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Dropbox’s Forced Arbitration Clause And the Phony Opt-Out Term

Dropbox’s Forced Arbitration Clause And the Phony Opt-Out Term

By Paul Bland, Senior Attorney

So a couple of weeks ago, Dropbox (a company that provides an on-line service for storing and sharing files) adopted a forced arbitration policy as one of its Terms of Service. This means that if you’re a Dropbox customer, and you have some dispute with the company (you believe it broke some law in a way that harms you), you can’t go to court to sue them, you have to go to a private arbitrator who is chosen by a company that Dropbox chose. And particularly important, Dropbox’s arbitration clause says that its customers can never bring or participate in a class action lawsuit against it – if it does something illegal that harms all of its customers in the same way, each of them would have to separately bring a case, they couldn’t join together.

As I set out in testimony to the U.S. Senate a few years ago, tons of corporations have adopted forced arbitration clauses that ban class actions, although this practice is extremely unfair to their consumers and employees. And as I’ve written elsewherethe U.S. Supreme Court has even upheld arbitration clauses that ban class actions in cases where it was proven that the arbitration clauses would gut important federal statutory rights.

One thing that was surprising to me about Dropbox’s policy was how credulous many friends (including consumer protection lawyers!) were about one provision of its arbitration clause. Dropbox tells its customers “If you don’t want to agree to arbitration, you can easily opt out via an online form, within 30-days of these Terms becoming effective.”

One person wrote me and said “what’s the catch? Will Dropbox get rid of me as a customer if I opt out of the arbitration clause?”  At first, that might sound like a cynical question. But actually, the more you know about the corporate strategy around forced arbitration, it’s actually an insufficiently cynical question.

The point of Dropbox’s opt-out provision (which is similar to opt-out provisions used by some banks, Comcast, and most nursing homes, etc.), is that it allows Dropbox to tell courts and any critics that its arbitration policy is NOT a “take it or leave it” proposition. Dropbox wants to be able to say it provision is voluntary and optional. And, at first blush, it is. But there IS a catch, just not the one my friend suggested.

As Dropbox knows, and as anyone familiar with marketing and consumer behavior realizes, only an incredibly tiny proportion of consumers actually read through fine-print contracts. It is absolutely predictable that only a tiny proportion of Dropbox customers will notice the opt-out term. (Most of them will not really be familiar with the idea of mandatory arbitration in any case.) Also, equally predictable, is that inertia is an incredibly powerful force in consumer behavior. Very few consumers will take the affirmative step of opting out of almost anything. Some years ago, AARP did a study of the privacy policies that a federal law required financial institutions to send out. If you polled consumers and explained what was going on in the privacy policies, the overwhelming majority of consumers did not want the institutions sharing certain private information. But when you required consumers to read a bunch of fine print and then take an affirmative step, only a few percent of them actually opted out of the disclosures. The same will be true here. As a result, it would be surprising if anywhere near 1% of Dropbox’s customers opt out of its arbitration clause.

So why does Dropbox have the opt out? Two main reasons. First, it is FAR harder in most parts of the country to get a court to ever strike down even the most unfair and abusive mandatory arbitration provision, if it has an opt-out term. Courts regularly reach the conclusion that even if a term would otherwise be illegal, if it’s contained in an arbitration clause with an opt out, that it has to be enforced. And second, it gives Dropbox a nice P.R. response to the charge that it’s hosing its customers.

So when my friend asked if Dropbox would get rid of them as a user, he was being credulous. If Dropbox gets rid of the tiny portion of customers who elect the opt out, then it’s screwed up all the value of the opt-out provision. The point of the opt out is to make the arbitration clause and the ban on class actions more enforceable, and to sound better. Canning customers would undermine both goals.

The whole thing is really driven by Dropbox’s desire to ban class actions. The point of having arbitration in the contract is not to arbitrate. Almost no consumers will actually go forward in arbitration against Dropbox or any other company, as the Consumer Financial Protection Bureau reported (based on all the arbitrations file in the U.S. by consumers against any kind of lender). The only reason to have the word arbitration is that this lets a corporation get rid of state laws that would strike down class action bans, which has proven to be a pretty effective strategy for corporations that want to avoid the laws

Right now, the Consumer Financial Protection Bureau is studying the use of forced arbitration clauses by lenders, and it has the power to ban these provisions.  Public Justice has filed comments (you can read them here and here) setting out substantial evidence why the Bureau should do just that. As one sign that opt-out provisions like Dropbox’s are meaningless, that in recent months, I’ve heard several clever bank lawyers suggest that it would be alright with them if the Consumer Financial Protection Bureau banned arbitration clauses unless they contained an opt-out provision. (The reason that the bank-side lawyers are open to anything is that they’re worried about the CFPB’s preliminary report, which contrasts the fact that almost no consumers bring cases in arbitration against lenders with the fact that consumer class actions have gotten financial and injunctive relief for many millions of consumers.) 

The banking lawyers who would be O.K. with an opt out really demonstrate what a meaningless term it is. If the only thing the CFPB does is ban arbitration clauses for lenders unless they have an opt-out provision, then at the end of the day banks will be able to have arbitration clauses and class action bans for 99.9% of their consumers, and almost nothing will have been accomplished.

Jane Wagner famously wrote that no matter how cynical one is, it’s never enough to keep up. I wonder if she used to hang out with corporate lawyers?

photo credit: ilamont.com via photopin cc