what is forced arbitration?With Congress and the president having some of the lowest approval ratings of all time, you’ve probably heard a lot of complaints about recent actions undertaken by the current administration. While it can be hard to keep up with all of the news, perhaps one of the biggest stories to develop last month was the repeal of a CFPB rule, which allowed consumers to bring class action lawsuits to banks and other businesses. This repeal will empower companies to settle disputes using what is known as forced arbitration, but just what is forced arbitration and how could it affect you? In this post, we’re going in-depth to give you a thorough look at the issue and explain how it specifically relates to data breaches and financial scandals.

Defining arbitration clauses

Arbitration is the act of handling a legal dispute through a third-party arbiter, rather than through the legal system (e.g., going to court). Arbitration in and of itself isn’t inherently bad, as consumer groups point out, because not all disputes require the time, effort and expense of a full legal trial. However, over the course of the past several years, there’s been an increasing trend of implementing forced arbitration clauses into terms of service agreements and other documentation.

Unlike mutual arbitration, forced arbitration and similar policies mandate that an individual waive their right to sue through a court for any types of dispute defined within a company’s terms of service. In many cases, companies can declare that any and all disputes must be settled through arbitration, even in cases where wrongdoing might have been present. Additionally, because the parties presiding over arbitration can sometimes have affiliation with the companies that are being brought into a dispute, there has been great concern that the process greatly favors corporations at the expense of consumers. While those who support forced arbitration usually argue for its expedience and lower costs, opponents often counter that consumer losses don’t outweigh the supposed upside of the practice. Some research has indicated that consumers (and even sometimes employees) under terms with mandatory arbitration clauses file fewer claims than those whom can bring suits to court. Additionally, some legal experts have been concerned that arbitration sometimes shields companies from the consequences of bad behavior, and thus, allows for the continuation of unfavorable or even unlawful behavior.

Why has arbitration been in the news lately?

As stated above, the CFPB’s arbitration rule was overturned by Congress late last month. However, the fight over arbitration started long before, with the CFPB looking into the issue a few years ago. Although consumer awareness of arbitration clauses has been growing, it wasn’t until the past year with incidents, like September’s massive Equifax breach or Wells Fargo’s ongoing scandal, that consumers collectively decried what has been seen by many as an overreach by large companies. Though public outrage resulted in the waiving of arbitration in the former case, it isn’t clear that negative PR will deter every firm from continuing to use forced arbitration, even in cases involving potential fraud, such as the Wells Fargo’s scandal.

How does this impact me?

While industry experts are suggesting that the CFPB might have other avenues for enforcing some form of arbitration restriction, consumers shouldn’t expect any movement on the issue in the near term. It is important to note, however, that like with Congress’ ruling on ISP privacy rules earlier this year, state legislation could provide a silver lining for some consumers. But for now, really the only thing consumers can do to protect themselves is to read the terms of service agreement for any company they use or work for — pay close attention to the rights/liabilities section. After all, a terms of service agreement is technically a legal contract that can be enforced. If you see that arbitration is noted in the terms of service, you may want to avoid doing business with or working for the company. On the other hand, if you’re already doing business with a company you suspect uses forced arbitration in this way, you might want to limit or stop your usage of the company’s services. This might not be possible in every case forced arbitration exists, but it could potentially limit the number of times you’ll be waiving away your rights entirely.

While it’s not always easy to keep up with the news, it’s important to understand how big decisions like forced arbitration could impact you, as it may be limiting your rights. For more information on news affecting consumers, continue reading our personal finance blog.