Arbitration Clauses and Class Action Waivers

The New York Times recently published a three-part series, Beware the Fine Print, criticizing the widespread use  of mandatory arbitration and class action waiver clauses in consumer contracts. The authors describe the growth of these contract clauses as “a far-reaching power play orchestrated by American corporations.” A Times editorial asserts that

“forced-arbitration clauses, found in the fine print of contracts, also typically bar aggrieved parties from pressing their claims as a group in a class action, often the only practical way for individuals to challenge corporations. In addition, corporations effectively control the arbitration process, including the selection of the arbitrator and the rules of evidence, a stacked deck if ever there was one.”

A recent ABA Journal blog post notes the increasing use of mandatory arbitration clauses, even by religious organizations: “Buying a Bamboo Floor? This Company Requires Religious Arbitration; Courts Uphold Clauses” (Nov. 3, 2015).

The Consumer Financial Protection Bureau released a study in March 2015 finding that the terms of a consumer contract “are not generally open to negotiation by the consumer, but are instead offered on a take it or leave it basis, meaning that the consumer either accepts those terms or instead shops for another product with different standard form terms. In legal terms, the contract is one of adhesion, making the clause ‘mandatory’ in contrast to the voluntary clauses that may be reached by negotiation between commercial parties.” CFPB Arbitration Study, March 2015, at 4 n.4.

The U.S. Supreme Court has consistently held that mandatory arbitration clauses in contracts must be enforced under the Federal Arbitration Act, 9 U.S.C. § 2. The Court ruled in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220  (1987), that investors who had signed agreements to arbitrate all disputes with their stockbrokers were required to submit their claims to binding arbitration rather than pursue them in court. When a 2005 California Supreme Court decision held that an arbitration clause that included a class action waiver in a consumer contract was unconscionable, Discover Bank v. Superior Court, 113 P.3d 1100 (2005), the Supreme Court resoundingly disagreed. In AT&T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011), it ruled that the FAA preempted contrary state rulings such as Discover Bank, “reflecting both a liberal federal policy favoring arbitration, and the fundamental principle that arbitration is a matter of contract. In line with these principles, courts must place arbitration agreements on an equal footing with other contracts, and enforce them according to their terms.” In American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 186 L. Ed. 2d 417 (2013), the Court went further, ruling that arbitration clauses with class action waivers should be “rigorously enforced” in nearly all cases, even if the costs of individually arbitrating claims exceed the potential recovery: “The antitrust laws do not guarantee an affordable procedural path to the vindication of every claim. . . or evince an intention to preclude a waiver of class action procedure.”

Samuel Gompers said:

Do I believe in arbitration? I do. But not in arbitration between the lion and the lamb, in which the lamb is in the morning found inside the lion. I believe in arbitration between two lions or two lambs. . . There can be arbitration only between equals. Rocky Mountain News, Feb. 10, 1888.

Additional Reading:

Frances E. Zollers, Alternative Dispute Resolution and Product Liability Reform, 26 Am. Bus. L.J. 479, 484 (1988) (available on Westlaw).
Rita M. Cain, Commercial Disputes and Compulsory Arbitration, 44 Bus. Law. 65 (1988) (available on Westlaw).
Alan S. Kaplinsky et al., 2014 Arbitration Developments-Courts Continue to Apply Concepcion and Italian Colors, 70 Bus. Law. 649 (2015) (available on Westlaw).


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