Mandatory Arbitration Clauses Are Everywhere But Aren't Good For The Consumer

mandatory arbitration ties your hands and prevents you from getting protections and remedies available under state and federal law

Mandatory Arbitration Clauses Are Everywhere But Aren't Good For The Consumer
Image: NCCC
March 26, 2018

You may have heard of arbitration, but you may not know what it means. Arbitration is another method of resolving disputes where parties present their sides of a complaint to an independent person who then decides on the rules, facts, and arguments before making a decision on the dispute. It’s similar to court proceedings, but you’re not in front of a judge or jury.

what is arbitration?

Arbitration is an alternative method of dispute resolution where both parties submit their dispute to an arbitrator or panel of arbitrators as opposed to going to court. The arbitrator decides what the rules will be, considers the facts and arguments of both parties, and then makes a decision as to the outcome of the dispute.

arbitration can be voluntary or mandatory

Arbitration can be voluntary or mandatory. Voluntary arbitration is preferred as it preserves your legal rights. Mandatory arbitration, on the other hand, compels you to first submit to the arbitration process as a condition of buying or using a product or service before you take your case to court. In many situations, however, accepting a mandatory arbitration clause means you surrender your rights to further court action at any time in the future for anything.

arbitration can be binding or non-binding

If arbitration is non-binding, you are free to either accept or reject the decision of the arbitrator. In binding arbitration, you are legally bound to the decision the arbitrator makes, even if you don't like it. In binding arbitration, you can never appeal, never sue, and never bring the same action against the company again.

Where can I find an arbitration clause?

Unfortunately, mandatory arbitration is included in more and more contracts and terms of agreement, even those used for employment, insurance, car loans, credit cards, and even customer loyalty cards at your local grocery store. You can, as a general rule, expect that any contract or agreement has an arbitration clause.

Where can I find an arbitration clause?

In order to spot these mandatory arbitration agreements, you need to be pretty savvy and to actually read the entire terms of service agreement or contract. Unfortunately, most consumers are unaware that they have agreed to arbitration simply because they don’t read contracts and don’t read terms of service. Arbitration clauses are hidden in pages upon pages of contracts and terms of service agreements and aren’t in the very first paragraph. They may even be called something different, such as "Alternative Dispute Resolution."

Is arbitration good?

There is nothing wrong with voluntary arbitration as it preserves your legal rights. The problem comes with mandatory or forced arbitration where you are giving away your legal rights if the arbitration process doesn't work in your favor. Companies have the advantage in arbitration and want you to go through the arbitration process.

companies want you to go through arbitration

Arbitration providers market entirely to businesses and their arbitrators often consist primarily of corporate executives and their lawyers. So, arbitration is tilted heavily in the favor of the company because the arbitrator is chosen by and paid for by the company. That arbitrator has a financial incentive to rule in the favor of the company in order to be chosen in the future by the company for other arbitration cases. But that doesn't necessarily mean that the arbitration will not find for the consumer. But arbitrators aren’t required to take law and legal precedent into account when making decisions like in legal proceedings. And since arbitration is private, everything that happens behind those closed doors is supposed to remain secret, meaning there is no public review of the process and no appeal in the case of binding arbitration.

arbitration clauses can be written to discourage its use

Arbitration clauses are often written in such a way so that consumers are discouraged to use it. You may have to pay larges fees just to initiate the process (often in excess of $750), travel thousands of miles from home at your own expense to attend a hearing, pay the arbitrator's hourly fee ($200-$300 per hour), and can be on the hook for the company's fees if you lose. To add more insult to injury, any fees for which you are responsible or may be responsible often have to be deposited to an account in advance of the hearing. So, a company is banking that you won't want to travel across country, put up a large deposit, split hundreds of dollars in fees, and risk having to pay additional fees in the event of a loss for a small claim. They're also banking that you just won't have the money to bring such an action anyway. As an example of arbitration fees, Lowes Home Improvement has an arbitration clause when you use its website, any of its apps, its customer programs, and any other site in which its terms and conditions may appear. The arbitration section ‘survives’ termination of the agreement, which basically means that in the absence of a new arbitration clause in a future contract or agreement, the arbitration clause in the original agreement remains in effect. Lowes Home Improvement’s agreement also specifies that you will split the cost of arbitration with the company regardless of the outcome. That alone might not be worth taking your issue to arbitration.

companies themselves hate being pushed into mandatory arbitration

While companies love pushing you into mandatory arbitration, they don't like being pushed into mandatory arbitration themselves. In fact, most companies refuse to deal with other companies where mandatory arbitration clauses are in effect. They want to control the process themselves, not be controlled.

is arbitration really cheaper?

Companies often tout the lowered cost of arbitration when compared to traditional legal avenues. But that's not necessarily true for you. It is true for the company, but if you have to shell out fees just to attend the hearing, you're already at a loss.

you can usually do better if you go to court

Companies don't want to go yo court because it puts them on a level playing field. Courts are ruled by law, legal precedent, and legal discovery, which allows litigants to obtain information and evidence from their opponents or from third parties. Discovery is a privilege in arbitration, but not a right. Arbitrators can't enforce subpoenas, meaning you have to file a lawsuit just to get a third party or a piece of information into the hearing. In open court, you don't have to jump through nearly as many hoops. Further, judgments in court are often more favorable to the consumer, both in the rate of success and the dollar amount of judgments.

arbitration agreements often prohibit class action lawsuits

Class action lawsuits are legal actions taken by a group of consumers, or a class, when a wide-scale wrong has been committed by a company. Class actions are sometimes the best option for consumers for such wide scale wrongs, scams or fraudulent practices where a lot of time, money, effort and experience are needed to prove these cases. But most arbitration agreements limit your ability to participate in a class action or prohibit your participation in class actions altogether.

you have limited remedies in arbitration

When you take a case to court, you have the option of any remedy that is available to you under law. Courts can order a company to do something or prohibit a company from doing something whereas an arbitrator can't. A court can award punitive damages, which are designed to punish a party that commits egregious actions. An arbitrator can't do that.

most people unaware they agreed to arbitration

People are often unaware that they've agreed to arbitration. In some cases, you may accidentally accept binding and mandatory arbitration through something that is seemingly unrelated to what you are using. As an example, you might accept mandatory arbitration through loyalty or rewards cards from your local home-improvement store or grocery store. You may think that you are just getting the card to get the discounts, but the terms of service for the card may have very clever terms of service agreements that specify your agreement to being bound by mandatory arbitration clauses that affect not just your use of the card but any interaction with the store. That can mean that you are giving up any and all rights to legal action for any length of time, even life, just by signing up for or accepting the loyalty card. And some of the agreements even specify that arbitration can’t be revoked once accepted.

arbitration may not bind the company

Mandatory arbitration is generally binding upon you and severely limits your options. But it's rarely binding on the company and almost always leaves any option available for the company. Mandatory arbitration clauses are often written in such a way to bind you to a specific action but to leave all rights available to the company, even court actions. So, if you have a dispute against a company you might be required to submit to arbitration. If the company has a dispute against you, the company can go straight to court. That's not really fair.

laws that protect us go out the window

Mandatory arbitration can essentially nullify legal protections we have. Arbitration clauses in employment contracts can dissolve your protections you get from federal laws, such as the Civil Rights Act, the Equal Pay Act, the Whistleblower Protection Act and the Family and Medical Leave Act (FMLA). That means that you may not be able to sue for discrimination, harassment, abuse, retaliation, or wrongful termination. State and federal protections for discrimination due to age, sex, religion, race, disability, equal pay for equal work, whistleblowers and FMLA users go out the window.

You can't ever sue

In many cases where arbitration clauses are present, you are not only giving up your rights to go to court for your disagreement, but you're also agreeing to give up your rights to sue for negligence, defective products, or scams. So if an arbitration clause is automatically agreed upon as soon as you buy a product or service, you are instantly losing your rights to hold the company accountable in court. Let's assume that all vehicle manufacturers have a mandatory arbitration clause that prohibits you from suing for any reason. All of those people who suffered injuries and death of loved ones due to those high-profile Jeep fires, GM ignition switch defects that shut cars off while driving or Takata airbags that fired shrapnel at occupants would never have been able to take the companies to court... ever.

Are there companies that don't use arbitration or only use voluntary arbitration?

Of course! Some businesses still don't require arbitration and they typically have the fewest complaints and disputes with consumers. Some industries, however, are requiring mandatory arbitration as a matter of general policy now, making it impossible to get certain products or services without agreeing to arbitration. Some examples include insurance companies, car dealers, credit cards, nursing facilities, software developers, and cell phone manufacturers and service providers. For the record, we do not use arbitration clauses of any kind in any of our agreements.

Nullifying an arbitration clause

Mandatory arbitration clauses can be nullified in cases where there is evidence of fraud, allowing consumers to participate in class actions and individual legal cases. The National Labor Relations Board had been nullifying mandatory arbitration clauses in employment contracts. The 7th U.S. Circuit Court of Appeals ruled that mandatory arbitration as a condition of employment to be a violation of federal labor laws that impeded rights afforded by the National Labor Relations Act, thereby making all mandatory arbitration in employment contracts non-binding.

Can I refuse to agree to mandatory arbitration?

In most cases, you can't refuse to submit to mandatory arbitration in the event of a dispute. If you buy a product and there is a mandatory arbitration clause in effect, you can do little more than return or not use the product. In other cases, it may be possible to avoid the arbitration. If you are buying a car, for example, and the dealership wants you to sign a mandatory arbitration agreement, you can always refuse. The dealer might not sell you the car, or the dealer might agree to strike out the arbitration clause and permit you to agree to the rest in order to make the sale. You can also cross out the arbitration clause and sign the paperwork anyway, hoping the other party will accept the contract. But the other party might be able invalidate the contract. It's hard to know what will happen if you refuse to agree to mandatory arbitration or if you strike out an arbitration clause. The law is not on our side.

Can I do anything?

If you are required to agree to mandatory arbitration and cannot negotiate it away or strike it out, your best best is to find an alternative product or service provider that doesn't require you to submit to mandatory arbitration. Then again, you can always continue with the agreement and hope that you don't ever suffer a problem. But until Congress passes legislation to forbid mandatory arbitration, however, we don't often have many choices but to accept it in our lives. As of March 2018, there are a variety of initiatives to end mandatory arbitration, including a letter signed by the governors of all 50 states to end the practice of mandatory arbitration in workplace sexual harassment cases. In October 2017, Congress voted to nullify a rule introduced in July 2017 by the Consumer Financial Protection Bureau (CFPB) that would have allowed customers of banks, credit-card companies, and other financial institutions to bypass arbitration and join together in class-action lawsuits.