Buried deep in the small print of many contracts is a provision stating that disputes will go into arbitration. That provision is typically inserted by the party having the higher degree of power: landlords, franchisors, etc. The two main reasons why arbitration (rather than lawsuits) are beneficial for the party with greater power are: (1) arbitration is a more streamlined and less costly option that proceeding through the court system and (2) arbitration proceedings are private, not subject to the same kind of public scrutiny as lawsuits.
The applicability of arbitration agreements came into sharp focus in a decision earlier this week by the Second Circuit Court of Appeals (one step below the U.S. Supreme Court).
Here is an oversimplification of the facts. ACN Opportunity, LLC (ACN) is a "multi-level marketing" company that enlists individuals to work on its behalf as "Independent Business Owners" (IBOs) in exchange for a sign-up fee and annual renewal fees. A large class of people signed up. When most people hear the term “multi-level marketing,” something goes ding, ding, ding in their brains and they slowly walk away. These investors did not. Why?
The answer is Donald Trump and the Trump Organization. Through various forums, including at ACN events, recruiting publications and videos, and on two episodes of "The Celebrity Apprentice" television show, ACN was strongly promoted. This series of messages by the Trump group was critical, the plaintiffs asserted, in convincing consumers – including them – to invest in ACN as IBOs. The court noted that the investors’ chances of success were minimal at best:
Contrary to the defendants' [Trump] representations that ACN's business opportunity was a low-risk entrepreneurial venture that offered investors a viable source of income, investigations by regulatory agencies allegedly have demonstrated that ACN's business was high-risk and that investors had a minimal likelihood of commercial success. Despite claims that ACN's business opportunity would be highly profitable for investors, it is nearly impossible for IBOs to profit or earn a satisfactory income from such multi-level marketing arrangements.
The problem wasn’t that Trump endorsed ACN. He endorses things all the time. The issue was that Trump claimed that the profitability of ACN was based on an “independent evaluation.” But was it?
[T]he plaintiffs allege that in exchange for millions of dollars in secret payments from ACN to the defendants[Trump] between 2005 and 2015, the defendants fraudulently promoted and endorsed ACN as offering legitimate business opportunities that were likely to afford IBOs success.
The plaintiffs had a choice. They could have pursued ACN for damages. However, under the terms of the IBO agreement, this would have gone to arbitration. So the plaintiffs sued Trump and the Trump Organization in the federal district court.
Trump cried foul, claiming that arbitration was required. Both the district court and court of appeals ruled against Trump, noting that since Trump was not one of the parties who signed the contract, arbitration did not apply.
Because of the court’s ruling (which specifically said it was not addressing the merits of the lawsuit), the case can proceed in the federal district court.
Why would Trump and his organization work so hard to keep this in arbitration? Public access to information.
Arbitration proceedings are conducted in private and the only thing that the public will typically ever hear is who won. Court cases, however, are widely reported, pleadings by the parties are public, and information that comes out during the lawsuit often reveals facts that some people would prefer remain hidden.
For an individual such as Trump who regularly uses arbitration agreements and nondisclosure agreements as a silencing measure, this defeat will be highly disconcerting.