Did you know there is a secret court system that provides protection for corporations, but strips away yours? And no, we aren’t talking about SCOTUS. Forced arbitration — a clause found in many employment contracts requires consumers and employees alike to resolve legal disputes with companies through a private arbitrator chosen by said companies.
Brendan Ballou, Founder of the Public Integrity Project, joins Tim to talk about his new book, When Companies Run the Courts, which exposes this shadow system. As Ballou explains, “forced arbitration kills justice,” because it traps consumers and employees into self-representation against rich corporations — in secret — without any possibility for appeal. Tim and Ballou also discuss the economic incentives behind this system and Congress’ failure to protect Americans from this exploitation.
Brendan Ballou is the Founder of The Public Integrity Project and a former federal prosecutor, who for two years prosecuted rioters who attacked the Capitol on January 6, 2021. He is the author of Plunder: Private Equity’s Plan to Pillage America, and the forthcoming When Companies Run the Courts: Forced Arbitration and America’s Secret Justice System.
Tim Dickinson
Hey, this is Tim Dickinson, Senior Editor here at The Contrarian. Our guest today is Brendan Ballou with the Public Integrity Project. Brendan has a new book about a shadow court system that we all live… get locked into, whether we like it or not. Brendan, welcome back to The Contrarian.
Brendan Ballou
Thank you so much for having me.
Tim Dickinson
So, what is forced arbitration, and why should people care about it?
Brendan Ballou
Yeah, so forced arbitration is a private justice system that surrounds all of us and binds all of us, even if we don’t necessarily know about it. So… Instead of going to court in forced arbitration, you have your case heard by a private judge, known as an arbitrator. And unlike court, these proceedings happen in secret. Unlike court, these proceedings can’t be appealed. And unlike court, where a judge is typically paid for by the taxpayers. Here, the judge, the arbitrator, is often paid for by the very company that you’re trying to sue. So, understandably, or unsurprisingly, overwhelmingly, these arbitrators rule against consumers and employees and against… and for companies.
Tim Dickinson
And, I mean, I think we all sort of end up in these forced arbitration agreements, whether we want to or not. Sometimes it’s an employer, sometimes It’s a company that we were interacting with when you sort of click through on the terms of service. Tell us about this couple who visited Disneyland, and the wife died of anaphylactic shock because of an allergen in her dinner meal that she had been promised wasn’t there, and found out that she wasn’t supposed to be able to sue because she had done what exactly? Or the family had done what, exactly?
Brendan Ballou
You nailed it. So, Jeffrey Piccolo and his wife were on vacation at Disney World. They went to this, faux Irish pub to eat. She had severe allergies, and severe, at least according to the subsequent complaint. They were very careful about what they ordered, and got repeated assurances from the wait staff that, in fact, the food was safe for her to eat. It wasn’t. And she shortly thereafter had an allergic reaction, died of anaphylactic shock. But when the husband, Piccolo, tried to sue, Disney moved to get his case kicked out of court and put into the shadows of this forced arbitration system. And the argument was. that he could be compelled into arbitration because he had, among other things, signed a Disney Plus account several years earlier. So, it seems sort of shocking that by, you know, signing up for a streaming service, you can be prevented from suing over the death of your own wife. But the law was very clearly on Disney’s side there, and in fact, these sorts of agreements bind us all the time, even if they’re totally unrelated to the actual dispute. So you have examples of people that signed up for gig delivery systems being forced to arbitrate their racial discrimination claim when they shop at Walmart. A father who, you know, sues over the wrongful death of his son, who dies at a rental house, being forced to arbitrate the dispute Because, he has an Airbnb account. So, you know, just to add one more thing about this, you know, in addition to making… sort of binding us into things that we just don’t expect, these agreements just surround us. So, you know, there are more arbitration agreements in America than there are Americans. About 80% of Fortune 500 companies use them with their employees or with their customers. About 60 million private sector employees are covered by forced arbitration. And if you look at the agreements that you’re just signing every day, those click-to-accept agreements that you have when you go to a website, you know, the take-it-or-leave-it contracts that you get when you get a new credit card, or a phone or whatever it happens to be. I would argue that over… increasingly, perhaps overwhelmingly, those sorts of agreements are going to have an arbitration clause that means that you can’t sue if those companies cheat you, discriminate against you, injure you, and, like we were just talking about in the Disney case, even kill you.
Tim Dickinson
One of the things I found so fascinating, and again, like, you talk about a book about forced arbitration, it doesn’t sound like everybody’s cup of tea, but the pervasiveness of this, and the way that this just envelops our lives, and I think in a very secret way, makes this so compelling, and one stat just jumped out for me from your book is that You have Amazon with 101 million Prime members. And they had just 15 cases make it to arbitration over, I’m not sure, the time period. But just the idea that this system is really intended to lock people out as much as it is to give them an alternate path to, you know, a reasonable arbitrated settlement. Can you talk just a little bit about the… How this insidiously works against people, getting their day in court, or even in arbitration.
Brendan Ballou
Absolutely. So, and this is why this topic, forced arbitration, really matters to you, even if it seems rather obscure, even if it seems sort of technical. So, if you feel like companies are increasingly beyond the reach of the law, if you feel like companies are increasingly running these small scams on you, where they charge you $10 or $15, then it doesn’t really seem like you owe them. If the customer service is getting worse, and they’re just ignoring you. Forced arbitration is a big reason why, and here’s why. So, back in the day, when a company scammed a lot of people for a little amount of money, or hurt people in ways that were real, but maybe weren’t enough to, you know, bring a multi-thousand dollar case over. you would bring what’s called a class action. All the people who had been similarly hurt, all those people who had been scammed for the $10 by the credit card company, or been discriminated against by the retailer. Would go bring one case where they could save money by just having a few lawyers, and all get the same relief. Forced arbitration kills that, because it forces people to go into the secret court system and to do so individually. They can’t bring a case together, and that means that, you know, just think about what it would take to arbitrate a case individually. Even if you didn’t have a lawyer, the time that it would take to look up how you even did that, to initiate the case, to actually argue it yourself. you are not going to do that except for the most expensive harm or deadly harms to yourself. And so, what you have is a system where For all but the most expensive and dangerous harms to you. companies are economically beyond the reach of the law, because nobody’s gonna go through and spend thousands of dollars individually to recover $10 on their credit card bill. And so, that’s why companies make, you know, I would argue it really feels like companies are behaving worse. I would argue they are, and that’s because of how the law has developed in the last 15 years. around forced arbitration.
Tim Dickinson
Now, can you walk us through a little bit of where this system comes from? It seems that it’s somehow everywhere, omnipresent, people are atomized, locked out of class actions, they’ve just described it. But where did this shadow system, how did it develop?
Brendan Ballou
Yeah, so, you know, this came out of an old, musty law from 1925 called the Federal Arbitration Act, and, you know, that law back in the day was meant to do something very specific, very narrow, which was meant to, help sophisticated parties at roughly equal bargaining power commit to arbitration if they had a subsequent dispute. And arbitration can make a lot of sense in a situation like that. You have informal procedures, it’s faster, maybe it’s cheaper. You know, that’s totally fine, and that’s what the law was meant to do. That’s how it was enforced for 50 years. But beginning in the 1980s, the Supreme Court reinterpreted that law, ignored the legislative history of the law, ignored the text of the law, and began to expand the federal arbitration agreement ever outward. They started to expand it not to sophisticated parties of roughly equal bargaining power. but to companies and their customers, and employers and their employees. And most importantly, they expanded it to what lawyers call contracts of adhesion, or what, you know, ordinary, regular folks would call just click-to-accept contracts. Those contracts that you can’t negotiate over. And so suddenly. Companies were able to put these agreements, and put these terms in all sorts of agreements, making it functionally impossible For customers to sue over most of the bad things that companies did to them, and the same with employees.
Tim Dickinson
Now, even if you have the money or the willpower to initiate an arbitration proceeding. Are these fair venues for people, or are they… who are the… who pays for them?
Brendan Ballou
Yeah, well, you know, it’s really oftentimes, maybe the majority of times, the company that’s getting sued that pays. And, you know, that’s often done in the name of fairness. We’re trying to make it affordable for people to pursue arbitration, but think about the incentives. Arbitrators need to find work, and so they are naturally going to be inclined rule for the side that’s functionally their employer. And the statistics back this up. You know, consumers win about 90% of the time in small claims court, before the largest arbitration companies. It’s 20% to 38% of the time or so. if they don’t have a lawyer representing them, it can fall to, you know, as little as 10% or so. Before one arbitration company that was particularly conflicted, it was a 2 and a thousand chance of winning, I think .02% chance of winning these cases, or .2. So just a tiny chance of winning in a lot of these forms. I’ll say, you know, I have been in arbitration. I’m a practicing lawyer, I’ve represented clients who have been in arbitration. The individual arbitrators, in my experience. generally are trying to do the right thing, they’re trying to be fair. But the fundamental economic incentives of this system push them towards one side.
Tim Dickinson
So, you’ve articulated the problem. Are there solutions out there? What can folks try to do? How can they engage to make this system more fair for the consumer, more fair for all of us who have to click to accept, just to stream our TVs, or, you know, get a house construction started?
Brendan Ballou
Yeah, so if you’re… if you made it this far in the interview, you’re probably starting to think, like, oh my god, I gotta start checking my contract more.
Tim Dickinson
Yeah, I’m like, you know.
Brendan Ballou
reading these things. I think that’s a very understandable instinct. It’s not going to be enough. You know, because the fact is, you are signing so many agreements, and the steps that you have to take to get out of arbitration… sometimes these companies don’t even offer steps to get out of arbitration. are so onerous that you’re probably never going to do it. And moreover, a lot of these contracts just aren’t negotiable. You know, you can’t, you know, call up Verizon and say, yeah, I want to get a phone from you, but I can’t agree to this arbitration agreement. They’re not going to do that. You have to accept the arbitration agreement. So we’re not going to solve this through what I would call ethical consumerism. Instead, we’re going to have to solve this collectively. I don’t have a lot of faith in Congress solving this on a broad scale, certainly not this administration, so progress is going to happen in states and cities. We need to make arbitration more transparent, make it more like a court system, add procedural safety to make it more likely that consumers and employees get a fair shake in arbitration, and we need to find ways to get people out of arbitration in the first place. California has this law called the Private Attorneys General Act. Which says that employees that are stuck in arbitration can bring cases, not on their own behalf, but on behalf of the State Labor Department. And unlike the employees, the Labor Department never signed an arbitration agreement, and so can bring a case that an employee can’t. So that law is called PAGA. We need PAGA for not just employment issues, but, you know, wage and hour issues, but discrimination issues, consumer issues, antitrust, securities, environmental issues, and so forth, and we need it in other states, too. I have model legislation on my personal website, so brennanballew.com. Download the model legislation, send it to your city council member, send it to your legislator. It’s through that kind of action that we’re going to solve this.
Tim Dickinson
Well, Brendan, thank you so much. You’re illuminating, you know, parts of the world that I think are everywhere, but we have a hard time seeing it. Your previous book was about the plunder of the private equity business, which is in a similar vein. Brendan, do you have any other last thoughts you want to leave our listenership with?
Brendan Ballou
No, this is a huge problem, it is shaping your life, but it is a problem that we can solve if we can do it together, so I hope that people will get active on this.
Tim Dickinson
Alright, well, thank you very much.
Brendan Ballou
Thank you.
