Increased Use of Mandatory Arbitration Clauses Make Shareholder Class Actions Impossible
Tuesday, January, 28, 2014
In the wake of two U.S. Supreme Court cases – AT&T Mobility LLC vs. Concepcion et ux. in 2011 and American Express Co. et al. vs. Italian Colors Restaurant et al. in 2013 – the right of corporations and investment firms to avoid any possibility of litigation or class actions taken up by shareholders by simply inserting an arbitration clause into any contract or service agreement has been enshrined in law. As a result, many investment firms, including those servicing pension funds and other group investments, have inserted arbitration clauses into their agreements that now specifically forbid their shareholders from litigating or joining class-action lawsuits against the firm.
While arbitration is widely regarded as a useful alternative to litigation in many disputes, proving to be faster, cheaper, and less gruelling, the proliferation of mandatory arbitration clauses that customers and shareholders have no alternative but to accept is now being seen as a threat to shareholders’ rights. Some investment watchdogs believe mounting frustration and anger over what is seen as an unfair and abusive move on the part of investment firms and other companies is resulting in a movement among shareholders to force companies to remove arbitration clauses from their agreements.
Due to the Supreme Court’s decisions in this area, many state laws that require accountability and transparency in investment services have been effectively overwritten because the federal laws allowing arbitration clauses trump state laws. This is seen as a possible vector to lobby the federal government to re-write current laws governing arbitration clauses to make the unilateral imposition of them without mutual agreement illegal.