Something very exciting is going on with major American companies.

They’re dumping mandatory arbitration clauses that require employees to arbitrate sexual harassment claims.

Google is leading the charge.  Facebook, Airbnb and eBay followed.

It’s time for you to take action. Dump mandatory arbitration in every aspect of your business.

The curse of mandatory arbitration

Mandatory arbitration requires employees, customers and clients to waive their right to a trial in court, before a jury of their peers.  Instead, they must submit their disputes to mandatory arbitration, administered by a tribunal, like the American Arbitration Association or JAMS.

Clients of brokers are required to arbitrate before a panel administered by FINRA, which many believe is biased and rigged against clients, and favors brokers and their firms.

Companies love mandatory arbitration.  It’s confidential. It’s very difficult to appeal from the decision of the arbitrator, which gives the arbitrator wide latitude, and it can be cost-effective, compared to a court proceeding.

But those are only pretexts for why mandatory arbitration is so popular.

It favors “repeat players.”

There’s ample evidence arbitrators rule in favor of those who arbitrate many cases.  This makes logical sense. Being an arbitrator is a coveted position.  It pays well and comes with additional perks (like power). If arbitrators get a reputation for making large awards against “repeat players”, they are unlikely to be selected for future panels.

Few employees and clients appreciate the disadvantage of signing away their constitutional right to access to the Courts.

Dump mandatory arbitration

As registered investment advisors, you agree to always place the interest of your client first, to avoid conflicts of interest where possible, and to disclose any unavoidable conflicts.

Many RIAs requires employees and clients to arbitrate disputes.  Few recognize this requirement as a conflict of interest, much less disclose it.

Here’s an alternative that preserves the benefits of arbitration and avoids this conflict.

Dump mandatory arbitration of all disputes with employees and clients.  Instead, give them a choice. Offer arbitration before a recognized tribunal (like the AAA or JAM) or the option of pursuing their claims in Court, with or without a jury of their peers.

You say you do the right thing for your clients.

This is the right thing to do for your employees and clients.

Resource of the week:

You can read about the insidious “repeat player effect” in this study.