Imagine this. You own a web-based business selling everything
from nutritional supplements, to skin cream, to jewelry to
consumers. Your website's registration page has a checkbox with
text alongside it. In large font, the text says, "By
purchasing a product and checking this box, you agree to the Terms
of Use, including its mandatory arbitration and a class action
waiver provisions. The hyperlinked Terms of Use explain the
provisions in more depth.
All is good. You're selling products, your customers are happy,
and you're making money. One day, a process server knocks
on your door. You've been served. A consumer class action
complaint has been filed in court against your business. The
complaint could allege that your advertising was deceptive, that
your product was defective, or that your continuity re-billing is
unlawful. You know the claims are frivolous but you also know that
even frivolous class action litigation can be expensive.'
In 2015, there is good news. With the fact pattern above, a court
will likely hold there can be no class action and the dispute must
be decided through less-expensive arbitration. Here's the
bad news. A year from now this could all change. You could end up
stuck in court defending an expensive class action lawsuit with
every customer you've ever had as a potential class
member.
Online marketers often implement binding arbitration provisions to
limit their exposure to consumer class action lawsuits.
Senator Al Franken (f/k/a Stuart Smalley) and Congressman Hank
Johnson want to change this. The proposed Arbitration
Fairness Act ("Act"), if passed, would ban those
provisions and allow parties to agree to arbitration only after a
dispute arises. If the Act passes, marketers who now rely on
mandatory arbitration provisions and class action waivers will face
class action lawsuits in court. This would up-end the Federal
Arbitration Act ("FAA") and recent U.S. Supreme Court
precedent.
The FAA, passed by Congress in 1925, provides for contractually
based, compulsory, binding arbitration. Under the FAA, if
parties have validly agreed to arbitrate disputes that arise under
a contract, the claims must be arbitrated rather than litigated in
court. The FAA codified the public policy in favor of enforcing
arbitration agreements, which typically provide for faster
resolution and more relaxed procedural rules as compared to
litigation in court.
Online marketers and retailers use mandatory arbitration and class
action waiver provisions to limit their exposure to expensive
consumer and class action litigation. The cost saving
benefits of arbitration allow parties to quickly and quietly
resolve disputes, rather than endure the length, costs, and risks
of litigation in court. Importantly, these provisions help to
fend off plaintiffs' attorneys who pursue consumer class
actions.
No doubt, class action litigation can be expensive. For
example, in 2014, a consumer alleged that after drinking Red Bull
over the years and despite the claim that Red Bull "gives you
wings," he neither grew wings nor experienced enhanced
athletic performance. Although Red Bull could have defended,
it chose the safer route, settled, and refunded $10 to any customer
who had bought the drink, ultimately paying $13 million. This is
not unusual. When facing a class action complaint, marketers often
settle to avoid the length, costs and risks of litigation, even if
there is a high probability that they could ultimately
prevail. Plaintiffs' lawyers know this, take advantage of
this, and dislike mandatory arbitration provisions. While
class actions may help plaintiffs' lawyers in pursuit of large
fee awards, arbitration is often a better, faster, and
less-expensive forum for the actual parties to the
dispute.
In recent years, the U.S. Supreme Court has issued several
pro-arbitration decisions. With AT&T v.
Concepcion in 2011, the Court upheld AT&T's
arbitration and class action waiver provisions which prevented a
customer from resolving claims in court or through class
action. In 2013 the Court decided American Express v.
Italian Colors, upholding an arbitration agreement that barred
plaintiffs from bringing a class action against American Express
for alleged antitrust violations. The plaintiffs' lawyers
refrain in these and other cases is that the mandatory arbitration
provisions should be unenforceable and class action should be
allowed since the cost of proving an individual claim would far
outweigh an individual recovery. In case after case, however,
courts have applied the FAA, emphasized that arbitration is a
creature of contract, and enforced arbitration agreements according
to their terms.
If enacted, the Arbitration Fairness Act would prohibit mandatory
arbitration provisions in consumer disputes, as well as employment,
antitrust, and civil rights cases. The Act's supporters
argue that consumers lack bargaining power when faced with a
contract containing a mandatory arbitration provision and that
these provisions allow companies to dodge liability and exposure
for violating consumer protection laws. Although the Act
would not prohibit companies and customers from arbitrating
consumer disputes, it would require that the decision to arbitrate
be made through agreement by the parties after the dispute has
arisen.
The Arbitration Fairness Act has been introduced to Congress
several times. In the past, various trade and public policy
organizations have lobbied for and against it. The arguments
against it are compelling because the benefits of mandatory
arbitration are compelling.
First, a single consumer could very well be worse off in
court. The court process is far from perfect, courts have
complicated rules and overburdened dockets, and most cases are not
suitable for class action treatment. For a single consumer
who must file a case in court, this likely means hiring a lawyer,
incurring the added cost of litigation, and waiting several months,
if not years, for trial, in the hope of one day obtaining
relief. By contrast, in arbitration, the rules are relaxed,
the cost is less, and the pace is faster. With more relaxed
rules and a more efficient process, it is far easier for a consumer
to represent themselves in an arbitration than in court. To
prohibit mandatory arbitration could actually limit access to
justice.
Second, if the Arbitration Fairness Act passed, this would
necessarily increase the price of consumer goods and services while
providing a boon for consumer class action lawyers. For
companies facing class actions, there is strong incentive to settle
for hundreds of thousands of dollars early on, rather than face
millions of dollars in certain litigation expenses and potential
worst-case exposure. The cost of these settlements would
necessarily be passed on to consumers. In many instances,
class action settlements also lead to big paydays for
plaintiffs' lawyers but only minimal relief to class
members. Although the Act's supporters are motivated to
help consumers, the Act could very well hurt consumers while lining
plaintiffs' lawyers' pockets.
Third, the notion that the Arbitration Fairness Act's provision
for post-dispute arbitration helps to ensure the availability of
arbitration's benefits is misguided. The reality is that
parties are more likely to agree on matters pre-dispute than after
a dispute has arisen. Once a dispute has arisen, each party
has an incentive to be strategic and prefer the forum that provides
the best route to a win. For an online marketer facing a
claim by an individual consumer and no longer bound by a mandatory
arbitration provision, the preferred forum could actually be court,
since again the consumer may have to hire a lawyer, incur the added
cost of litigation, and wait several months if not years in the
hope of one day obtaining relief. With the Arbitration
Fairness Act, a consumer who actually prefers arbitration for any
number of sensible reasons could instead be required to litigate
and wait years for a decision in court.
The Arbitration Fairness Act may never pass. If enacted,
however, the Act would have a widespread impact on consumer
transactions, prices, and the way marketers conduct business and
analyze legal risks. Given these stakes, online marketers
would be wise to track the legislation and should be prepared to
add their voice to the debate.
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.