Traveling salesman Matt Moraca lives on his cell phone. So last year, when Alltel Corp. (AT) offered him wireless service for much less than he had been paying, the St. Petersburg liquor wholesaler jumped at the deal. But within months, Alltel had jacked up his $49-a-month bill by $10. When Moraca threatened to sue, Alltel pointed to the fine print in his contract. It required him to settle all disputes by arbitration. Outraged, he sued anyway; his suit is pending. "What's to stop them from raising my rates $10 every month?" he says.
Moraca is in good company. While the securities industry has long obliged its clients to use arbitration, the practice is spreading rapidly. From AT&T (T) and credit-card giant MBNA Corp. (KRB) to mortgage lenders such as Country Wide Home Loans, more and more consumer companies and employers are turning to arbitration to avoid costly litigation. Essentially, they have decided to take tort reform into their own hands by forcing customers or workers to sign away their rights to go to court.
It's a shift that has drawn plenty of critics. Fearful that arbitration is depriving consumers of their legal rights, some have begun to challenge the arbitration clauses in court. "I'm a lifelong Republican, but forced arbitration is the most corrupt thing I've seen in the practice of law," says John O'Neil, whose Houston law firm has filed suits against corporate arbitration clauses.
Still, the challenges are unlikely to slow arbitration's spread. While no one knows exactly how much the practice has grown, the American Arbitration Assn., the industry leader, says it alone arbitrates employment disputes at 600 companies covering 5 million employees. Its caseload is growing 10% annually, with nearly 2,000-plus settlements last year.
Several factors account for the jump. Companies say they're turning to arbitration to protect themselves from skyrocketing legal costs. With class actions and other suits on the rise, companies' costs are way up, even if they win in the end. Restricting disputes to arbitration reins the costs in considerably.
Arbitration proponents also argue that is simplifies dispute resolution. The American Bar Assn. found in a recent survey that 75% of all consumers have no access to the courts. Either they can't afford a lawyer, or they don't understand the legal system. "Arbitration lets people process smaller claims than a lawyer would ever take on," says India Johnson, American Arbitration's senior vice-president.
But critics contend that arbitration clauses actually discourage legitimate class actions. That's particularly true in situations similar to that at Alltel, where each person's damages may be too small to warrant individual litigation. Says St. Petersburg trial lawyer Kathleen Ford: "Businesses use arbitration to lock the door of the courthouse to consumers."
Or take the case of Sears, Roebuck & Co. (S), which paid nearly $300 million in 1997 to settle class actions stemming from federal and state charges that it illegally collected debts from bankrupt credit-card holders. Two years later, it began adding an arbitration clause that prevents class actions or other litigation to resolve disputes. A Sears spokesman says the settlement and the new clause are unrelated.
Critics also question the impartiality of the process. Companies tend to pick arbitrators who are industry experts and insiders. Very few are retired judges or lawyers. Arbitrators also count on the companies for employment. "Companies don't hire back arbitrators who consistently rule against them," says Charles Craver, a law professor at George Washington University.
Moreover, overturning an arbitrator's decision is tough. Such rulings are often made orally and without explanation. Nor are arbitrators bound by existing state and federal law. Since their decisions take precedence, arbitration rulings are rarely overturned. Still, challenges to arbitration are growing. In San Francisco, plaintiff Darcy Ting persuaded a federal district court to stop AT&T from using forced arbitration to impose changes in her long-distance contract. The judge blasted AT&T's arbitration clause as "illegal and unconscionable." Given the rapid growth of arbitration, watch for such challenges to multiply as well. By Charles Haddad and Aixa M. Pascual in Atlanta