Mandatory Arbitration for Customers but Not for Peers: A Study of Arbitration Clauses in Consumer and Non-Consumer Contracts

Article excerpt

Mandatory arbitration clauses have been in the spotlight recently, as consumer advocates have challenged dieir legitimacy. Popular consumer products such as cellular phone service, credit cards, and discount brokerage often come with fine print contracts in which the customer agrees to submit disputes to arbitration rather than to litigate in court. Typically, the customer also agrees not to participate in aggregate proceedings such as class actions, either in court or before an arbitrator. Another common contract provision makes arbitration clauses and class arbitration waivers non-severable, so that if an arbitrator authorizes claimants to aggregate dieir claims, they must instead proceed in court. The combined effect of mese contractual provisions is to ensure mat consumers will pursue claims individually and before arbitrators, if at all. Mandatory arbitration clauses also ensure that disputes between firms and consumers will not be decided by juries.

Not surprisingly, firms that include arbitration clauses in dieir contracts with consumers have taken a strong public stand on the benefits of arbitration, not only for tiiemselves but for dieir customers. In litigation testing the validity of mandatory consumer arbitration, briefs on behalf of corporate defendants and industry groups repeatedly assert that arbitration saves both parties time and money and yields fair results for consumers.1 Proponents of mandatory arbitration cite high levels of satisfaction and favorable win-rates for claimants,2 and add that reducing the costs of dispute resolution for firms means lower prices for consumers.5

Opponents argue that mandatory arbitration clauses are imposed on consumers without full consent and that arbitra- tion deprives consumers of jury trials, reduces awards, and fails to advance the public's interest in deter- rence and law reform." More pointedly, oppo- nents object to the use of arbitration clauses to cur- tail aggregate proceed- ings. Without the option of aggregate dispute resolution, they maintain, small claims are not finan- cially viable in any forum. As a result, firms will escape liability for misconduct that imposes small per capita losses on large numbers of consumers.5 Judicial responses to mandatory arbitration have been mixed, although several state courts have recently found particular arbitration provisions unconscionable.6

Against this background, we conducted a study of contractual practices by well-known firms marketing consumer products, comparing the firms' consumer contracts with contracts the same firms negotiated with business peers. The frequency of arbitration clauses in consumer contracts has been studied before, as has the frequency of arbitration clauses in non-consumer contracts.7 Our study is the first to compare the use of arbitration clauses within firms, in different contractual contexts.

The results are striking: in our sample, mandatory arbitration clauses appeared in more than three-quarters of consumer contracts and less than one tenth of non-consumer contracts (excluding employment contracts) negotiated by the same firms. This suggests that the firms' faith in arbitration is considerably weaker than they have claimed. For the purpose of businessto-business disputes, in which they may be either plaintiffs or defendants, they prefer the option to litigate in court.

We approached our project with several hypotheses in mind. First,because the firms we studied, or trade organizations to which they belong, have publicly endorsed arbitration as speedy, cost-effective, and fair, and because speed, cost-effectiveness, and fairness are desirable in any contractual dispute, one would expect firms to provide consistendy for arbitration in contracts of all types. Second, because businesses have often expressed a skeptical view of the reliability of juries as fact-finders, one would expect firms to provide consistendy for non-jury trials, even in the absence of mandatory arbitration provisions. …