Unfriendly cellphone contracts shine light on dangers of arbitration

By Martin Bosworth

This week’s Business Week has a look at how the wireless industry is being challenged over its notoriously unfriendly contracts, which demand consumers give up their rights to resolution by jury trial or class action in court in favor of arbitration:

One class action involving early-termination charges, a leading gripe among cell users, should get a trial date in the next several months, says Jacqui Mottek, a lawyer at Lerach Coughlin, a lead firm representing the plaintiffs. “You don’t see this kind of restrictive contracts except in a few industries,” she says. “With [a home] phone company, you can quit any time you want. It [usually] doesn’t require you to arbitrate disputes. Wireless companies have brought this upon themselves.”

The article mentions that the issue, which has been around for years, is receiving new traction due to the iPhone frenzy, and the resultant realization of many buyers that the $500-$600 phone they just bought only works with one carrier, and that they’ll have to fork over another $175 to get out of the contract–and heaven help them if they try to sue or join a class action over the many defects and lack of features of the iPhone hidden under its shiny surface.

But there’s a bigger issue at work here, and that is how corporations use their market power to force consumers into contracts that, quite literally, deprive them of their rights. The shill from AEI flat-out says it in the BusinessWeek article–“It restricts businesses from offering consumers lower prices for waiving certain rights.” That’s an example of the careless contempt these organizations have for the ordinary citizen–that they see us as so easily swayed that we’ll give up our rights for bargains.

Unfortunately, this happens far too often, mostly because consumers don’t have the time to read 20-page contracts, or simply don’t understand what they’re signing away when they buy in. As this excellent article on the dangers of arbitration clauses notes, many of these agreements not only tilt the balance of power squarely away from the consumer, but also cost even more than a jury trial or class action would:

Campbell and his clients have found that it costs $12,000 to $16,000 to go into arbitration under the commercial rules and that much of that has to be paid upfront. There is no contingency in arbitration. Also, these costs don’t include costs for an attorney if you want one. Bland says that in many cases, a consumer’s cost can easily exceed $10,000. “We’ve seen employment cases in arbitration where the fees go as high as $50,000 for the consumer,” he says.

The Alliance For Justice has a great PDF one-sheet available that outlines how rigged the arbitration system is against the little guy, and a recent study by the Christian Science Monitor found that in cases of credit and debt-related arbitration, the arbiter ruled in favor of the creditor a whopping 96 percent of the time. Why? Because the arbiters know that ruling against big business too often would cost them business in the long run, and it’s not like consumers pay that well anyway.

It’s also another example of the unmitigated monopoly that is the wireless industry. It’s easy to say that irate customers can simply cancel their contract and move on to another provider, but when that cancellation entails paying hundreds of dollars and having your phone turn into a shiny doorstop–and every other provider uses the same punitive terms in their contract–what choices do you really have?

Corporate players and their allies on the conservative front like to point to extreme cases such as the “pants lawsuit” as examples of how our system of law needs reform. But in so doing, they are waging war on one of the most fundamental rights we have–the right to redress grievances in front of a jury of our peers. Every time you sign one of these immensely complex agreements, be sure to read the fine print–you may be signing away your rights when you sign on the dotted line.

6 replies »

  1. The only issue here is that the contract you sign – usually a couple years – includes a heavy handset subsidy. That changes the equation slightly.

  2. I’ll give you an example from South Africa. Richard Branson started a new company here: Virgin Mobile. He promised no contracts, no hidden costs, etc. All that you ask for. The only thing is, without these contracts there can be no subsidies for the handsets and Virgin Mobile didn’t offer “free” phones with contracts – you have to buy them.

    The public has rejected them outright and they have struggled to make any impact on the market. Recently they began offering contracts with “free” phones.

    Customers insist on these “free” phones and companies need to secure some way of ensuring that they get their money back. If a lawsuit prevents contractual lock-in then, as Sam says, bye-bye subsidised handset.

  3. Sam and Gavin,

    Simply put, there are more important things in life than free. Consumers prefer the free phones because they don’t understand what these subsidy contracts really entail. Of course, what they really want is to eat their cake and have it too–the free phone with no punitive fees–but nothing’s perfect. If it comes between companies maintaining profits and the customer maintaining their rights, the company should find a better way to profit.

    That’s why I support applying the Carterfone standard to wireless companies. These companies, more often than not, don’t make the phones they sell–and if I pay one fee to a company for buying their phone, why should I pay a carrier for anything more than the service they provide? Do I pay DirecTV for my television set?

    Plus, as I said, arbitration is endemic throughout modern industry. I just picked the wireless world because their contracts are particularly egregious.

  4. I’m not disagreeing with you at all, but it is a “should” / “would” argument. It “would” be nice if consumers weren’t blinded by the idea of a free phone. But they have been. Re-educating them (i.e. us) is certainly possible – just very painful; for everyone.

    And you do have a “Cry Wolf” legal system that does wrap companies in costly legal disputes for ages. I’m not in the least surprised they do their best to find ways around court cases (where sympathetic juries are likely to award massive punitive damages against them) and into arbitration where decisions are much harder to reach.

    This isn’t a judgement on your legal system, merely an observation of a “moral hazard” result of an asymmetry.

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