Aug 28 2011

Arbitration as a consumer dispute resolution tool

Several months ago the Supreme Court insulated arbitration clauses in consumer and other small claims settings from the most frequent challenge to their enforceability – the allegation that they are unconscionable unless they allow class action proceedings. The decision presents businesses with a choice – many will use mandatory arbitration clauses in licensing, online, services, and other contracts.

 

The Federal Arbitration Act (FAA) states a strong federal policy in favor of arbitration. It also bars state laws that discriminate against enforcing contractual arbitration clauses. The statute states:

A written provision in … a contract evidencing a transaction involving commerce to settle by arbitration a controversy … arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2.

Starting in the 1990’s, a number of licensors, banks, service providers, online providers, and hard goods manufacturers began to use arbitration clauses in their contracts for a number of reasons, including to eliminate risk of class action claims for small problems. Sometimes this latter effect was done with an express “no class action” term, while in others it was left to the idea that class action arbitration was not appropriate unless expressly agreed to by both parties. While courts in most jurisdictions enforced these terms, courts in some jurisdictions held that no-class-action arbitration clauses were unconscionable.

These decisions were uncontrolled judicial law-making of a type that has always been a risk under unconscionability doctrine: the judges invalidated the clauses because they personally believed that a class action was the preferred way to protect “consumer rights” and that a judicial rule preserving this remedy should override laws about enforcing contracts or federal law about arbitration. Remnants of this judicial activism (in the same jurisdictions with the same judges) remain for choice of judicial forum clauses. 

But, for arbitration clauses, the game of judicial activism ended with the Supreme Court ruling in AT&T Mobility Co. v. Concepcion, 131 S.Ct. 1740 (2011) when a majority held that California’s rule invalidating class action waivers in arbitration clauses as unconscionable was invalid. It was invalid because it conflicted with the purposes and policies of the FAA. In a prior case, Stolt-Nielson, SA v. Animalfeeds Int’l Corp., 130 S.Ct. 1758 (2010), the Court had concluded that a party could not be forced to engage in class action arbitration where the arbitration clause was silent on the issue, emphasizing the contractual nature of an agreement to arbitrate.

Concepcion held that policy conflict preemption existed: the unconscionability decisions were invalid because they conflicted with federal policy favoring arbitration and did so in a way that contradicted the basics of arbitration, which are grounded in tailored, contractual and streamlined dispute resolution. There are many other aspects inherent in arbitration, such as the lack of a jury, the selection of special arbitrators, expedited procedures, the lack of judicial review, and the like. The ruling in Concepcion is that these normal aspects of arbitration (including lack of class actions) are what Congress supported and that they cannot be undermined by the states in the guise of unconscionability or similar “general” rules.

So, now the choices presented to licensors and other companies in consumer space are to 1) present arbitration clauses on fair terms and avoid the risk of class action lawsuits, or 2) rely on ordinary remedy clauses and accept that class action claims might occur. 

For many companies, the choice will be option 1. But this works only if the terms enable the individual consumer to actually be able to pursue her claim in arbitration. Concepcion does not hold that arbitration clauses are immune from unconscionability challenges in all cases. Putting class action issues aside, there are cases where courts have held an arbitration clause to be unconscionable where the cost of filing arbitration exceeds the predictable claim. In Concepcion, the arbitration provision was very friendly to allowing the individual to bring non-frivolous claims.

For the consumer (or other small claims person), what is the best option?

For an individual consumer, a fair arbitration clause is always better because it gives the opportunity of recovering that consumer’s losses. For this to be true, the clause must fairly deal with questions about filing costs and attorney’s fees, but the point is that the procedure deals with remedies for the individual. Here is the Court’s description of the AT&T clause in Concepcion:

[C]ustomers may initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT & T's Web site. AT & T may then offer to settle the claim; if it does not, or if the dispute is not resolved within 30 days, the customer may invoke arbitration by filing a separate Demand for Arbitration, also available on AT & T's Web site. In the event the parties proceed to arbitration, … AT & T must pay all costs for nonfrivolous claims; … arbitration must take place in the county in which the customer is billed; … for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions; that either party may bring a claim in small claims court in lieu of arbitration; and that the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages. The agreement, moreover, denies AT & T any ability to seek reimbursement of its attorney's fees, and, in the event that a customer receives an arbitration award greater than AT & T's last written settlement offer, requires AT & T to pay a $7,500 minimum recovery and twice the amount of the claimant's attorney's fees

Class action claims, on the other hand, seldom yield much for individual consumers but they may impose significant liability on companies. Frequently, the main beneficiaries of class action proceedings are the attorneys. Even if this is not true, the focus typically shifts from compensating individuals to dealing with more general issues.

If I were a consumer presented with a proposed term like the AT&T provision, I know which option I would prefer. The world of class action lawyer compensation may be ending.

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