gone. Some, but not all, cable franchises have created rules to provide some consumer protection. And there is nothing like a tariff for broadband products.

The main reason large ISPs are using forced arbitration is not so that they don’t have to adjust customers’ bills. The arbitration provision makes it much harder to bring a class action lawsuit against a carrier for harming many customers. You can like or hate class action lawsuits. There certainly have been abuses in this area with unscrupulous lawyers filing such suits in the hope of reaching a settlement. But there are also many cases where these suits were the only way to get large companies to stop deceptive billing practices or other ways of ripping off customers.

What I find most interesting about Commissioner Clyburn’s position is that perhaps the FCC is now in the process of doing something about forced arbitration for telco products. There are other government agencies ranging from the Department of Education, the Department of Defense, and the Consumer Financial Protection Bureau that are trying to crack down on the practice.

It’s possible that Title II regulation gives the FCC the authority to address the issue. I’m no lawyer and I have no idea if Title II regulation gives the FCC that power. But in the past, the protections built into tariffs largely flowed downhill to the states due to the FCC’s position on customer rights, and that authority stemmed from Title II regulation of telephone service.

I think small ISPs ought to look to see if your customer terms of service contain forced arbitration. I would bet that many do, because it’s common for small companies to copy the terms of service from some larger company. If you have such a clause you ought to consider the message it gives to your customers. It says that they are basically powerless to sue you over a dispute. That may sound like a good thing, but then also ask how many times customers have actually sued you over one of your consumer products. Chances are that it’s zero. The fact is that small companies find ways to resolve issues with customers while big companies do not. Removing forced arbitration from customer contracts is more customer friendly and that is probably in your best interest. Also, if the FCC makes this mandatory you want to be able to say to your customers that you were ahead of the curve and do not require forced arbitration.

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