Signing Away the Seventh Amendment: Latest Developments in Mandatory Arbitration Cases

11 November, 2016

Nathan Morris

Nathan Morris


On November 7, a federal judge dealt a blow to the government’s latest attempts to rein in mandatory arbitration abuses in nursing homes. At the same time, the Wells Fargo fiasco is breathing new life into a will for change. Here’s the latest lay of the land:

A terrible pest makes its nest in the fine print that wraps around each part of our lives. Want to use a cell phone? A bank account? A credit card? Want to buy something online or get a private student loan? Want to catch-em-all or even just Netflix and chill?

First get ready to sign away your Seventh Amendment rights.

Mandatory arbitration agreements are so prevalent that when businesses are called out for some seriously shady practices, they respond with the classic middle school zinger that everyone else is doing it. In a previous piece I referred to “arbitration creep,” not knowing that one Alabama bankruptcy judge had already said as much in even stronger terms:

“When introduced as a method to control soil erosion, kudzu was hailed as an asset to agriculture, but it has become a creeping monster. Arbitration was innocuous when limited to negotiated commercial contracts, but it developed sinister characteristics when it became ubiquitous.”

(But, to be fair, kudzu root can make a migraine-soothing tea, while a fine-print arbitration agreement almost invariably makes your headache worse).

Some have set to the task of weeding out the worst forms of pre-dispute arbitration clauses. We’re watching now to see how hard the ‘creeping monster’ fights back.

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Wells Fargo Forgoes the Courts

Our latest glimpse into just how fast this monster is creeping comes with the sad and sorry Wells Fargo fraud stories. You’ve heard that harried employees opened nearly 2 million bogus accounts to meet sales quotas, forging customer signatures, landing them with $1.5 million in fines and wrecking credit scores. But in a final slap to the face, those hurt by these practices have no right to sue.

Though Wells Fargo doesn’t seem to be in any position to purse their lips and be a stickler for the fine print, in previous cases they’ve successfully argued that their customers at some point signed a blanket form containing a mandatory arbitration clause for any dispute regarding “claims based on broken promises or contracts, torts, or other wrongful actions.” These agreements also snuff out customer’s rights to class action lawsuits. Even when contracts were blatantly forged, judges have found those customers must still submit to arbitration — or that when the venue is in question, arbitration is the right place to determine whether arbitration is the right place.

Investigations into the bank’s action are cracking open the fine print, publicizing the crisis of arbitration’s overreach. Some are noting that the reason the Wells Fargo fraud could go so long undetected was because the process draws a heavy curtain around business wrong-doings. A fiery Senator Elizabeth Warren, grilling former Wells Fargo CEO John Stumpf, asserted “If we had class action on this in 2010, 2009, 2008, the problem never would have gotten so out of hand.”

Legislators are promising that once Congress returns following the elections, they’ll push through a bill to make Wells Fargo sue-able. Sen Sherrod Brown (D-Ohio) said “Giving customers back their right to take Wells Fargo to court gives them the power to ensure they are made whole and helps prevent cases like this in the future.”

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How Did We Get Here?

This latest insult-to-injury is breathing new life into efforts to end mandatory arbitration clauses in fine print contracts. But those efforts are finding the path rockier than expected.

I was just reading a 1942 Supreme Court case where the fine Judges vowed: “[T]he right of jury trial in civil cases at common law is a basic and fundamental feature of our system of federal jurisprudence . . . [a] right so fundamental and sacred to the citizen [that it] should be jealously guarded by the courts” Jacob v. New York City, 315 U.S. 752-753, 62 S. Ct. 854, 86 L. Ed. 1166 (1942).

Some of these jealous guards got weary on the job. But as the loss of Seventh Amendment rights spread, some justices kept their fire. The previously-mentioned Alabama bankruptcy judge noted at the end of the 90s:

“Ask any reasonable man on the street, i.e. a consumer, if he thinks it is fair that he is barred from access to the courts when he has a claim based on a form contract which contains an arbitration clause and he will respond with a resounding ‘No!’ [.. .] The reality that the average consumer frequently loses his/her constitutional rights and rights of access to the court when he/she buys a car, household appliance, insurance policy, receives medical attention or gets a job rises as a putrid odor which is overwhelming the body politic.” — In re Knepp, 229 B.R. 821, 827 (Bankr. N.C. Ala. 1999)

For a list of the ways forced arbitration favors corporations at the expense of consumers, read my last piece on the subject.

But more recently in 2011 and 2013, the Supreme Court has ignored any putrid odor to sign off on the use of arbitration agreements in almost all imaginable settings. This includes in situations where those signing are most vulnerable — as in nursing homes.

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Arbitration’s Mistreatment of Elders

The New York Times tells how an elderly woman in a California nursing home was sexually assaulted two times in as many days by other residents. The state’s department of public health investigated the issue, and concluded the nursing home failed in its duties to protect the resident. However, even with this finding, her family was barred from suing the nursing home because of an arbitration clause, pushing them to ultimately give up and settle.

Other harrowing stories include tales of murder and wrongful death in nursing homes, which are never allowed into the court system because of mandatory arbitration fine print.

As Patrick Leahy (D-Vermont) put it: “The sad reality is that today too many Americans must choose between forfeiting their legal rights and getting adequate medical care.”

In this clearly imbalanced situation, some legislators like Leahy have tried to have a go at agreements. Sen. Al Franken (D-Minnesota) recently teamed up with FCC commissioner Mignon Clyburn in a Time op-ed, noting that the Consumer Financial Protection Bureau found that 99.9% of all internet users were subject to mandatory arbitration clauses, and 99.7% of those contracts specifically prohibited class-action lawsuits.

But legislative attempts up to now have floundered, as politicians find themselves up against a wall of corporate interests.

With two branches of government blocked, consumer advocates have looked to the Obama administration to chip away at arbitration’s power where it can without legislative approval. One key piece comes from the Consumer Financial Protection Bureau, which has power from the Dodd-Frank Wall Street Reform Act. They’re in the final drafting phase of a rule that will prevent credit card companies and other financial firms from using mandatory arbitration clauses that outlaw class-action lawsuits.

The administration has also pushed against mandatory arbitration clauses in college settings, particularly after the demise of several massive for-profit institutions that left their students shackled with debt. These rules are slated to take effect July 1, 2017. (We’ll follow all of these efforts — and their likely legal challenges — in future posts on arbitration).

It’s in this context that an agency within the Health and Human Services Department issued a rule saying that they would only give federal funding (through Medicare and Medicaid) to nursing homes that don’t strip away residents’ rights to sue in court. This rule would only affect new residents — already-signed agreements would be permitted.

The new rule, which would also reinstate the right to join in class action suits as well as shine a light on elder-care practices and conditions, was intended to go into effect on November 28th. But the nursing home industry pushed back.

An industry trade group called the American Health Care Association (AHCA), along with four other industry groups, claim the government overstepped its authority. In response, they did the very thing they want to stop elderly residents from doing: they sued. (As Susan Harley from Public Citizen put it, “It’s obviously striking that these nursing homes are using the court system to deny seniors and other residents of their right to their day in court.”). The AHCA claimed the department didn’t have the authority to make this rule, which violated the Federal Arbitration Act (FAA). They asked that the rule be suspended from going into effect until these issues were resolved.

George Slover, Senior Policy Counsel at the Consumers Union, reviewed the suit, and finds the government agency “well within its legal authority to require nursing homes that want federal certification not to block residents and their families from taking legal action to ensure that basic legal protections are enforced.” He notes: “There have been too many instances of gross abuse and neglect. Nursing homes should not be able to slip forced arbitration clauses into admissions paperwork to shield themselves from accountability. This rule will help ensure that nursing home operators are held accountable and face a strong deterrent.”

But just on Monday morning, a federal judge saw things differently. Judge Michael Mills in Mississippi granted a preliminary injunction stopping the new rule from going into effect. He found 1) a fair likelihood of the rule eventually being overturned as overreach, 2) a good change it would cause irreparable harm to the nursing home industry in the meantime, and 3) little extra damage was done to nursing home residents while the rule’s suspended (his argument for this last part is that mandatory arbitration has been the status quo for so long that a bit longer can’t do much harm).

However, even in his finding on behalf of the industry groups, Judge Mills recognizes grave issues in mandatory arbitration at nursing homes. He notes in particular that over half of those accepted as residents have Alzheimer’s disease or other forms of dementia, meaning they can’t be considered mentally competent enough to sign away their rights. Though the industry responds that arbitration agreements won’t be upheld when it’s found that those signing it weren’t mentally competent, that is done typically by the resident first having to sue for the right to sue, doubling the work of their attorney. At the same time, this erodes the justification industry often gives for the clauses — that this will severely cut down on everyone’s time in court.

As Judge Mills put it: “Needless to say, any plaintiff’s attorney who fears that he might have to conduct a trial (and possible appeal) on arbitration issues before even starting discovery on the underlying lawsuit must give great pause before agreeing to accept the case.”

He also notes the catastrophic judicial headache of these kinds of cases:

“this court is unaware of any form of litigation which provides as effective a tool for pure delay, while not advancing the underlying litigation, as nursing home arbitration litigation. This is partly due to the inherent difficulty in deciding nursing home arbitration-related issues, such as mental competency and agency. In resolving such issues, the most important witness, the resident, will generally have died by the time the lawsuit is filed, making it exceedingly difficult to determine, after the fact, the decendent’s level of mental competency or whether he authorized a relative to sign on his behalf (particularly since the relevant agency standards are quite vague). Moreover, the surviving witnesses testifying in these matters usually find themselves aligned with either the plaintiff or the nursing home, and thus often have a motive for selective memories. Considered together, these factors frequently make it nearly impossible for courts to reliably resolve nursing home arbitration issues.”

He ultimately sends out a wish that Congress would pass legislation doing what the rule does, and concludes:

“This case places this court in the undesirable position of preliminarily enjoining a Rule which it believes to be based upon sound public policy.”

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What Does This Mean?

I find a deep hypocrisy buried in the arguments of the nursing home industry groups. The main crux is that even though they’re not being forced to change their mandatory arbitration clauses, the nature of their business means that they need to use Medicaid and Medicare money. It’s a kind of take-it-or-leave-it rule, they argue, that results in a de facto ban on arbitration and ergo violates the FAA.

Judge Mills finds this a compelling argument. What interests me about it is how much it mirrors the way normal people are constantly forced to sign away their constitutional rights — not because the law outright demands it, but because they simply can’t fulfill their day-to-day needs without buying into take-it-or-leave-it contracts that erode their constitutional rights.

And yet, courts are currently far more cautious about one of these take-it-or-leave it choices than the other. As its core, the judicial system has so far decided that an obscure law about merchant’s agreements is more central and important than an individual’s Constitutional Rights.

In the middle of this turmoil, the Supreme Court just agreed to review another nursing home arbitration case (Kindred Nursing Ctrs. LP v. Clark, U.S., No. 16-32, review granted 10/28/16). The move confused legal scholars at the time (wait: aren’t these lawsuits soon going to be a thing of the past?). But with the Health and Human Services Department rule at best delayed, the Supreme Court finding will take heavier import.

Though SCOTUS has been notoriously cozy with mandatory arbitration agreements in recent years, some legal scholars see a small possibility for a different sort of finding on this one. The decisions in favor of arbitration have typically been 5-4, and now the FAA’s main champion Justice Antonin Scalia is gone. Justice Clarence Thomas has said that he doesn’t believe the FAA should apply in state court, as in this case.

Will this finding could begin the slow work of rolling back of the Supreme Court’s boosterism for all-things-arbitration? Or will this steamroller keep on chugging along? One way or the other, keep your eyes on the Filevine blog to learn new developments in the use of mandatory arbitration clauses.