Senators Blumenthal and Franken recently introduced a bill that would prohibit mobile carriers from including mandatory arbitration clauses1 in their customer contracts. This, of course, raises the question of what an arbitration clause is, exactly, and why it’s a big deal?

Arbitration is semi-formal dispute resolution process. It’s semi-formal because it’s not as formal as a court, which brings with it voluminous rules of evidence, procedure, and entirely of the host state’s laws which decide the outcome. In arbitration, none of this is strictly necessary or guaranteed. This makes arbitration significantly less expensive for the two sides, and administratively much quicker.

However, there are rules. Groups like the American Arbitration Association have publicly posted rules that govern their proceedings, and most arbitrators will take common law and state and federal laws into consideration when making a decision.

So what’s the big deal?

If the law passes, consumer goods companies might have to make really big changes to the way they handle disputes, do business generally, or they may even have to increase fees. Here’s why:

Class action lawsuits are often impossible in arbitration. Class Actions are truly scary for consumer goods companies, because while a $200 complaint about a cell phone is obviously not worth the cost of litigation, several thousand consumers’ combined $200 issues certainly are. Damages can quickly add up to millions of dollars.

Common Law precedent also can’t come from arbitration hearing because they’re not constitutionally authorized courts. This makes it safer to toe the line because losing in arbitration today has no effect on tomorrow’s arbitration hearing dealing with substantially the same issues.

Finally, because arbitration has free reign to consider almost any standards they want when making decisions, companies can rely on one law—there’s less hassle dealing with the nuances of the laws of all 50 states, plus how those interact with federal law.

What would happen if the bill passes?

If mobile carriers can’t rely on this quick dispute resolution option, they’ll have some choices to make. They could try to revamp their practices to reduce consumer complaints—but this takes time and money. They’ll have to spend more money on dispute resolution as they navigate more complex state rules, some of which have strict consumer protection laws. In any case, this bill would probably cause a fee increase, a drop in profits, or both.

Is arbitration good or bad?

Don’t think of it in those terms just because there’s a bill proposal about it. Arbitration can be attractive for both parties in a dispute because of its quick resolution and low cost. At the same time, some people may be put off by it. Always ask a business advisor or lawyer if it is wise under the circumstances before including arbitration in your contracts.

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1.  See Verizon’s arbitration clause for example (the rest of the contract has been deleted, and the ALL CAPS formatting has been removed).