Few people like their cellphone company. Check some of them out at Brand Mojo, and you’ll see that people prefer leaky oil companies to their cell phone carriers. Why do consumers almost universally hate an industry that provides one of the most useful services around – after all, what would we do without them? Learn how cellphone industry manipulate consumers.

Manipulation of Cellphone industry

So very, very lonely....

Well, part of the answer is that cell phone companies spend an inordinate amount of time and effort trying to manipulate their customers. Cellphone companies could provide, on their own, enough material for a year of this blog, but I want to focus this week on one particular technique, arbitration. Or, more accurately, mandatory binding arbitration.

Arbitration is a logical concept, in theory – let people take simple disputes to an arbitrator instead of a judge. No lawyers, simplified rules, faster conflict resolution – what’s not to like? In fact, in the 1980s, courts liked arbitration because they saw it as a way for employees and others to defend themselves against big corporations: arbitration was much cheaper (so hourly workers could afford it), and it would free up  the courts for more serious business. So the law provided the framework to let people, companies – even states – to choose arbitration to settle their disputes, instead of going through the hassles of the standard judicial system.

Fast forward a couple of decades, and corporations started to think that arbitration might be a good idea from their perspective as well. Companies do not, as a rule, like to get sued. Juries are unpredictable, and small matters can end up with big penalties. So arbitration began to look like a good way to ensure that consumers suing the companies could only win modest real judgments (arbitrators usually cannot award punitive damages, which is the real painful part of jury judgments).

Of course, for this to work, everyone needs to opt-in this mediation business. So companies started to put specific language in the core contracts that consumers or buyers needed to sign before being allowed to do business with the company. So, if you pull out the contract of service of your favorite cell-phone carrier (you have kept it handy and read it regularly, right??) you will notice that, when you signed it, you have:

  • Agreed to use arbitration instead of any jury trial for all your disputes with your carrier (this it the “binding” part of Binding Mandatory Arbitration).
  • Agreed to abide by the decisions of the arbitrator, without any form of appeal (the “mandatory” part of Binding Mandatory Arbitration).
  • Agreed to let your cell phone carrier choose your arbitrator (if fact, Verizon had at one point the language “your arbitrator may be an employee of Verizon” – you have to give them points for gumption!).
  • If you insist on bringing the carrier to court despite your mandatory arbitration, you agree to pay the carrier’s legal costs to get your suit thrown out of court and back to arbitration.
  • Finally, you agreed that you cannot be part of a class action of any kind (companies hate class action lawsuits, as those typically involve very large sums of money).
 Beware of Manipulations

"I did what??"

By the way, there is no way to avoid this contract – all cell phone providers demand that you sign it as a condition of service. Even using the phone essentially binds you to the above. Of course, don’t take my word for it – check out AT&T’s 2,500 page Guidebook of Rules here yourself. It’s fun. Go ahead. We’ll wait back here.

In and of itself, this would be manipulative enough – but it only got better over time.

Arbitrators, unlike federal or state judges, do not get paid by the state. They get paid by the people whom they arbitrate for. As a result, implicitly or not, arbitrators depend on large corporate clients for their livelihood. It’s hard to rule against the guy who pays your salary, after all. Even if some arbitrators were unbiased, since your carrier can choose whom they pick as arbitrator, it would be relatively easy for them to select arbitrators that are… relatively sympathetic to the carriers.

And this is what happened. The Pubic Citizen survey in 2007 found that consumers lost 94% of the time in California, for example.

This is not good.

Now, not all arbitration is that stacked. Several studies (Warning: PDF) show a better win rate for consumers, but there is usually a catch (in this case, for example, the study looked at consumer-initiated arbitration. Consumers who start arbitration against their carriers are rare – most of the arbitration proceedings that are relevant are initiated by the carrier themselves).

With this type of win rates, carriers became bolder. They started to add more and more conditions to their terms of service. They added confidentiality clauses (you can’t talk about losing your arbitration proceedings). They added language that actually started to override laws, like shortening the amount of time consumers had to opt out of service, or reducing the impact of consumer protection laws.

Eventually, this landed the carriers in trouble. In 2008, a Washington State appellate court, for example, found AT&T’s terms unconscionable, and voided the mandatory binding agreement for one customer who had been overcharged by the carrier for years.

But even with this occasional backlash, arbitration is still a good manipulation technique. It is easy to defend (“less expensive than lawsuit!”), easy to hide (“it’s right there on page 1,562!”), and quite effective (90%+ win rate for the carriers). Taken altogether, these are compelling arguments for why all carriers in the US have turned to it.

In fact, binding mandatory arbitration is now found in far more than dusty carrier service terms. Many employment agreements have them (check yours now!), credit card contracts, and even mortgages. So, like it or not, you will probably become quite familiar with arbitration at some point in your life. When you do, drop by here and leave a comment behind and let us know how it went!