The recent uproar over General Mills’ decision to adopt and later retract a new policy by which consumers, by engaging in activities such as downloading a recipe, or participating in a contest, or “liking” the firm on Facebook, would unwittingly be agreeing to arbitrate, certainly refocused the spotlight on the prevalent use of mandatory, predispute arbitration in consumer transactions.
Indeed arbitration clauses abound in the consumer context, showing up in a vast array of contracts for consumer goods and services. Applied for a credit card? You’ve likely agreed to arbitrate disputes with your bank. Got a new cell phone? Payday loan? Rented a car? Opened a checking or stock brokerage account? Arbitration is likely right there in your contract.
Unfortunately, the supporters of consumer arbitration -- typically businesses -- and those that hate it -- typically consumer rights advocates -- are locked in a polarized death embrace, with each side demanding that their view prevail. Opponents of consumer arbitration want mandatory predispute arbitration agreements (“PDAAs”) banned outright. Supporters want arbitration left alone. I suggest that by insisting that they get what they want – instead of what they need - they are both wrong. As the Rolling Stones song says, “you can't always get what you want, but if you try sometimes, you just might find you get what you need.” And I think I’ve identified that need.
The Current Landscape
In 1925, what’s now called the Federal Arbitration Act (“FAA”) was enacted. It made PDAAs enforceable as a matter of federal law, and the Supreme Court in recent years has steadfastly supported the FAA. Legislation called the Arbitration Fairness Act has been introduced in both houses of Congress that would amend the FAA to ban PDAAs outright in consumer contracts.
Before we get too excited, bear in mind that there were several attempts over the years to amend the FAA to limit or ban use of mandatory arbitration in consumer contracts. These failed when the Republicans controlled the White House and Congress, and have met a similar fate under Democratic control of these institutions as well. For example, in 2009 the Democrats regained the White House and control of both houses of Congress. The capital markets tanked, there were Madoff and other scandals, and the economy crashed. But the Arbitration Fairness Act didn’t make it out of the House Financial Services Committee, which at the time was chaired by Barney Frank, an avowed critic of PDAAs in consumer contracts. If it didn’t happen then, it’s not going to happen today with a Republican controlled House. And it certainly won’t happen if the Republicans gain control of Congress.
Consumer Advocates: Be Careful What You Ask For
I also submit that before they jump on the anti-arbitration bandwagon and seek passage of the AFA, consumer advocates should be careful what they ask for. I see potential harm for consumers in the offing.
- The bill would require both sides to agree to arbitration after a consumer dispute arises. First, assuming all sides will agree to arbitrate after a dispute arises is a fool’s paradise. Research shows clearly that, at that juncture, one side or the other has a strategic or tactical reason not to agree to arbitration. And assuming that it will always be the consumer that rejects arbitration is wrong. That door would swing both ways. A business could decide to go scorched-earth litigation on a case by case basis, dragging consumers through protracted and costly litigation.
- The dispute resolution process would become unpredictable. A consumer would have no way of knowing which disputes would go to litigation, and which would end up in court.
- Dispute resolution providers may not be there. With caseloads becoming unpredictable and sporadic, alternate dispute resolution providers might find it untenable to maintain their fora. This is not theoretical; it’s already been discussed.
- Costs would rise. And who would bear the cost off all this uncertainty? The consumer.
- And litigation stinks. Also, let’s think about where these disputes would end up if PDAAs are banned – in court. Going to court is terrible for all parties, especially consumers. Granted, in some parts of the country litigation is relatively quick and inexpensive, and a consumer occasionally gets a large jury verdict against the a business, but in general it takes a long time, is very costly, and is subject to both extensive discovery and relatively liberal dismissal standards. If arbitration is eliminated, I stand by my belief that litigation would be a poor way for the parties to resolve their differences.
Businesses: Be Careful Urging Preservation of the Status Quo
The problem with the status quo is that it generally doesn’t last forever. While the Supreme Court has been generally supportive of PDAAs, it has hinted several times that there may be limits. For example, the Court requires that the arbitration rules and program be fair, that the consumer be able to obtain essentially the same relief in arbitration as in court, and that the fees not be excessive. Also, it is folly to think of arbitration as a Red State-Blue State issue. In my view, it is transitioning to becoming more of a populist issue. It wouldn’t be shocking to see Republicans in states like the Dakotas or Alabama breaking ranks at some point. In short, things could change in a hurry.
Back to the Rolling Stones
Instead of both sides digging in and demanding what they want, they should consider a compromise that gives both sides what they need. And what do they both need? A bill that might actually be enacted that would serve both sides. Here are the main aspects of this compromise:
- in a consumer contract, any predispute arbitration agreement must be separately signed or clicked by the consumer;
- a consumer cannot be denied goods or services if the consumer declines the arbitration option; and
- clear procedural fairness guidelines be followed in any consumer or employment arbitration.
How would this work?
- Give the individual a choice of agreeing to arbitrate, but at the time of contracting. My AFA would state that no individual would be denied goods or services or employment if he or she declined the arbitration option. This would provide the consumer/employee the choice the AFA proponents want, but move it up to the time when the contract is signed to avoid the practical realities of getting a bi-lateral post-dispute agreement to arbitrate. This requirement would give the dominant party a reason to offer incentives to the weaker party to agree to arbitrate, and – dare I say it – sell the process. By following this approach, the AFA would provide meaningful choice, but in a practical way.
- Ensure that there is a knowing and voluntary agreement to arbitrate by requiring in the statute that the individual separately initial/click the arbitration agreement. The Friedman version of the AFA would deal with the problem of ensuring a truly “knowing and voluntary” agreement to arbitrate by requiring that the arbitration agreement be separately acknowledged. By so doing, my AFA would eliminate any uncertainty that the weaker party didn’t know what they were getting into.
- Ensure procedural fairness safeguards. The new AFA would also require that any consumer or employee arbitration system adhere to basic tenets of procedural fairness. These are not hard to find; the challenge if anything will be narrowing down the list.
Conclusion: Getting what you need
This approach gives both sides what they need: a fair system that gives consumers the choice they want and businesses the predictability and risk management they crave. Or, somewhat like another song says, “all we are saying is give choice a chance.”
*George H. Friedman, an ADR consultant, retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. He is Chairman of the Board of Directors of Arbitration Resolution Services, Inc. and serves on the Board of Editors of the Securities Arbitration Commentator. Friedman holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional (Wharton-FINRA Institute). This article first appeared in his ARS Blog.
 See, e.g., Barlyn, Suzanne, South Carolina jury awards $8.1 million to investor who was misled by BB&T (June 30, 2014), available at http://www.reuters.com/article/2014/07/01/us-adviser-verdict-exclusive-idUSKBN0F52RF20140701 <visited Oct. 28, 2014>.