Arbitration Takes a Beating

Arbitration allows disputes to be settled out of court, in front of a neutral arbitrator, sooner and more quickly than in court and with less procedural hassle. The flip side is that the parties give up some of their rights, and the results are often confidential and don't serve as precedent for later arbitrations. When it comes to disputes between companies, arbitration is often the right approach.

But what about disputes between companies and "just plain folks" - consumers, web users and employees? That's where arbitration benefits companies and may not help the little guy. Arbitrators sometimes award smaller judgments than courts, and arbitration clauses often preclude class actions - a procedure that allows many people's small claims to be aggregated into one lawsuit. That makes small claims worth fighting, which is why consumer-facing companies often prefer to avoid class actions.

Four California decisions in the last few weeks - involving AOL, ATT, t-Mobile, and now Circuit City - have all invalidated clauses of this sort. The takeaway: company-written arbitration clauses in these areas must bend over backwards to be fair to the individual, and these provisions require very careful lawyering if they have a hope of being enforceable.