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Bound & Gagged

How will the battle over mandatory binding arbitration affect you?
Magazine Contributor
2 min read

This story appears in the December 2005 issue of Entrepreneur. Subscribe »

You're taking legal action against a large company. But instead of a jury trial, you're facing an arbitrator.

It's a growing trend, as credit card companies, banks, auto manufacturers and other big businesses inform customers in fine print that any claim, dispute or controversy will be settled in arbitration, where there's no jury and no right to appeal. The result: Just 3 percent of U.S. civil cases now make it to trial. "A trial is very expensive," says Judge William Huss, a mediator and arbitrator in Los Angeles and author of Start Your Own Law Practice. Arbitration, he contends, "is fast, fair and final."

Consumer advocates dispute its fairness, however, since arbitration clauses prohibit class action lawsuits, limit complaint periods and include filing fees. Plaintiffs pay at least $750 just to get a case started, according to Public Citizen, a national public interest organization based in Washington, DC.

Arbitration can work for and against entrepreneurs, who can use it to limit lawsuits against their firms, but can also find themselves forced into arbitration as the plaintiff if, for example, they're in a dispute with their credit card company. "The small-business community probably does feel there's a role for binding mandatory arbitration. With costs going up for insurance and liability, they would like to limit the downside of being sued," says Linda Sherry of Consumer Action, a San Francisco-based public interest group. "The problem with arbitration is that it puts high costs on the plaintiff."

Battles over the role of arbitration are heating up. A coalition called Stop Binding Mandatory Arbitration wants to raise awareness of arbitration abuse. And in November, the U.S. Supreme Court--which has generally ruled in favor of arbitration--was scheduled to hear arguments in Cardegna v. Buckeye, a Florida case involving quick-money lenders. In the case, the 4th U.S. Circuit Court of Appeals first ruled that arbitration terms are enforceable even if a contract is illegal, but then it overturned that decision.

"[This] is an issue about whether arbitration clauses are going to be treated differently than other types of contracts," says Paul Bland, attorney for the plaintiffs in the Cardegna case. "We're saying there have to be limits to arbitration." For now, make sure to read the fine print.

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