Last week, Professor Warren highlighted one of the problems with arbitration clauses – surprise the arbitrators aren’t impartial! But that’s only the start of it. Have you seen this clause in your credit card agreement?

"You (the cardholder) agree to waive any dispute or claim you may have against us (the card issuer), even if we violate this agreement or violate state or federal law."

OK, so nobody’s credit card agreement actually says this verbatim. But that seemingly innocuous arbitration clause has this same effect, because it routinely destroys the cardholders’ rights to prosecute their claims in a class action. And if cardholders cannot aggregate their claims, then small claims are waived. ...

What middle class consumer has the time to take Discover through arbitration for a $25 dispute? And even if you have the time, what about the expertise? (You can bet that Discover card isn’t going to rely on a school teacher or mechanic to defend themselves.) And even if you win, what about the other 49 million cardholders?

That means that credit card issuers are free to violate their cardholders' agreements and violate our rights under state and federal statutes, as long as the loss to any particular cardholder is relatively small. When you have over 50 million cardholders, a little tweak to all of them can be pretty profitable. (Of course, this isn’t just about credit card companies – it applies to all adhesion contracts with arb clauses.)

Class actions have gotten a hard knock lately (and Congress ostensibly “fixed” them in 2005), but there is no escaping the logic of their necessity in the world of today. Modern companies make their money through standardization and aggregation. Think of all the legal devices that allow them to do so – for example, the corporate form allows aggregation of investors, and adhesion contracts allow aggregation of consumers. If companies had to negotiate a contract with every investor or every consumer, the modern business form would collapse. Likewise, aggregation of consumer claims is necessary to make them functional.

The Supreme Court has said as much:

“The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor."

Amchem Products, Inc. v. Windsor 521 U.S. 591 (1997). Yet, I would not hold my breath for this Supreme Court to start throwing out arbitration clauses willy nilly.

So that’s why we need Congress to step up. Here’s a very specific proposal for the next Congress: Amend the Federal Arbitration Act so that arbitration clauses in adhesion contracts are unenforceable unless there is a mechanism for the efficient aggregation of claims. We can class them in or out of arbitration – but there must be a functional class mechanism.

The California Supreme Court has already made such a finding as a matter of state law, holding that arbitration clauses that exclude class actions are unconscionable and unenforceable, since they tilt the scale so eggregiously. Discover Bank v. Boehr, 36 Cal.4th 148, (Cal., 2005). Although it is hard to argue with their logic that such terms eviscerate consumers rights, other states have been slow to follow, perhaps due to worries that that such state law judgments may be preempted by the Federal Arbitration Act.

So Congress, if you really care about the middle class, but are worried about judicial activism, here's your chance to do something about it.