Disputes between consumers and businesses that are arbitrated are resolved by an independent neutral arbitrator rather than in court. Although parties can agree to arbitrate a particular dispute after it arises or may agree that the award is non-binding, most consumer arbitrations occur pursuant to a pre-dispute arbitration clause where the arbitrator's award is binding.
In the United States, there is an ongoing debate over the use of arbitration clauses in consumer contracts. Differences between arbitration and litigation include the costs of resolving a case, the speed of resolution, and the procedure of resolving a case, including how and where the arbitration is conducted and the availability of discovery. Critics of consumer arbitration say that arbitrators and arbitration administrators can be biased (in part due to the repeat-player effect), arbitration clauses are not conspicuous, and for many classes of consumer goods and services, nearly all providers require arbitration. Proponents of consumer arbitration cite "consumer-friendly" terms that lower the dispute resolution costs of consumers and provide incentives for consumers to bring claims in arbitration. Most arbitration clauses require parties to waive their right to proceed on a class action basis in either court or arbitration, and, in the United States, the debate over consumer arbitration has also featured discussion of the merits of class actions.
In 2011, the Supreme Court of the United States ruled in AT&T Mobility v. Concepcion that state laws that in effect require the availability of class actions to resolve consumer disputes are preempted by the Federal Arbitration Act.AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) The ruling resulted in the adoption of new arbitration clauses or changes to existing ones in consumer contracts, as well as renewed efforts to persuade the federal government to regulate or ban the usage of consumer arbitration clauses.
The support given to consumer arbitration under United States law (particularly the Federal Arbitration Act) has been compared to other countries, whose laws restrict or ban consumer arbitration.
Background
In arbitration, a claimant submits a claim to a neutral arbitrator, and the opposing party (the respondent) responds to the claim. A neutral arbitrator collects evidence and hears arguments from both parties, and then issues an award. Pre-hearing conferences determine procedural matters for the arbitration hearing (such as whether the arbitration is to be confidential). Hearings, which can be held in a conference center or at an office, involve the parties presenting opening statements, evidence such as documents and tangible objects, and witnesses who testify and are cross-examined. Closing arguments may be presented at the hearing, or submitted afterwards in the form of a post-hearing brief. The arbitrator's award consists of a written decision, which may simply consist of a statement of the relief awarded to each party, or it may include a written explanation. Appeal of an arbitration decision is very limited; under the Federal Arbitration Act, an awarded may be vacated only if one of the following conditions is satisfied: "the award was procured by corruption, fraud, or undue means"9 U.S.C. §10(a)(1) "there was evident partiality or corruption in the arbitrators, or either of them"9 U.S.C. §10(a)(2) "the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced"9 U.S.C. §10(a)(3) "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made"9 U.S.C. §10(a)(4)
History
The FAA and the Supreme Court's "liberal federal policy favoring arbitration" Congress passed the Federal Arbitration Act (FAA) in 1925 to require courts to enforce valid arbitration agreements. Before then, courts routinely refused to enforce arbitration agreements, making such clauses ineffective.
According to §2 of the FAA (codified at 9 U.S.C. §2):
In the 1970s, due to growing court dockets, courts enforced arbitration agreements more often. In the 1983 case Moses H. Cone Mem'l Hosp. v. Mercury Constr. Co.,460 U.S. 1 (1983) the Supreme Court stated that by enacting §2 of the FAA, Congress made a "declaration of a liberal federal policy favoring arbitration agreements". Later decisions by the Supreme Court in the 1990s established that the FAA preempts state laws regulating arbitration agreements and that statutory claims may be arbitrated pursuant to an arbitration agreement.
First consumer arbitration clauses In a 1996 article in the Franchise Law Journal, Edward Wood Dunham described "The Arbitration Clause as Class Action Shield." Dunham suggested that franchisors should add arbitration clauses to their franchise agreements to minimize exposure to class actions and large jury awards. In the late 1990s, the National Arbitration Forum advertised its services to corporate lawyers, suggesting that the only way for companies to avoid being liable in a class action lawsuit was to insert arbitration clauses with class action waivers into their contracts. The Ross v. Bank of America class action alleged that major credit card companies illegally colluded during the late 1990s to support enforcement of arbitration clauses via amicus curiae briefs and to include materially identical arbitration clauses in their cardholder agreements. In August 1999, Consumer Reports wrote that over the previous three years, the number of consumer arbitration clauses has "increased manyfold", according to the National Arbitration Forum.
According to Ramona L. Lampley, the first generation of consumer arbitration clauses was characterized by drafters including not only class action waivers but also damages limitations, bars on recovery of attorney fees, requirements that consumers pay half or all of the arbitration fees, confidentiality requirements on the parties to an arbitration, or allowing the business to unilaterally select the arbitrator, all of which were found unenforceable by some court. In August 1999, Consumer Reports cited a then-superseded arbitration clause by Gateway where a consumer would have to pay $2,000 to file a claim, would have to mail the claim to a Paris address, and would have to travel to Chicago for arbitration hearings. However, in 2001, Christopher R. Drahozal wrote that "unfair arbitration clauses" are less prevalent than thought, and that even unfair terms could be beneficial to the contracting parties. In 2001, Stephen Ware suggested that requiring consumer protections in arbitration (requiring the availability of class proceedings, applying a universal cap on consumer fees without a case-by-case determination of whether the consumer can afford those fees, "requiring substantial discovery", or requiring businesses and consumers to arbitrate the same types of claims) would increase the costs of dispute resolution for the business, which would raise prices.
In 2002, Julia A. Scarpino wrote that "many consumer contracts ... contain an arbitration clause" but consumers are generally unaware of the existence of arbitration clauses.
Unconscionability as a defense Unconscionability is a defense to the enforcement of a contract. Most jurisdictions in the United States determine unconscionability based on two prongs: procedural unconscionability and substantive unconscionability. Procedural unconscionability arises from "contract formation" issues such as inconspicuous terms or terms offered on a "take-it-or-leave-it basis", while substantive unconscionability arises from "overly-harsh" or "one-sided" terms.
In 1998, Richard E. Speidel discussed the possibility the unconscionability could be a defense to the enforcement of a consumer arbitration agreement, but he concluded that such a defense would be unlikely to succeed (even in a standard form contract) when the arbitration clause is not hidden or there are competitors that offer similar products or services without requiring arbitration. Alan Kaplinsky and Mark Levin wrote in a May 1999 article that "relatively few consumer arbitration provisions have actually been struck down by courts as 'unfair' or 'unconscionable'". Charles L. Knapp, in a 2009 article, noted that Speidel only cited one case where an arbitration clause was unconscionable, and, in that case, it was based on what the Court described as "unique facts". Aaron-Andrew P. Bruhl wrote that courts are not allowed to refuse to enforce an arbitration clause because of the nature of arbitration, but courts have considered whether specific arbitration terms are unconscionable. Knapp wrote that since Speidel's 1998 paper, more cases have arisen where a party successfully asserted unconscionability as a defense to the enforcement of an arbitration agreement. According to Bruhl, unconscionability was an issue in about 15 to 20 percent of cases in the mid 2000s, up from 1 percent a decade earlier. Bruhl posited that the rise in unconscionability defenses may have arisen from the Supreme Court's arbitration jurisprudence striking down other defenses to the enforcement of arbitration agreements. Bruhl wrote that some unconscionability challenges to arbitration terms (such as punitive damages limitations) do not fit in the mold of classical unconscionability cases. According to Bruhl, scholars have seen the unconscionability doctrine as a check against the Supreme Court's pro-arbitration jurisprudence. Bruhl suggested that courts opposing arbitration turned to fact-specific unconscionability inquiries as opposed to categorical rules to make their decisions more likely to stand after appeal. Overall, Bruhl concluded that "[u]nconscionability might operate as a sort of safety valve that makes arbitration politically sustainable" since courts can use unconscionability to strike egregiously unfair terms, while the threat that an arbitration provision may be found unconscionable can encourage businesses not to include unfair arbitration terms.
Proponents of consumer arbitration have cited courts' usage of the unconscionability doctrine to say that current arbitration law sufficiently protects consumers from unfair terms. Andrew Pincus, who argued on behalf of AT&T Mobility in Concepcion, described the continued existence of the defense of unconscionability as preventing an "anything goes" approach to the enforcement of arbitration clauses. Rutledge and Drahozal wrote that the savings clause of §2 of the FAA may be sufficient to prevent the application of unfair arbitration terms, which may make specific legislation banning those terms unnecessary. Arpan A. Sura and Robert A. DeRise wrote that, after Concepcion, an argument could be made that courts would be required to enforce egregiously unfair arbitration terms such as those found in Hooters of America, Inc. v. Phillips.Hooters of Am., Inc. v. Phillips 173 F.3d 933 (4th Cir. 1999)
National Arbitration Forum ceases administration of consumer arbitrations
AT&T Mobility v. Concepcion