Mandatory Arbitration Contract Provisions: Beware the Fine Print

By Spring 2018 M-VETS Student-Advisor Nebye Kahssai

Contracts between companies and consumers are ubiquitous these days. Companies like Google and Apple with online and other electronic applications bombard us with dialog boxes that open up on our computer screens or phones that require us to “check the box” indicating that we have read the company’s “Terms of Agreement.”  If you’re like most people, you simply agree so that you can continue checking your email or using any of the dozens of things you need to do with your phone.  A problem is that almost all contracts that consumers enter into these days are what are referred to as “adhesion contracts” which are defined as the following:

“a standardized contract prepared entirely by one party to the transaction for the acceptance of the other; such a contract, due to the disparity in bargaining power between the draftsman and the second party, must be accepted or rejected by the second party on a ‘take it or leave it’ basis, without opportunity for bargaining and under such conditions that the [consumer] cannot obtain the desired product or service [except] by acquiescing in the form agreement.”[i]

So when consumers enter into contractual agreements with large companies like Apple, Google, or practically any other large company, consumers do not have the power to renegotiate the terms of agreement for use of the product or service. The inability for consumers to renegotiate the terms of these agreements can have adverse consequences for consumers when problems arise with the particular product or service. Many of the adhesion contracts that consumers enter into with large companies contain provisions to settle problems related to the product or service through arbitration.  Arbitration is “the out-of-court resolution of a dispute between parties to a contract, decided by an impartial third party (the arbitrator).”[ii]  Here is an example of an arbitration clause that a consumer can find in the fine print of their contract or terms of services agreement:

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial [or other] Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.”[iii]

These arbitration clauses are often inserted into the fine print and buried in “take it or leave it” agreements between consumers and companies, sometimes with very negative consequences. Arbitration procedures prevent consumers from having their issues related to the purchased products or services adjudicated by the courts.  This hurts consumers because while courtrooms are public forums for parties to “air out dirty laundry,” arbitration proceedings are often held behind closed doors:

“Once a relatively obscure legal issue, mandatory arbitration agreements are now under scrutiny by activists who say they force victims of harassment and discrimination into silence. Opponents of mandatory arbitration say that the closed hearings, which include non-disclosure clauses and are often performed by a third-party arbitrator paid by the company itself, prevent victims from taking further action. . .”[iv]

In addition to courtrooms acting as public forums, courtroom procedures allow parties to engage in “discovery” which is the exchange of information between opposing parties so that each party can learn more about the details of the claims or defenses being made. “The [Federal Rules of Civil Procedure] permit broad discovery, which can involve documents that are not directly relevant to a claim or defense, but which have the potential to lead a party to other documents that do contain such information.”[v]  In arbitration, however, the discovery process, and the exchange of information between the parties, is often much more selective, and “fully within the control of the arbitrator.”[vi]  The American Arbitration Association’s discovery rule, R-22, “frames the process of discovery in a way where the ‘arbitrator shall manage’ whatever exchange of information takes place with a view towards economic efficiency, and equality of treatment.”  Given arbitration’s “dictator-like” discovery rules, a consumer with limited resources challenging a large company is at risk of potentially arbitrary behavior on the part of the arbitrator.

In an example of the adverse consequences of arbitration provisions, Wigdor LLP, a New York law firm, recently filed a class action lawsuit against Uber on behalf of women who claimed they were assaulted or raped by Uber drivers.[vii]  The women blamed Uber’s background check procedures and sought through litigation to understand if Uber’s policies put them in danger.[viii]  Rather than being able to “have their day in court,” however, the women discovered that their agreement with Uber required that they address their issues in arbitration.  A group of fourteen of the women “sent an open letter to the company’s board, asking to be released from the mandatory arbitration clause in the Uber app’s terms of service.”[ix]  The group’s letter reads, in part:

“Secret arbitration is the opposite of transparency. Forcing female riders, as a condition of using Uber’s app, to pursue claims of sexual assault and rape in secret arbitration proceedings does not ‘make streets safer.’  Silencing our stories deprives customers and potential investors from the knowledge that our horrific experiences are part of a widespread problem at Uber.”[x]

The experience of these women demonstrates that companies are dictating the terms of how consumers are able to bring grievances forward. As a result of the widespread use of mandatory arbitration provisions in contracts between consumers and companies, if consumers are harmed by a company’s goods or services, consumers can no longer rely on the right to their “day in court” to obtain appropriate redress.  Companies lock consumers into forced arbitration procedures, reinforced with non-disclosure clauses, to keep cases out of the public view of judges and juries.  Given the lack of transparency, we cannot tell whether an arbitrator’s decisions and procedures are arbitrary or whether they are compatible with a fair and reasonable view of the law and the facts.  What we know for certain, however, is that those important decisions are not made by judges and juries who remain at least somewhat publicly accountable for their actions.

So, what are consumers to do you might ask? One answer comes from what has transpired from the work of that brave group of women who decided to fight Uber’s mandatory arbitration policies.   As a result of those women’s actions, Uber announced that it is “ending mandatory arbitration for individual claims of sexual assault or sexual harassment by Uber drivers, riders or employees.”[xi]  Uber also announced that it “is also ending the requirement that victims sign a confidentiality provision preventing them from speaking out about the sexual assault or sexual harassment they suffered – saying survivors will now have the option to settle their claims with Uber without having to agree to being publicly silenced in order to do so.”[xii]

Public action by consumers can sometimes lead to a change a company’s practices. Such action might even lead to a cascading effect whereby other large companies are forced to rethink their own adhesion contracts.  Unfortunately for most consumers, however, adhesion contracts do not appear to be disappearing from our legal environment any time soon.  The most that consumers can probably do is to scrutinize the contracts that they do have some control over; contracts that aren’t “take it or leave it.”  A consumer agreeing to a mandatory arbitration provision has to consider whether they really want to give up the right to their “day in court.”  In addition to a mandatory arbitration provision, if a consumer has the power or the ability to determine the terms of their contract, they should look at each term of agreement carefully.  At bottom, the consumer must beware the fine print.

[i] Steven v. Fidelity & Casualty Co. of New York, 377 P.2d 284, 297 (Cal. 1962)

[ii] https://www.adr.org/Arbitration, accessed 5/14/2018.

[iii] https://www.adr.org/Clauses, accessed 5/15/2018.

[iv] https://techcrunch.com/2018/04/26/women-alleging-sexual-assault-by-uber-drivers-asked-to-be-freed-from-forced-arbitration/, accessed 5/15/2018.

[v] Paul B. Radvany, Recent Trends In Discovery In Arbitration and In the Federal Rules of Civil Procedure, 34 Rev. Litig. 705, 736 (2015).

[vi] Id.

[vii] https://techcrunch.com/2018/04/26/women-alleging-sexual-assault-by-uber-drivers-asked-to-be-freed-from-forced-arbitration/.

[viii] Id.

[ix] Id.

[x] Id.

[xi] https://techcrunch.com/2018/05/15/uber-ends-policy-of-forced-arbitration-for-individual-sexual-assault-clams/, accessed 5/15/2018.

[xii] Id.