Arbitration Agreements in Consumer Contracts

There is a disturbing trend that has taken place over the last 10-20 years: the use of forced arbitration to settle disputes between businesses and consumers, commonly referred to as Arbitration Clauses or Arbitration Agreements. In effect, arbitration clauses can prevent consumers from pursuing legal claims in court and force them to use private arbitration providers, such as the American Arbitration Association (AAA) or JAMS (formerly known as Judicial Arbitration and Mediation Services). Organizations such as these provide an Alternative Dispute Resolution forum that theoretically enables consumers to resolve their disputes with businesses in a more efficient and less costly manner than a lawsuit in court. Unfortunately, many of the safeguards provided by the Court system disappear in arbitration.

For example, within the Court system, litigants have the right to appeal decisions to a higher court level, all the way to a state or the U.S. Supreme Court. In arbitration, the arbitrator’s decision is usually final, unless there is egregious misconduct by the arbitrator. Although arbitrators are supposed to follow the law just as judges do, arbitrators may not leave a written record of how they came to their decisions or arrived at the amount of their award. Court records are open to the public, which serves an important public policy of transparency for the legal process. Private arbitration forums are, well, private. Arbitration clauses typically prohibit class actions against offending businesses, which removes one tool for consumers to obtain justice.

Perhaps most important is the actual or perceived risk of bias by the arbitrator. An arbitrator’s fee is usually paid by the business, which may repeatedly use the arbitration forum. Consumers may have one or two disputes decided by arbitration over the course of their lives. Arbitrators who consistently rule in favor of consumers run the risk of being rejected by the businesses that pay the arbitrators’ fees. Hopefully, the vast majority of arbitrators maintain their neutrality and fairness. Nevertheless, the mere fact that the business pays their fees can create the perception of bias.

HOW DOES FORCED ARBITRATION AFFECT THE CONSUMER?
Unfortunately, Arbitration Clauses and Arbitration Agreements are now very common in standard consumer contracts. They are found in virtually all cell phone contracts, credit card agreements, banking and brokerage agreements, and many automobile contracts, to name a few areas. They are even creeping into employment contracts. However, few people take the time to read them. Somewhere in these contracts, there will be broad language to the effect that the consumer agrees to settle any disputes via arbitration. The U.S. Supreme Court has decided that arbitration agreements are voluntary choices made by the parties to the contract. Therefore, even onerous arbitration clauses such as requiring someone on the east coast to travel to the west coast for the arbitration hearing are perfectly legal. The Supreme Court’s justification is that if someone does not like the arbitration clause, that person can simply refuse to enter into the contract. Of course, if all cell-phone providers require arbitration, a consumer who refuses to arbitrate a dispute will have to do without a cell-phone.

The Federal Arbitration Act (FAA), which gives force to arbitration agreements, was enacted almost 100 years ago to allow equally powerful parties (meaning businesses negotiating with businesses) to choose to arbitrate their disputes instead of having to litigate in court. More recently, the Supreme Court has extended the law to include contracts between unequal parties, such as a business and a consumer, or an employer and an employee, under the fiction that a consumer has equal bargaining power in a “take it or leave it” contract (called “contracts of adhesion” in legal terminology). Furthermore, research has shown that most people do not read through the language in the contracts they sign and are not even aware that they have signed away their right to use the courts to resolve their disputes.

WHAT DOES THIS MEAN TO YOU, THE CONSUMER?
The first thing that you should do is to read any contract or agreement before signing it. Arbitration clauses are not the only parts of a contract that may put consumers in a bad position. Arbitration clauses are supposed to be conspicuous in a contract. If they are buried in the fine print and not labeled as arbitration clauses, you may have grounds to fight the arbitration clause. They also show up on websites in the “Terms and Conditions” links that few people read, but have to click through to get to the next step.

Additionally, if the arbitration clause is in a section that requires your separate signature or is contained in a separate document, you can avoid signing it. If you do not sign such an arbitration clause, and the business goes through with the transaction anyway, you can argue that you never agreed to arbitrate a dispute.

You can vote with your feet. In certain industries, some, but not all, of the players use arbitration clauses. If a business requires arbitration in their contracts, perhaps its competitor does not.

Lastly, the existence of an arbitration clause in a contract does not doom you to defeat if you have a dispute. Businesses do not always enforce arbitration clauses because many arbitration clauses require the business to pay the cost of arbitration. Additionally, businesses sometimes waive their right to arbitrate if they do not insist on arbitration after the lawsuit is filed in court.

If you believe that you are a victim of consumer fraud, do not let a requirement to arbitrate your claim deter you from pursuing your consumer rights. Contact the Law Office of David C. Ricci, LLC, for a free consultation with a skilled consumer attorney to evaluate your options.

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