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1.3 Definition of Predispute Binding Arbitration Agreement—or “Forced Arbitration” Agreement

Arbitration is only one of a wide variety of alternative dispute resolution (ADR) mechanisms. For example, mediation is another form of ADR, but differs substantially from arbitration. A mediator attempts to facilitate an agreement between the parties, while an arbitrator actually decides the case. Mediation does not prevent the consumer from bringing an action in court.1

There are also a variety of types of arbitration. This treatise focuses solely on mandatory, predispute, binding arbitration agreements. When this treatise refers to “mandatory arbitration,” “arbitration clauses,” or “forced arbitration,” those phrases are used as a shorthand for mandatory predispute binding arbitration agreements.

A “mandatory predispute arbitration agreement” is a contractual provision, agreed to in advance of any dispute or claim, which requires a party to take any claims that may later arise to arbitration instead of to court. These provisions are often contained in contracts of adhesion—standardized, preprinted form contracts presented to consumers on a take-it-or-leave-it basis, with no opportunity to bargain.2 Because they are presented on a take-it-or-leave-it basis, they are often referred to as “forced arbitration” agreements. Empirical evidence shows that only a minute percentage of consumers read form contracts, and an even smaller number understand them.3 For example, the Consumer Financial Protection Bureau (CFPB)’s study on forced arbitration found that less than 7% of credit card consumers whose contracts with credit card providers included arbitration clauses understood that they could not sue their provider in court.4

Predispute arbitration agreements may be sharply distinguished from postdispute arbitration agreements, in which two parties who have an existing dispute agree, after the dispute arises, to submit that dispute to arbitration. Many of the concerns voiced by consumer advocates with respect to predispute arbitration are greatly reduced in the setting of postdispute arbitration, and some courts have expressed a similar sentiment.5 Most significantly consumers, unlike corporations, rarely have access to counsel when they enter into transactions and are therefore unlikely to focus on the significance of waiving their future access to the public court system should a dispute arise.6

In “binding arbitration” the arbitrator is empowered to issue a final, binding ruling on the merits of a suit, subject only to the very limited judicial review provided by the FAA or state law to modify or vacate the award.7 There is no other right to appeal the arbitrator’s award and the consumer has no right to seek to redo the action in court. When the arbitration award is confirmed in court, the award has the same force as a court judgment.

As a result, “mandatory predispute binding arbitration” means that in many cases consumers, through a form contract to which they do not meaningfully consent, lose virtually all access to the public court system. This result produces what one commentator called the “anti-democratic consequences of mandatory arbitration.”8

Because of recent Supreme Court case law that allows businesses to use arbitration agreements to prevent consumers from banding together to bring their claims on a class basis, also discussed at length in this treatise, many consumers have no realistic opportunity to vindicate their rights through the alternative dispute resolution process to which they have purportedly agreed. Yale Law School scholar Judith Resnik summarized the problem:

The result [of recent Supreme Court decisions] has been the mass production of arbitration clauses without a mass of arbitrations. Although hundreds of millions of consumers and employees are obliged to use arbitration as their remedy, almost none do so—rendering arbitration not a vindication but an unconstitutional evisceration of statutory and common law rights. The diffusion of disputes to a range of private, unknowable alternative adjudicators also violates the constitutional protections accorded to the public—endowed with the right to observe state-empowered decision makers as they impose binding outcomes on disputants. Closed processes preclude the public from assessing the qualities of what gains the force of law and debating what law ought to require. The cumulative effect of the Supreme Court’s jurisprudence on arbitration has been to produce an unconstitutional system that undermines both the legitimacy of arbitration and the functions of courts.9

Footnotes

  • 1 {1} For example, Texas’s deceptive acts and practices (UDAP) statute demonstrates this distinction: the statute was amended in 1995 to provide for mandatory, nonbinding mediation, upon either party’s motion, of UDAP suits seeking less than $15,000 in economic damages. Tex. Bus. & Com. Code Ann. § 17.5051 (West).

  • 2 {2} See § 8.6.1, infra. See also Rudbart v. New Jersey Dist. Water Supply Comm’n, 605 A.2d 681, 685 (N.J. 1992); Cordova v. World Fin. Corp. of N.M., 208 P.3d 901, 910 (N.M. 2009); Buraczynski v. Eyring, 919 S.W.2d 314, 320 (Tenn. 1996).

  • 3 {3} Jean R. Sternlight, Creeping Mandatory Arbitration: Is It Just?, 57 Stan. L. Rev. 1631, 1648 (2005).

  • 4 {4} Consumer Fin. Prot. Bureau, Arbitration Study, Report to Congress Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act § 1028(a), at § 4.1 (Mar. 2015), available at http://files.consumerfinance.gov.

  • 5 {5} E.g., Armendariz v. Found. Health Psychcare Services, Inc., 6 P.3d 669, 682 n.8 (Cal. 2000) (emphasizing that “[Certain arbitration protections may not be necessary] in situations in which an employer and an employee knowingly and voluntarily enter into an arbitration agreement after a dispute has arisen. In those cases, employees are free to determine what trade-offs between arbitral efficiency and formal procedural protections best safeguard their statutory rights.” (emphasis added)). See also United States Senate Comm. on Banking, Hous. & Urban Affairs, Summary of the Predatory Lending Consumer Protection Act of 2002, available at http://banking.senate.gov (seeking to prohibit use of predispute arbitration clauses in high-cost home mortgages, but preserving option of postdispute arbitration agreements).

  • 6 {6} See Linda J. Demain & Deborah Hensler, “Volunteering” to Arbitrate Through Predispute Arbitration Clauses: The Average Consumer’s Experience, 67 Law & Contemp. Probs. 55, 73–74 (2004) (“Given the lack of information available to consumers in predispute arbitration clauses, and the difficulty of obtaining and deciphering these clauses, it is likely that most consumers only become aware of what rights they retain and what rights they have waived after disputes arise.”); Christine Reilly, Achieving Knowing and Voluntary Consent in Pre-Dispute Mandatory Arbitration Agreements at the Contracting Stage of Employment, 90 Calif. L. Rev. 1203, 1225 (2002) (empirical research demonstrates that employees “do not understand the remedial and procedural consequences of consenting to arbitration” and that “[v]ery few are aware of what they are waiving”). See also Paul D. Carrington & Paul Y. Castle, The Revocability of Contract Provisions Controlling Resolution of Future Disputes Between the Parties, 67 Law & Contemp. Probs. 207, 218 (2004).

  • 7 {7} For a discussion of the scope of judicial review under the FAA, see Chapter 11, infra.

  • 8 {8} Richard C. Reuben, Democracy and Dispute Resolution: The Problem of Arbitration, 67 Law & Contemp. Probs. 279, 309–318 (2004). See also John Adams, Clarendon No. 3, 27 Jan. 1766, in Papers of John Adams (Robert J. Taylor, et al. eds., 1977) (“In these two powers [of voting and of trials by jury] consist wholly, the liberty and security of the people: They have no other fortification against wanton, cruel power: no other indemnification against being ridden like horses, fleeced like sheep, worked like cattle, and fed and cloathed like swine and hounds: —No other defence against fines, imprisonments, whipping posts, gibbets, bastenadoes and racks.”).

  • 9 {9} Judith Resnik, Diffusing Disputes: The Public in the Private of Arbitration, the Private in Courts, and the Erasure of Rights, 124 Yale L.J. 2804 (2015).