‘Arbitration Clause’ Controversy

Arbitration is a common procedure to resolve disputes between “parties” to a contract.  Most contracts existing today have an “arbitration clause” contained in the fine print of the document.  They can be non-binding (voluntary) or binding (mandatory).

Recently, arbitration clauses have come under increased scrutiny.  If an average consumer chooses to fight for his right after being subjected to an unfair business practice, he/she will most likely lose to the larger corporation.  This is likely due to the big business atmosphere of big money, big power, big executives and lots of fine print.  The following sentence is an example of this problem and is contained in the American Express credit card contract:  “[You] may elect to resolve any claim by individual arbitration…”  That clause makes it very improbable for “Joe Schmoe” to fight a corporation for any wrong doing it may have done to one individual or thousands of individuals.

On May 5, 2016, The Consumer Financial Protection Bureau intervened in the arbitration clause controversy when it proposed a regulation that would eliminate mandatory clauses in financial sectors.  These clauses specify that a company or a consumer may require disputes that arise between them must be resolved by chosen arbitrators, “except for cases brought in small claims court.”  These clauses generally prohibit average consumers from joining class-action or group claims through the arbitration method, thereby, forcing each individual to solely wrestle with the company that may have caused the harm or unfair practice to them; even though collectively, the group cannot jointly fight together via class-action lawsuits.

In 2014, a US District Court in California disagreed with Samsung’s contractual tactics and ruled for the plaintiff in Norcia vs. Samsung.  The Court held that the case could not move forward with its intended arbitration clause attempt; and suggested that Samsung’s ‘warranty booklet’ was sufficient in supplying customers the opting-out of the contract.  The holding was appealed and on March 3, 2017, the Ninth Circuit Court affirmed the District Court’s decision by denying Samsung’s motion “to compel arbitration of a class action complaint.”  The plaintiff in the case, Daniel Norcia, bought a Samsung Galaxy S4 phone, signed a receipt stating the agreement of the arbitration clause, but the customer, Norcia, exited the store without the cellphone box which contained the warranty booklet, containing the fine print clause.

There have been victories by companies in their quest to uphold opting-out clauses.  Case in point is the Uber Technologies, Inc. vs Suarez (May 4, 2016) case.  In a federal court, Uber and the arbitration clause ‘won’ their case based upon a double check/agreement system that gave the drivers two reasonable chances/options to ‘opt-out’ of the clause and then additionally gave the drivers 30 extra days to ‘think about it.’  The federal court determined that the arbitration clause was ‘not unconscionable.’

Arbitration is generally faster and more efficient than court room settings where legal proceedings to their credit, are totally public and transparent.  Arbitration can be very costly.  The average cost is $9,000 to start the process for an $80,000 dispute.  In addition, there are many national arbitrator groups that actually offer their services to companies, creating a ‘biased’ position at the bargaining table.  Arbitration disputes are located in private settings, and thus may be tainted and unfair. The arbitrators themselves may have been specifically chosen for their expertise to represent a company unbeknownst to the smaller individual consumer; whereas a court judge may not be familiar with the subject or the particulars of the disputed case.  An advantage of a court ruling in a dispute is the fact that it can be appealed to a higher court whereas an arbitration case can only be removed to a court after its final judgment.

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Written by Tanner Heintz

All blogs are written on behalf of Heintz & Becker for informational purposes. These articles should not, however, be considered legal advice, or in any way responsible for creating an attorney/client relationship.