Key Takeaways

  • Mandatory arbitration clauses require disputes to be settled outside of court through arbitration.
  • Consumers often agree to these clauses without realizing it, as they are commonly embedded in fine print.
  • Pros of arbitration include quicker resolutions and lower costs compared to court litigation.
  • Cons of arbitration involve limited rights to appeal, potential bias of arbitrators, and lack of transparency.
  • These clauses are prevalent in consumer, employment, healthcare, and financial service contracts.
  • Legislation and court decisions continue to shape how enforceable these clauses are in various contexts.
  • Consumers and employees have pushed back against unfair arbitration practices through advocacy and legal challenges.

Mandatory arbitration clauses in consumer contracts require consumers to agree to accept the ruling of a third party rather than taking a case to court if there is an issue with a product or service. It's an alternative approach to resolving a dispute, and an unbiased third party listens to those involved and makes a binding decision about the issue. Arbitration is popular because it saves time when compared to lawsuits.

Benefits of Choosing Arbitration Over a Legal Case

Some of arbitration's benefits include:

  • Arbitration reduces the time involved in receiving a decision instead of keeping things tied up in court proceedings indefinitely.
  • Arbitration can be less costly than a court hearing because discovery and depositions are not required for arbitration.
  • Arbitration gives each party more control over the proceedings than they would have with the formality of court proceedings.
  • It may be possible to select an arbitrator who has experience in the specific field involved.
  • Arbitration typically doesn't require the parties involved to hire a lawyer, so both sides save money.

What Makes Arbitration Legally Binding?

Mandatory arbitration clauses are legally binding because they are contractual agreements between the parties involved. Once agreed upon, these clauses typically waive the right to pursue disputes through the court system. Key legal elements that make arbitration binding include:

  • Written agreement to arbitrate disputes.
  • Clear language stating that arbitration replaces court litigation.
  • Binding nature of the arbitrator’s decision, with very limited grounds for appeal.
  • Compliance with the Federal Arbitration Act (FAA), which generally enforces such clauses unless deemed unconscionable or invalid under contract law.

Disadvantages of Arbitration

When agreeing to a mandatory arbitration clause, it's important to know what you may be giving up. Some disadvantages of arbitration are:

  • The absence of formal evidence and fact discovery means no testimony is taken from witnesses, which might otherwise strengthen a case for a court hearing.
  • The decision in an arbitration case is binding, so you can't appeal if you feel the decision is incorrect or unfair.
  • When companies put mandatory arbitration clauses in contracts, such as consumer or employment contracts, those contracts typically tend to favor the interests of the company over the employee or consumer.

These clauses asking consumers and employees to agree to arbitration have been growing in popularity with companies for the past few years.

Types of Mandatory Arbitration Clauses

There are several types of mandatory arbitration clauses commonly found in consumer contracts, including:

  • Pre-Dispute Clauses: Require arbitration for any future disputes before any conflict arises.
  • Employment Arbitration Agreements: Typically part of employment contracts, requiring disputes between employees and employers to be arbitrated.
  • Consumer Product or Service Agreements: Often included in terms of service for products, subscriptions, credit card agreements, or healthcare services.
  • Class Action Waivers: Sometimes embedded within arbitration clauses, preventing consumers from joining together in collective legal actions.

Understanding the type of arbitration clause can help consumers assess their legal options more effectively.

Agreeing to Arbitration Without Realizing It

Mandatory arbitration clauses have become a common addition to user contracts for online companies recently. Sometimes consumers aren't even aware of agreeing to these clauses, especially with online companies, because the mandatory arbitration clauses are often hidden in fine print or have to be quickly accepted via a popup screen when initiating a website's service. Some other places these clauses turn up include agreements signed at the doctor's office, bank documents, and employment agreements that must be signed in order to work for a business.

Consumer Response to Mandatory Arbitration Clauses

While courts have supported the rights of companies to put mandatory arbitration clauses in contracts, consumers have started pushing back against some one-sided mandatory arbitration clauses. For example, Starbucks gift card buyers pushed the company to take out the forced arbitration clause printed on gift cards. General Mills also received flack from customers over a mandatory arbitration clause that squeezed the rights of customers who entered their online sweepstakes or downloaded coupons from their website. As recently as May 2018, the Supreme Court decided companies can add arbitration clauses that block employees from suing employers over employment issues.

Laws and Court Decisions on Mandatory Arbitration

The legal landscape surrounding mandatory arbitration is influenced by federal law, state regulations, and court rulings. Some important legal considerations include:

  • Federal Arbitration Act (FAA): Strongly favors enforcement of arbitration agreements across most industries.
  • State Law Limitations: Some states have sought to restrict the use of arbitration clauses, particularly in employment and consumer contexts.
  • Supreme Court Rulings: The U.S. Supreme Court has upheld mandatory arbitration clauses in multiple cases, including Epic Systems Corp. v. Lewis (2018), which permitted class action waivers in employment contracts.
  • Proposed Legislation: Efforts such as the Forced Arbitration Injustice Repeal (FAIR) Act aim to limit the use of these clauses, particularly where they are deemed unfair to consumers or employees.

These legal developments shape the enforceability and scope of arbitration clauses nationwide.

Concerns Over Mandatory Arbitration Clauses in Consumer Contracts

A number of concerns exist over the issue of forced arbitration clauses in consumer contracts, such as:

  • Consumers have no actual choice in this type of forced agreement, and this conflicts with the purpose of the original arbitration which both parties agreed to accept.
  • Agreeing to a mandatory arbitration clause takes away a consumer's right to sue, participate in class action suits, and appealing the arbitrator's decision isn't even an option.
  • Consumers don't always know when they have accepted an arbitration clause because the clauses are not openly expressed in some situation.
  • Arbitrators aren't necessarily unbiased, though they are supposed to be, because they work for the companies that hire them.
  • Consumers get no say in where and when the arbitration session is held.
  • While the consumer's rights are taken away by the mandatory arbitration clause, the companies that use these clauses can sue the customers if the correct phrasing is used.
  • If a consumer wants a lawyer's representation, smaller potential awards mean the consumer pays by the hour rather than by putting the lawyer on retainer.
  • Damages awarded to consumers are typically lower than the court awards in lawsuits.

Frequently Asked Questions

  1. What does it mean to define mandatory arbitration in consumer contracts?
    Mandatory arbitration requires consumers to resolve disputes through an arbitrator instead of suing in court, often outlined in the fine print of contracts.
  2. Are mandatory arbitration clauses always enforceable?
    Not always. Courts may refuse to enforce clauses deemed unconscionable, overly one-sided, or lacking clear agreement between parties.
  3. Can I opt out of a mandatory arbitration clause?
    Some companies allow an opt-out period, typically requiring written notice within a specific timeframe. Always check the contract terms.
  4. What rights do I lose under a mandatory arbitration clause?
    You generally waive the right to sue in court, participate in a class action, or appeal the arbitrator's decision.
  5. How can I challenge a mandatory arbitration clause?
    Challenges often rely on proving that the clause is unfair, hidden, or that consent was not genuinely given. Consulting with an attorney is advisable.

If you need help with a mandatory arbitration clause in a consumer contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.