Thursday, January 17, 2008

Retailer Is Saved by Mandatory Arbitration Clause from Consumer Class Action

Mandatory arbitration clauses have come under attack recently because they may prevent consumers from effectively vindicating their rights. A case in point is the recent decision Deaton v., No. 07-cv-643, 2007 WL 4569874 (S.D. Ill. Dec. 27, 2007).

Class Action Lawsuit Against Overstock Based on FCRA Violations - A customer of the online retailer claimed that Overstock violated the Fair Credit Reporting Act (FCRA) by displaying on her receipt the last four digits of her credit card and the expiration date (while the law allows the display of the last 5 digits or the expiration date). 15 U.S.C. § 1681c(g). The customer, Shandie Deaton, filed a class action lawsuit against Overstock in federal court in Illinois seeking the statutory damages of between $100 and $1000 per consumer. Id. § 1681n. Deaton alleged that Overstock intentionally continued to use devices that were not compliant with the law.

Lawsuit Dismissed Because of Arbitration Clause - In making her purchase, however, Deaton had agreed to Overstock's terms and conditions, including a mandatory arbitration clause, which required arbitration in Salt Lake City before the AAA, and barred class arbitration proceedings, and barred the joining of multiple arbitration proceedings into one case. Deaton argued that the arbitration clause was unenforceable: first, because it made enforcement of her FCRA prohibitively expensive; and second, because it unconscionably prevented class actions, which may be the only effective way for consumers to protect their FCRA rights.

The court rejected Deaton's arguments and dismissed her suit, disagreeing with her as a factual matter on her estimate of the costs of arbitration, and observing that the Seventh Circuit has never held that arbitration agreements barring class actions are unconscionable. News coverage of the case is available here.

Issues with Mandatory Arbitration Clauses - The court's ruling upholding the class-action prohibition means that the costs for individual consumers in terms of time and effort will drastically limit the number of consumers who will be able to protect their statutory rights. Quite possibly, it will be more cost-effective for to fight FCRA claims in arbitration than it would be for Overstock to purchase FCRA-compliant equipment. This evasion of FCRA requirements is presumably inconsistent with the intent of Congress.

In addition to defeating class-actions, arbitration clauses are considered pro-defendant because arbitrations are considered more likely to be decided in favor of defendants, and if the plaintiffs win, the awards are likely to be smaller. These issues were discussed in the recent article "Mandatory arbitration stacks deck against you."

I was involved in a successful multi-million dollar arbitration against a retailer a couple years ago, but my client was a sophisticated business rather than a consumer, and the award would likely have been larger if we had been in front of a jury.

One arbitration service refused to enforce arbitration agreements that prohibited class actions, but they eventually reversed their policy under pressure from defense attorneys.

Legal Opposition to Mandatory Arbitration Clauses - Some organizations have been fighting against mandatory arbitration clauses in the courts. For example, the non-profit organization Public Justice (formerly Trial Lawyers for Public Justice), has been fighting against mandatory arbitration clauses in the courts, through their Mandatory Arbitration Abuse Prevention Project. They have had some successes. (One of my law school friends was involved in some of these cases for Public Justice, which is why I'm aware of their work in the area. Thanks Rich!).

Proposed Legislation Limiting Mandatory Arbitration - Other groups have been fighting against mandatory arbitration clauses in Congress, lobbying for new legislation against binding mandatory arbitration. There is now a bill pending in Congress – the Arbitration Fairness Act of 2007 – that would help protect consumers' rights to their day in court by making unenforceable pre-dispute arbitration agreements related to employment and consumer disputes, or arising under statutes intended to protect civil rights or to regulate contracts between parties of unequal bargaining power. S. 1782, 110th Congress. The bill was proposed by Democratic Senator Russ Feingold and Congressman Hank Johnson in July, and the Senate Judiciary Committee held a hearing on the bill in December. See Business fights to keep mandatory arbitration; Bills aim to get consumers their day in court (free subscription).

Sample Arbitration Clauses - Unless or until legal reforms are made, retailers can continue to benefit from arbitration clauses with consumers. Sample arbitration clauses to insert into contracts are available on the web sites of arbitration services like the AAA or JAMS. If the clauses are excessively one-sided consumer adhesion contracts, however, they may be unenforceable, depending on the jurisdiction. The law of unfavorable jurisdictions may sometimes be avoided through the use of a choice-of-law provision naming the law of a more favorable state. Such use of contractual choice-of-law provisions as applied to consumer adhesion contracts was criticized in the article: William J. Woodward, Constraining Opt-Outs: Shielding Local Law and Those it Protects from Adhesive Choice of Law Clauses, 40 Loyola L.A. L. Rev. 9 (2006), as mentioned on the Consumer Law & Policy Blog.

Advantages and Disadvantages of Arbitration - For contracts between businesses, mandatory arbitration clauses may or may not be advantageous. Arbitration services may charge higher fees for cases that arise under pre-dispute mandatory arbitration clauses, and their fees are many times higher than court fees. Arbitration services may also charge the parties for hearing room rental, arbitrators' time, and other miscellaneous costs. On the other hand, attorneys' fees may be lower because the proceedings are more informal and usually more expedited, and if you're the defendant, you might get a lower award before an arbitrator. Most arbitrations are also confidential, which some businesses may prefer.

Cautions for Consumers - For consumers (and plaintiffs' lawyers), take hope in the pending legislation, be careful about what you sign, and before filing suit check whether there is a mandatory arbitration clause (as well as a choice of law and choice of venue clause). I have seen cases where class actions were filed outside the jurisdiction stated in a choice of venue clause, and the defendant counter-sued the named plaintiffs for the defendant's costs of defending the suits outside the chosen venue. (The defendant's counter-suit was eventually dismissed on procedural grounds, but the plaintiffs incurred costs in defending the suit and eventually agreed to a transfer to the specified venue). Filing in court in the face of a mandatory arbitration clause is not likely to lead to a counter-suit, but will likely be fruitless unless you have grounds to defeat the clause.

Related Post: Ninth Circuit Finds T-Mobile Mandatory Arbitration Clause Unconscionable.


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