Consumer Contracts: Mandatory Arbitration Clauses

Related Item

Businesses scored a big legal win when the Supreme Court ruled arbitration agreements could limit class action lawsuits. The ruling affects businesses, consumers, and quite possibly, employees.

A couple sued AT&T Mobility for fraud because their "free" cell phone offer required payment of $30 in state taxes. Their purchase agreement had a mandatory arbitration clause. California law allowed them to file a class action for fraud. But the Supreme Court said the Federal Arbitration Act (FAA) trumped this law. The FAA allows businesses to require arbitration of disputes in consumer transactions. Because this sets a federal policy in favor of arbitration, the same may hold true for employer-employee arbitration.

Original Article

On July 22, 2009, the House Oversight and Government Reform's Domestic Policy Subcommittee held a hearing questioning the fairness of mandatory arbitration clauses in the contracts of credit card, mobile phones and other consumer services. A report released by Congress suggested the ties were too close between the National Arbitration Forum (NAF) and creditors and collection agencies that were all on one side of the arbitration table. NAF is the number one generator of arbitration awards against credit card customers.

On July 17, NAF settled a lawsuit filed by Minnesota Attorney General Lori Swanson, barring them from taking on any new consumer debt-collection disputes. Swanson testified before the Domestic Policy Subcommittee and asked Congress to add new consumer protections to federal law governing arbitration. Swanson told the subcommittee NAF was part of a debt-collection conglomerate.

NAF Worked against Interests of Consumers

Swanson's lawsuit alleged that the NAF worked alongside creditors and against the interests of ordinary consumers to convince credit card companies and other creditors to deprive consumers of their legal rights by inserting arbitration provisions in their customer agreements and then to appoint NAF to decide the disputes. The lawsuit also alleged that NAF had financial ties to the collection industry.

Swanson's investigation and the lawsuit uncovered a problem with mandatory arbitration clauses in consumer contracts. Swanson urged Congress to protect consumers from forced arbitration arising out of fine-print contracts.

Arbitration Fairness Act of 2009

There is legislation moving through Congress to put an end to forced arbitration. The Arbitration Fairness Act of 2009 is currently in the House. If the Act passes, it will be illegal for companies to force binding arbitration upon consumers. The Act will make arbitration a voluntary option where both parties must agree to arbitration, rather than making it mandatory.

Mandatory Arbitration Clauses in Consumer Contracts

Mandatory arbitration clauses can be found in almost any consumer contract. You can find them in your cell phone agreement, your credit card terms and conditions and the paperwork from your automobile purchase. By entering into the contract, you agree to waive your right to a trial if you want to sue the company. If the company sues you, you agree to abide by rulings made by arbitration boards and to waive most of your rights to appeal.

Mandatory arbitration severely limits your options for resolving a dispute. Before any problem arises you're locked into binding arbitration for all future disputes or problems. You're given almost no opportunity to negotiate or reject the provision and yet, through these provisions, you give up their right to have their day in court. The contract typically also names the arbitration company that must be used.

What You Can Do

You can help put an end to forced arbitration by writing to your Representative and urging them to support and co-sponsor the Arbitration Fairness Act of 2009.

Questions for Your Attorney

  • What does a mandatory pre-dispute arbitration clause cover?
  • Can I negotiate a mandatory pre-dispute arbitration clause?
  • How will an existing consumer debt claim against me be handled now by NAF that they are not taking consumer debt cases?
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