How Mandatory Arbitration Clauses Impact Consumer Rights

Whenever you open a bank account, sign up for a credit card, or even download an app, you receive a lengthy account-holder agreement — a long scroll of terms and conditions. And when you click “agree” or sign the dotted line, one of the many contractual conditions you’ve probably agreed to is an arbitration clause.

You may have additional consumer protections under state law. To understand and enforce your consumer rights, reach out to an experienced consumer law attorney.

Arbitration Provisions in Consumer Contracts

Most people don’t read the boilerplate language in contracts. Buried in the fine print is a requirement that disputes be subject to “mandatory arbitration.”

“People don’t know that provision is in there,” says Joseph H. Mizrahi, a partner at Mizrahi Kroub LLP. “That’s unfortunate because they’re losing a significant legal right: To be able to litigate their claim in a courtroom and in front of a jury of their peers.”

“The vast and overwhelming majority of consumers who have come to our office have been utterly unaware that there was this sort of clause in their standard contract,” says Daniel Schlanger, a consumer protection attorney at Schlanger Law Group.

“It’s often accompanied by a class action waiver. Virtually every forced arbitration clause nowadays is both an agreement to not go to court and an agreement that in any arbitration, you will proceed individually and not on a class basis. I think it’s terrible and unfair,” he says. “That said, it has not been my experience that arbitration hearings are uniformly hostile to consumers.”

What Does Mandatory Arbitration Mean?

Mandatory arbitration agreements bar consumers from class-action lawsuits, forcing individuals into private suits.

Banks and business interests assert that the private arbitration process is more efficient and flexible for consumer claims, allowing for speedy resolution and lower costs. They argue that class action lawsuits are time-consuming and costly, an expense that is passed on to consumers in the end.

But these relative savings come at a cost, says Portland consumer law attorney Justin Baxter. “Arbitration is run by private companies that hold quasi-court forums. There’s a range of rules and remedies. Consumers lose the benefit of a jury of their peers and instead have their cases decided by a lawyer whose full-time professional practice is being an arbitrator. Consumers also lose out on the public scrutiny of the legal process, because arbitration is confidential,” he says.

“There’s a reason why big companies like Wells Fargo put these into their boilerplate: to protect Wells Fargo.”

According to The New York Times, “Consumer arbitration clauses have derailed claims of financial gouging, discrimination in car sales and unfair fees.”

One key aspect of mandatory arbitration clauses is the loss of the ability to join claims into a single class action on behalf of many. “The problem is that no one is going to take the time or trouble to bring an individual arbitration case to get their $30 back. So that just goes away, and all the thousands of cases like it go away,” Baxter adds.

What Is the Arbitration Process?

So what is arbitration? A form of alternative dispute resolution (ADR), arbitration procedures resemble those of the court system, albeit in an abbreviated form.

The most common services that execute arbitrations are Judicial Arbitration and Mediation Services (JAMS) and the American Arbitration Association (AAA). These organizations provide the arbitrator who oversees each case.

Often, arbitrators are former judges, Mizrahi says, “but sometimes they’re former corporate officers who might have anti-consumer positions — definitely in comparison to a typical jury, which usually sides with consumers rather than corporations.”

Arbitration proceedings are also private and tend to move much faster than court proceedings. Procedures for gathering information and documents are more limited in arbitration. And except in narrow circumstances, there is no right to appeal an arbitration decision. “Otherwise, the arbitration rules are modeled in a similar way to a court proceeding,” Schlanger says.

The Political Battle Over Mandatory Arbitration

The Consumer Financial Protection Bureau (CFPB) issued a rule in 2017 that limited the use of arbitration clauses in certain financial products, allowing consumers to participate in class action claims. However, this rule was repealed by Congress. “Functionally, this meant that class binding arbitration waivers became unenforceable,” Baxter says.

This means class actions are, once again, disallowed in arbitration.

Is there anything an individual consumer can do to avoid the use of arbitration in a contract? Probably not, Baxter says. “It’s really rare for an individual to negotiate this term out of a contract. In some instances, the contract language might provide for an opt-out, but as a practical matter, no one opts out. No one reads the fine print.

“Arbitration has generally been upheld, considered a creature of contract. Two people make a handshake agreement to skip court. But when it’s in a contract on a take-it-or-leave-it basis, the consumer never really chose it,” he adds.

Opting Out of the Use of Arbitration

Some arbitration clauses allow consumers to file in small claims court. Others have provisions that allow consumers to opt out within a certain period of time (commonly 30 or 60 days). So, if you happen to notice the opt-out, should you?

“Yes, I most definitely would recommend that,” Mizrahi says.

However, the fine print in consumer contracts can be difficult to fully understand. The National Association of Consumer Advocates has some valuable background information, Mizrahi says. “Otherwise, you really need to find a consumer law attorney who can guide you.”

Many state consumer statutes allow for fee shifting, “meaning the corporation that we sue usually pays the legal fees upon a settlement or a win,” Mizrahi says.

Even if you’ve already clicked “agree” or signed a contract that requires arbitration, “it doesn’t mean you can’t win,” Schlanger says. “It has been my experience that most arbitrators are open to hearing the evidence and hearing the arguments.”

For legal advice about mandatory arbitration with consumer finance and credit card agreements, talk to a consumer protection law attorney.