Consumer Arbitration: Next-Level Advice for Next-Generation Agreements

Think you can rely on that arbitration agreement that may or may not have been cut and pasted from the internet? Think again. Such agreements have been evolving for years, to be sure. As a bulwark against class actions, they have long been resisted by plaintiffs, reviewed by judges, and refined by defendants. Over decades, that process produced modern arbitration agreements that benefit not only companies (by averting aggregate claims) but also consumers (by enabling individual ones). But two trends—requests for public injunctive relief and mass arbitration—may cause a quantum evolution (or perhaps speciation) the likes of which have not been seen since the Supreme Court blessed class action waivers a decade ago. It has therefore never been more important for businesses to stress-test their arbitration agreements.

Arbitration Agreements 101

The judicial hostility to arbitration that animated the Federal Arbitration Act (FAA) nearly 100 years ago is still alive and well in some quarters. Perhaps harking back to first-generation arbitration agreements, some courts seem to assume that class actions are good at providing relief to consumers and that arbitration is good only at allowing businesses to avoid accountability.

But research suggests that arbitration organizations enforce their due process protocols, consumers are successful more frequently and more quickly in arbitration, most class actions are dismissed or settled on an individual basis, and the rest are efficient at driving money into the hands of the lawyers on both sides of the dispute. See Searle Civil Justice Institute, Consumer Arbitration Before the American Arbitration Association, Preliminary Report (Mar. 2009). In contrast to arbitration, courts are overtaxed, counsel are overpaid, and consumers are overlooked.

As some are still skeptical of arbitration, though, scriveners should take care not to draft agreements that appear to disadvantage consumers. It is imperative that agreements use consumer-friendly terms and yield admissible evidence of mutual assent. Businesses that want to include arbitration in their dispute-resolution programs should therefore consider retaining not only an attorney who drafts such contracts but also an expert who reviews—and, if necessary, defends—their readability.

Those who are unfamiliar with this subject can glean some best practices from the drafting guidelines offered by the American Arbitration Association (AAA) and JAMS—two recognizable and reputable arbitration organizations. See AAA Consumer Due Process Protocol; JAMS Minimum Standards of Procedural Fairness.

These guidelines include clear and conspicuous notice, access to information about how to commence arbitration, a convenient location, reasonable fees and schedules, access to small claims court, the ability to retain counsel, binding arbitral awards, and some opportunity for discovery and appellate review. They also suggest things that are not necessarily intuitive—for example, directing the reader to the agreement, explaining how arbitration differs from litigation, and providing a link to the arbitration organization’s rules.

To be clear, strict compliance with each of these guidelines is not necessarily essential to the enforcement of an agreement. But it is advisable, as motions to compel arbitration are often opposed and arbitration organizations may require compliance with their consumer standards irrespective of what a contract says.

Otherwise, though, agreements come in all shapes and sizes. Businesses must consider a number of issues—for example, whether to include certain nonparties in the agreement’s scope, whether to exclude certain claims from its scope, whether to delegate certain issues to the arbitrator, whether to specify a particular arbitration organization, and whether to let customers reject changes to the agreement or to opt out of arbitration altogether. The language and even location of related provisions—for example, jury waivers, severability provisions, and survival clauses—also require careful thought. Each of those issues could be the subject of its own article. For present purposes, however, we will focus on just two emerging issues: public injunctive relief and mass arbitrations.

Public Injunctive Relief

One of California’s “maxims of jurisprudence” is that “a law established for a public reason cannot be contravened by a private agreement.” Cal. Civ. Code § 3513. In McGill v. Citibank, N.A., 393 P.3d 85 (Cal. 2017), the Supreme Court of California seized on that maxim and invalidated part of an arbitration agreement that prohibited an individual from seeking “public injunctive relief” in either an arbitral or a judicial forum. And because the agreement stated that its class action waiver could not be severed, the entire arbitration agreement was stricken and all of the claims—whether for “public injunctive relief” or otherwise—could be pursued in court.

McGill and its progeny suffer from several fundamental flaws, not the least of which being that the FAA declares that arbitration agreements are “valid, irrevocable, and enforceable” except “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Putting aside whether this “maxim” existed in law or equity at the relevant time, it says nothing about the “revocation” of a contract. Congress was careful to preserve only defenses that allow one to revoke a contract in its entirety. That is not the same thing as striking part of a contract that (whether rightly or not) is deemed unconscionable. So it may well be that the McGill rule is eventually addressed by the Supreme Court.

Anecdotal evidence suggests that most businesses are waiting for that process to play out before revising their contracts, which means that potential drafting solutions have yet to be subjected to scrutiny. But given that the gist of the McGill rule is that consumers must have an opportunity to seek public injunctive relief, the first movers could expressly permit arbitrators to grant public injunctive relief, or at least not expressly prohibit them from granting such relief, and could allow for robust appellate review if it does. Alternatively, businesses could exclude such relief from the scope of the agreement so that monetary relief is sought in arbitration while public injunctive relief is sought in court, though perhaps only after arbitration has concluded. They could also consider giving consumers a window of time in which to opt out of arbitration altogether, which would make it difficult (if not impossible) to argue that the agreement prevented a given consumer from seeking public injunctive relief. Other potential workarounds could consist of limiting (or even deleting) severability provisions or using separate agreements that are specific to California.

Only time will tell which (if any) of these solutions will be widely adopted.

Mass Arbitration

Another recent phenomenon is the filing of “mass arbitrations” in which thousands of claimants—generally employees but sometimes consumers—file demands for individual arbitration at the same time. This is done not because their lawyers want thousands of arbitrations, but because they want to force the defendant to choose between the Scylla of paying thousands of filing fees or (they hope) the Charybdis of settling on a class-wide basis. Some courts have described this as ironic, for example referring to such defendants as “the dog that caught the car” or as having “traded a giant incoming meteor for a landslide of pebbles.” 

Like public injunctive relief, mass arbitration is largely a creature of California law, in this case a 2019 statute that singles out arbitration agreements by prohibiting businesses from enforcing them if they do not pay their share of the arbitral fees within 30 days. See Cal Civ. Proc. Code § 1281.97. Much has been written about how businesses have responded to this tactic in court by arguing, for example, that the statute is preempted by the FAA, or that many of the claimants were improperly obtained and inadequately vetted, or that claimants should be redirected to small claims court instead. But little has been written about how businesses might avoid this headache in the first place.

One way would be to recalibrate cost-sharing provisions. When the enforceability of arbitration agreements and class action waivers was less certain, many businesses went out of their way to make the process as consumer-friendly as possible, including by bearing much, if not all, of its cost. That went above and beyond what the law or arbitral rules require.

The real irony of these cases, then, is that businesses will respond not by abandoning arbitration agreements, but by revising them to make it less likely that individual fees can be used to obtain aggregate settlements. In other words, businesses that were willing to cover most or even all of a claimant’s costs will now reexamine that practice. And claimants will almost certainly end up paying more to pursue their claims.

While revising cost-sharing provisions is one obvious response to mass arbitrations, next-generation agreements may change in other ways as well. For example, agreements might provide that either party—i.e., not just the consumer—can choose to have a dispute heard in small claims court. Agreements might also require that claimants submit detailed factual statements or meet and confer about the organization with which a demand will be filed. Businesses should also carefully consider which organization’s rules are best adapted to the possibility of mass arbitrations and whether those rules—in particular, rules regarding when a defendant’s share of fees becomes due—can be adjusted by agreement.

Conclusion

If properly drafted and deployed, arbitration agreements can benefit both businesses and consumers by creating a viable alternative to the judicial system’s two traditional methods of resolving consumer disputes: inefficient class actions and impractical individual actions. Careful companies have long made a point of regularly reviewing and refreshing their customer-facing contracts to ensure their enforcement. As consumers increasingly pursue public injunctive relief to avoid arbitration and mass arbitration to pressure businesses, stress-testing arbitration agreements is more important than ever. The time to do so is now.