United States: Use TACT: The Arbitration Alternative

In April 2014, the media ignited a firestorm of controversy over General Mills' decision to modify its online Privacy Policy and Legal Terms to include a mandatory arbitration provision. The proviso required consumers who downloaded or printed coupons, "joined an online community," subscribed to an e-mail newsletter, redeemed a promotion, or participated in any "offering" to forego their right to sue the company in court and instead submit to private, binding arbitration to resolve any disputes with the company. In the face of the outcry over this policy change, the company reversed course and restored its prior legal terms, which contained no mention of arbitration.

The media's vilification of the policy change once again brings to the forefront the tension and competing interests between class action litigation and the freedom to contract to arbitrate. This tension has existed since the Federal Arbitration Act was enacted in 1925 and, much to the chagrin of class action litigation proponents, the expansive reach of mandatory arbitration has gained a strong foothold in recent years, due to the overwhelmingly pro-arbitration precedent established by the Supreme Court in its Concepcion and Italian Colors decisions, which express a clear federal policy in favor of enforcing class action waivers contained in arbitration agreements.

Public perception of mandatory arbitration provisions is unquestionably negative. Detractors of this method of dispute resolution largely deride it as an "anti-consumer" practice that allows big corporations to escape all liability by unconscionably and covertly tricking unsuspecting, unsophisticated consumers into clicking away their federally protected legal rights. The mandatory arbitration system is also criticized for establishing a climate where large groups of consumers cannot seek redress for small claims because the individualized nature of the proceedings makes it prohibitively expensive to seek relief.

Yet, an examination of the present consumer class action litigation system reveals its numerous failings, namely that the current structure often results in little or no relief to class members while providing exorbitant compensation to the attorneys involved. Literature on the subject also reveals that the vast majority of consumer class actions simply do not provide a monetary benefit to class members whose interests the system is designed to protect, especially where the members cannot be identified. If implemented properly, mandatory arbitration may actually provide a better mechanism for advancing and protecting consumer rights for legitimate small claims than class action litigation. It is critical for practitioners counseling corporations on this issue to advise their clients that they must use "TACT" (Transparency, Agreed-upon terms, Clarity about costs, and Thoroughness) when enacting arbitration policies.

FAA and the Supreme Court's Pro-Arbitration Progeny

Prior to the enactment of the Federal Arbitration Act (FAA) in 1925, arbitration agreements were met with hostility by the United States judiciary and courts generally refused to enforce such agreements. The FAA, however, ushered in a new era in which arbitration agreements are considered to be presumptively enforceable (so long as the parties have contracted fairly), thus putting agreements to arbitrate on equal footing with other contracts.

In the years following the FAA's passage, the U.S. Supreme Court has repeatedly upheld the FAA and, in the recent landmark decisions, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) and Am. Exp. Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013), the Court has further solidified its pro-arbitration stance by determining that the FAA expresses a clear federal policy in favor of enforcing class action waivers contained in arbitration agreements.

In Concepcion , the Court struck down a California common law rule that invalidated class waivers in consumer arbitration agreements (including contracts of adhesion) as unconscionable because the rule conflicted with the pro-arbitration policy of the FAA. Two years later, the Court continued its pattern of enforcing arbitration agreements according to their terms in the Italian Colors decision. In that case, the Court held that a class action waiver contained in an arbitration agreement was enforceable even though the plaintiffs showed that the waiver effectively prevented them from bringing their federal antitrust claims because litigating the claims individually would be prohibitively expensive.

The clear presumption of enforceability of arbitration clauses propounded by the Supreme Court has raised serious concerns about the use of class waivers by corporations in form contracts because such waivers have the potential to insulate corporations from virtually all liability for actions that allegedly create small harm to large groups of consumers.

Failings of the Class Action Litigation System

Class action litigation serves two primary purposes. First, as a matter of economic efficiency, it provides a mechanism for large numbers of consumers who have suffered similar small harms to aggregate their claims where the cost of litigation outweighs the potential recovery to individual consumers. Second, pursuant to the notice requirement of Federal Rule of Civil Procedure 23(b)(3) actions, the device benefits society as a whole by alerting consumers to potential, small-scale injuries that they may have suffered, and opening up a discourse about the legal relief available to these consumers.

While the individual, privatized nature of mandatory arbitration and the Supreme Court's enforcement of class action waivers in arbitration agreements appear to thwart the very important principles underlying class action litigation, existing literature on the subject reveals that, all too often, the consumer class action mechanism simply does not deliver meaningful benefits or relief to class members.

Literature on consumer class action lawsuits reveals that, in those cases that do result in settlement, the recoveries achieved for the class are minimal. See Ronald J. Levine and Sharon A. O'Shaughnessy, Class Actions: Where's the Beef? LJN's Product Liability Law and Strategy, Vol. 32, No. 1 (July 2013) (available at http://bit.ly/1vCQByq). 

This is especially true in consumer class action settlements in which there are no records of the names and addresses of the consumers and where the individual payments are relatively low. It is difficult to advise a consumer public that settlement has been reached, especially where there are unregistered purchases, and even if consumers are aware of the settlement, it is questionable whether a consumer will go to the effort of filling out the claims forms.

While class action settlements often leave class members with awards of little or no value, the current structure of the system frequently results in a monetary windfall to class counsel. Although class action settlements are judicially scrutinized to ensure procedural and substantive fairness (due to the fact that class members are bound by them), the scarce publicly available data discussing how much cash relief class members receive post-settlement paints a disturbing picture: Often, attorney fees are approved without an inquiry as to the actual value of class recovery, and while plaintiffs' lawyers are well-compensated (often in the millions of dollars), only a small percentage of settlement awards actually goes to consumer class members, and only a small fraction of the class may take home any cash relief.

These findings confirm what critics of the class action litigation device have long suspected: The vast majority of consumer class actions where members cannot be identified simply do not benefit class members whose interests the system is designed to protect.

The Virtues of Consumer Arbitration

General Mills' implementation of its mandatory arbitration policy was attacked by the media as an attempt to trick consumers into forfeiting their legal rights by the mere act of interacting with the company's brands online. The method by which the company rolled out the policy detracted from the fact that, in practice, the company's mandatory arbitration policy was actually quite generous to consumers and had the potential to provide meaningful relief to consumers with small claims.  

In the ensuing media storm, detractors of mandatory arbitration seized upon the opportunity to criticize the arbitration process. While it is true that arbitration reduces procedural rights such as appeals and jury trials, and immunizes large companies from public proceedings due to its private nature, the benefits of arbitration can far outweigh the downsides in the consumer context. If properly executed, arbitration may actually provide a better mechanism for advancing and protecting consumer rights for small claims than class action litigation.

In practice, the arbitration forum is an efficient, streamlined mechanism for pursuing small fee claims that has the potential to be far more advantageous to consumers than class action litigation for six distinct reasons.  

First, in light of the abysmal monetary relief that is awarded to individual consumers when a consumer class action with unidentified members actually results in a settlement, consumers have a higher likelihood of garnering real, tangible benefits through arbitration.

Second, despite public perception to the contrary, the arbitration process actually does provide robust protections to consumers' due process rights. For example, the American Arbitration Association (AAA) has a "Consumer Due Process Protocol" in place that requires corporations' arbitration agreements to comply with certain notice and process requirements. If an arbitration agreement does not comply with the Consumer Due Process Protocol, the AAA will provide the company with an opportunity to revise the clause. If an arbitration containing a non-compliant arbitration clause is filed, the AAA will return the arbitration filing information to the consumer with instructions to pursue other remedies and will refuse to administer any of the company's other cases until the arbitration agreement is in compliance. JAMS has also enacted a "Policy on Consumer Arbitrations Pursuant to Pre-Dispute Clauses Minimum Standards of Procedural Fairness."

Third, arbitration is cost-effective. Many corporations will actually pay all arbitration fees for claims that fall below certain monetary thresholds. For example, General Mills, in its mandatory arbitration policy, offered to pay all fees for consumer claims totaling less than $5,000.  

Fourth, arbitration provides much more autonomy to consumers. While class actions are binding on class members, oftentimes consumers have the ability to opt out of arbitration clauses and may instead pursue their claims in local small claims court, provided the claim meets the court's jurisdictional limits.

Fifth, arbitration is a much more expeditious process than class action litigation, which can often take years.  

Finally, there is less red tape involved in arbitration and often it is not even necessary for attorneys to be involved.

Use 'TACT'

The backlash that General Mills endured from the media over the implementation of its mandatory arbitration policy provides a teachable moment for all practitioners who counsel large companies that are considering utilizing mandatory arbitration procedures. When enacting policies for resolving consumer fee claims, practitioners must advise their clients to use TACT in implementing all arbitration agreements:  

Transparency: Broadcast the policy. State the policy clearly and visibly, and disseminate its terms far and wide.  

Agreed-Upon Terms: Corporations should capture clear evidence of agreement to avoid an enforceability challenge down the line. For instance, if a corporation revises its online legal terms to include an arbitration clause, it is a best practice for consumers to agree to the clause through electronic signature.  

Clarity About Costs: Corporations should make painstaking efforts to communicate their arbitration fee policies explicitly, especially if the policy will cover a consumer's arbitration costs.  

Thoroughness: The agreement should: 1) include a class action waiver; 2) ensure that the arbitration clause complies with AAA's and JAMS' due process protocols; and 3) emphasize the benefits of arbitration and highlight its expeditiousness, cost-effectiveness, consumers' ability to opt out, and the higher likelihood of obtaining relief.  

In addition to ensuring that any consumer arbitration agreement meets the foregoing standards, it is also prudent for practitioners to counsel their corporate clients to implement further procedural safeguards in an effort to avoid getting embroiled in class action litigation. These procedures include settling risky individual lawsuits that have the potential to develop into class actions, implementing a system to isolate and monitor unorthodox customer requests or complaints to determine if the consumer is working with class counsel to create documentation for a lawsuit, and tracking pending class actions that have been initiated against similar companies in the industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions