It’s Time to Update Your Arbitration Clause

By Hudson Cook

Hopefully, by now, you’re using a consumer arbitration clause as part of the packet of documents you agree to with your consumers. When properly drafted, these clauses can help you and your consumers resolve disputes efficiently and effectively. If your consumer documents don’t yet include an arbitration clause, you’re at a higher risk for class action litigation. The law and plaintiff practices aren’t static, so you should consider reviewing and updating your consumer arbitration clause. California law imposes specific consumer protections in contracts with arbitration clauses. Judges may vary in their interpretation of the scope of the agreement to arbitrate. There’s also an emerging threat of mass arbitration.

The threat of mass arbitration

Arbitration involving one company and one individual consumer has become a good process to reduce exposure to expensive, drawn-out litigation and class action lawsuits. Through an arbitration clause, the parties typically agree to waive the right to a trial by jury or to bring claims in a representative capacity, and to follow an arbitration organization’s consumer arbitration rules. Those rules usually provide a more efficient process than litigating in court, including limited discovery, limited availability to file motions, no public proceedings, and limited appellate review.

In recent years, plaintiffs’ counsel have attempted to weaponize individual claimant arbitration with “mass arbitration.” Mass arbitration is where a lawyer or a coordinated group of lawyers file a large number of essentially identical arbitration demands simultaneously. A consumer filing an arbitration demand triggers the business’s obligation to pay filing fees. For one or two cases, that’s not much. But when a lawyer is filing hundreds or thousands of cases, the business’s obligation to pay can amount to hundreds of thousands of dollars, or more. The abusive aspect of that is where the plaintiffs’ attorneys use the high filing fee as leverage for a hefty settlement, even when claims have very little merit or value.

One important and cost-effective solution is to insert a helpful dispute resolution clause that requires an unhappy consumer to write to you, in a document they personally sign, to tell you about their issue, and mandate that you propose a solution in response before any litigation or arbitration can begin.

While a class action plaintiffs’ attorney only needs a single client, who will act as the representative for other similarly situated individuals, a mass arbitration plaintiffs’ attorney needs a client for each demand for arbitration (what a complaint is called in arbitration). Social media has made claimant recruiting incredibly easy for mass arbitration plaintiffs’ attorneys. After exploiting social media campaigns to recruit a large number of clients, plaintiffs’ attorneys leverage technology for client intake and form preparation to initiate arbitration. In some cases, courts reviewing these tactics have found that duplicative demands for arbitration were filed by an attorney on behalf of a consumer or there were circumstances that called into question whether the consumer had even agreed to representation. So, what can businesses do to combat this threat?

There are several measures to consider. One important and cost-effective solution is to insert a helpful dispute resolution clause that requires an unhappy consumer to write to you, in a document they personally sign, to tell you about their issue, and mandate that you propose a solution in response before any litigation or arbitration can begin. Requiring an individual to do so can help resolve issues before they go to court. Moreover, if a plaintiff’s lawyer skips this step as part of a mass arbitration effort, they may be forced to go back and do so first, leading to a simple resolution, rather than a costly case. Another solution is to consider generally agreeing to follow the mass arbitration rules issued by arbitration organizations. Some organizations, including some new arbitration organizations, have developed more cost-effective measures to address mass arbitration costs.

State protective measures of consumers facing mandatory arbitration

Some states impose certain requirements to protect state residents from “mandatory” arbitration. For example, California has several statutes and court rulings that seek to protect consumers in the face of mandatory arbitration clauses, and recently enacted even more restrictions, which include:

No mandatory arbitration of California claims outside of California (i.e., forcing the consumer to come to the business’s state)

No choice of non-California law if claim arises in California

No mandatory arbitration if claim can be brought in a California small claims court

No waiver of right to seek injunctive relief on behalf of the public (i.e., the McGill rule)

No fee and costs shifting against a non-prevailing consumer (Cal. Code Civ. P. § 1284.3)

No waiver of discovery procedures available to a consumer in California court, except that depositions are at the arbitrator’s discretion

Failing to pay mandatory arbitration costs is a material breach and waiver of the right to arbitrate; gives consumer right to pursue claims in court, seek attorney’s fees and costs incurred in arbitration, and sanctions (which the court must impose) (Cal. Code Civ. P. §§ 1281.97 and .98)

With respect to these state protective measures targeted at arbitration, one key solution is to make sure that your arbitration clause is governed by the Federal Arbitration Act (“FAA”), rather than state arbitration rules. A long line of cases have broadly ruled that the FAA preempts state laws that appear to target arbitration. State laws may address whether there was an agreement at all, whether there was mutuality, whether the terms are unconscionable, and other issues related to formation of the overall contract. However, applying the FAA will help reduce the risk of judicial overreach in applying some of these so-called state protections.

Other improvements to help make sure arbitration clauses are enforced include:

using “plain language” drafting and formatting so consumers understand the terms,

making sure to highlight the existence of arbitration terms for consumers when they sign your contract so they know they’re subject to such terms,

providing both parties clear rights to use courts for non-class action matters up to a specified damages cap so it’s clear that arbitration is not mandatory, and