What are Arbitration Clauses and Why Should You Care?

Have you ever signed a contract that contained an Arbitration Clause?  Did you read the clause fully?  Did you understand the ramifications of the clause?  If you answered “no” to any of these questions, you are not alone.

The impact of arbitration clauses has greatly limited consumers’ ability to hold a wrongdoer responsible for unjust actions.  The provisions of these forced arbitration clauses are unfair to consumers, who have no bargaining power to set the terms of the applicable contract.

Forced arbitration clauses are commonly added to the terms of agreement and contracts, especially those related to employment, nursing homes, auto sales contracts and consumer finance contracts.  Currently, approximately 48% of credit card contracts contain a forced arbitration clause.

What is an Arbitration Clause?

Arbitration is an alternative to going to court.  The two sides, who agree in advance to arbitrate disputes that may arise in their business dealings going forward, appear before an arbitrator or a panel who acts like a judge.  The arbitrator weighs the facts and arguments and makes a final decision.

Arbitration can be either voluntary or forced.  In voluntary arbitration, both sides voluntarily agree to the arbitration in order to solve the dispute.

In forced arbitration, a company requires a consumer to arbitrate any dispute that may arise.  It is prerequisite of buying a product or service. The consumer waives their right to sue, to participate in a class action lawsuit, and to appeal. Forced arbitration is mandatory and the decision is binding.

The Impact of Arbitration Clauses on You as the Consumer

A recent study[i] by Professor Jeff Sovern of St. John’s University School of Law indicates that even though arbitration clauses are extremely common, most people don’t know that they have signed a contract containing one or they don’t understand the significance of the clause.  The study was performed on 688 average American consumers who were asked to read a standard credit card contract containing an arbitration clause.  The participants took a survey based on their reading.  A summary of the results are below:

  • Participants read approximately 14% of the contract although ample time was allowed.
  • Although the arbitration clause was marked “Read Carefully” in both italics and ALLCAPS, most spent less than 19 seconds reading the sixth page of standard contract. Forced arbitration clauses typically appear toward the end of the contract.
  • Most participants did not remember even seeing the arbitration clause in the contract.
  • 43% of the participants still thought they had a right to sue in court. Not true.  An arbitration clause takes away your right as a consumer to sue for any potential wrongdoing.
  • Less than half knew that a court challenge to a “properly worded” clause would not be successful; only 29% knew they could not bring a class action; and, less than 20% knew the decision of the arbitrator was final.
  • The average consumer does not know they have been subject to a forced arbitration clause. In this study, 47% claimed they never signed a contract containing an arbitration clause.  87% of them were wrong.  Common companies whose consumer contracts include forced arbitration clauses are AT&T, Verizon, and Sprint phone contracts, Paypal, and Skype.

These consumers are not alone.  In 2009, U.S. Senator Elizabeth Warren stated, “I teach contract law at Harvard and I can’t understand my credit card contract.”

Federal Law and Recent Court Cases

The Federal Arbitration Act (FAA)[ii] provides for “liberal federal policy favoring arbitration agreements.”[iii]   Under the FAA, there are few exceptions to the enforcement of an arbitration clause.

In recent years, Supreme Court decisions have largely favored the clauses.  Although state and federal appellate courts have applied those decisions differently, overall, most courts favor strict enforcement of arbitration clauses, causing a negative impact on consumers’ right to sue.

There is some hope in New Jersey.  In a recent action[iv], the New Jersey Supreme Court cast some doubt over the enforceability where the clause lacked clear language.

Last week, Amazon.com Inc. asked a federal court in California to dismiss a class action that alleged Amazon misled its customers.[v]  Amazon’s argument was based on an “arbitration” pact the consumer allegedly agreed to simply by using its website.  We will wait and see what happens in California.

 

[i] ‘Whimsy Little Contracts’ with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, Jeff Sovern et al., Oct. 29, 2014, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432.

[ii] Federal Arbitration Act, 9 U.S.C. §§ 1-16 (2014).

[iii] Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).

[iv] Atalese v. U.S. Legal Services Group LP (N.J. Sept. 23, 2014).

[v] Amazon Invokes Arbitration Clause In List Price Class Action, by Michael Lipkin, Law 360, Feb. 2015, http://www.law360.com/articles/624662/print?section=consumerprotection.

 

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