Beware Before You Sign: Understanding Mandatory Arbitration Clauses

by The Rothenberg Law Firm LLP
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Mandatory Arbitration Clauses

Many consumer transactions that Americans make today are governed by mandatory arbitration clauses. Most frequently, cell-phone contracts, airline tickets, rental agreements, and other such purchases have a mandatory arbitration provision. Generally these clauses are buried in the fine print of a contract, and may be overlooked by consumers. However, mandatory arbitration clauses are an important part of a consumer transaction.  It is important for consumers to familiarize themselves with a basic understanding of these clauses.

What is Arbitration?

Arbitration is a dispute-resolution process that is different from the typical process of filing a lawsuit in a civil court. In arbitration, an individual (called an “arbitrator”) is hired to hear both sides of the dispute, and is meant to render an unbiased opinion as to its outcome. An arbitrator’s decision may be binding, which means that it may not be appealed to a court.

When a consumer signs a contract that contains a mandatory arbitration clause, he or she is agreeing that if there is a problem or dispute with the service or product, he or she must arbitrate that issue rather than go to court.

It is important to note that a consumer may be bound by the arbitration clause. Therefore, the consumer in many cases, may not be able to seek a remedy in court even if he or she did not fully read the contract that he or she signed.  In certain circumstances, such as fraud or duress, the consumer may not be bound by the arbitration clause and may in fact be able to bring a cause of action in court.

Mandatory Arbitration Clauses Can Harm Consumers

An unwitting consumer, who finds him or herself in a dispute with a merchant, may face the many complications that the mandatory arbitration process poses. The Public Citizen website details many of these pitfalls.

First, arbitration can be a very costly process to consumers. For example, the person who brings the claim to arbitration may be forced to pay a very expensive filing fee. In addition, an arbitrator usually charges an hourly fee to review the case, which can run in the $200-$300 per hour range.

Secondly, arbitration providers have been accused of favoring big businesses. Opponents of mandatory arbitration claim this is because arbitration providers are marketed towards big businesses, and many arbitrators are former businessmen themselves. There is also an overarching tendency for arbitrators to split the difference in a dispute. Splitting the difference may favor a big business if it is truly at fault for the consumers’ damages.

Third, mandatory arbitration does not have discovery rules that are protected by the courts. For this reason, it may be difficult- if not impossible, for consumers to obtain crucial documents from big businesses that could make or break their cases.

Fourth, mandatory arbitration clauses generally prohibit class action lawsuits—lawsuits with many plaintiffs who have a claim in common. Individual consumers may not have the clout, time, finances, effort or energy to bring an individual arbitration claim, whereas an attorney, if permitted, could bring a class action suit on behalf of hundreds of plaintiffs facing the same issue.

Finally, mandatory arbitration clauses may dictate that a hearing is held in a location that is convenient for the business. That means that a claimant may have to travel long distances to have his or her case heard.

There are also a number of other issues that mandatory arbitration clauses pose to consumers, such as one-sided provisions (i.e. the consumer must bring a claim in arbitration, but the business can bring other claims in court), the lack of public record of the dispute, limitations on available remedies, and very limited review by a court.

Federal Legislation on Mandatory Arbitration Clauses

For the reasons listed above, the federal government has made efforts to protect consumers from onerous mandatory arbitration clauses. In 2013, Senator Al Franken, of Minnesota, sponsored the Senate’s version of the Arbitration Fairness Act (AFA) of 2013. According to a release by Senator Franken, the AFA would restore the intent of the original federal law, the Federal Arbitration Act (FAA) of 1925. That law was passed to govern agreements between competing businesses, but has been expanded during the years to make mandatory arbitration clauses between consumers and businesses enforceable. The AFA would clarify the FAA, and would add a new chapter which would make mandatory arbitration clauses related to employment, consumer, civil rights, and antitrust disputes invalid if arbitration is required before the dispute arises. The AFA would not, however, completely ban arbitration. Rather it would allow the parties to choose to arbitrate after the dispute arises. The bill was sent to Committee on May 7, 2013 for consideration and is still pending resolution.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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