Partner Richard F. Griffin comments on compulsory arbitration provisions in consumer agreements in the March, 2016 edition of the Buffalo Law Journal

Sep 28, 2016 | News

Multiple Problems with Compulsory Arbitration in Consumer and Service Agreements

Your client’s wife has died in a nursing home due to administration of an improper medicine. As you are preparing a complaint to start a wrongful death action in court with a jury trial, you review the nursing home agreement and are amazed to read this provision:

“Any claim shall be resolved by arbitration… and you will not have the right to participate in a class arbitration or a class action in any civil court”.

This can’t be enforceable! Such a waiver will not be enforced because it must be against public policy.

You and Justice Ginsberg of the United States Supreme Court are in the minority. Justice Ginsberg dissented in a recent case upholding an agreement mandating arbitration and banning class arbitration.

These decisions have predictably resulted in the deprivation of consumers’ rights to seek redress for losses, and, turning the coin, they have insulated powerful economic interests from liability for violations of consumer-protection laws. See N. Y. Times, Nov. 1, 2015, p. A1, col. 5 (“By inserting individual arbitration clauses into a soaring number of consumer and employment contracts, companies [have] devised a way to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices.”). DIRECTV, Inc. v. IMBURGIA et. al. (December 14, 2015 No. 14-462, p. 11).

Millions in the U.S. have signed credit card, mobile phone, car rental and other agreements without realizing that they contain compulsory arbitration provisions. The Supreme Court in Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201 (2012) has upheld a nursing home compulsory arbitration and class action waiver agreement. Most New York courts follow these decisions. See, e.g., Ayzenberg v. Bronx House Emanuel Campus Inc., 93 A.D. 3d 607 (2012), involving an agreement to attend a camp. A comprehensive review of New York and other recent decisions on these issues is in Outside Counsel, on page 4 of the NY Law Journal issue of December 29, 2015.

Basis for Federal Jurisdiction

Arbitration has become a much used procedure for resolving disputes. Every day thousands of arbitrators are involved in hearing business, employment, construction, and personal injury disputes. Parties select one or three arbitrators; hearings are more informal than a court trial; the award is binding, and no appeal is permitted. Arbitration is a cost-effective procedure. Many business and construction contracts provide for arbitration. AIA building forms have an option for arbitration; claims against stockbrokers must be arbitrated under FINRA. In our community parties to a personal injury claim often opt to arbitrate their case.

The Federal Arbitration Act, (FAA), 9 USCA §§ 1-13, governs all arbitrations that involve interstate commerce. The Supreme Court consistently reminds us that the FAA preempts state law. See, AT&T MOBILITY LLC v. CONCEPTION, 563 U.S. ____ (2011) (enforcement of a class action waiver in a cellular phone contract that was voided as unconscionable by a California court because it disallowed class wide proceedings). Practically all transactions involve some aspect of “interstate commerce” as discussed in AYZENBERG, supra.

An application of the FAA interpretation close to home deals with New York’s common law which does not permit an award of punitive damages, (Garrity, 40 N.Y.2d 354, 1976). However, the U.S. Supreme Court in Mastrobuno (514 U.S. 52, 1995) held that an arbitrator may award punitive damages in an appropriate case where the FAA preempts. This writer suspects that the FAA may be applicable to a large number of the arbitrations held in our community without the participants realizing that there is FAA jurisdiction.

Legislation and Regulations are Needed to Limit the Scope of Many Compulsory Arbitration Clauses.

It is probably impossible to obtain either legislation or agency rulings banning arbitration clauses in normal consumer contracts such as credit cards, car rentals, cell phones, etc. Most of the claims are relatively small and it is not economical for vendors or consumers to hire a lawyer and go to court. The best that can be hoped for is legislation or rule-making that requires a bank or other service provider to expressly call the consumer’s attention to the compulsory arbitration clause, or have some separate acknowledgement form to sign that the clause has been read.

The waiver of class action arbitration – or joining a class action in court – is a much different matter. In October 2015, the Consumer Financial Protection Bureau (CFPB) announced it was considering regulations that would require banks and other consumer financial institutions to include a term expressly permitting class action lawsuits in all pre-dispute arbitration agreements. (The CFPB is a federal agency deriving its jurisdiction from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010).

A major effort will be necessary to obtain legislation or agency rulings to preserve lawsuits and class actions or class arbitration rights in cases of non-routine consumer agreements such as nursing homes, hospitals, doctor’s offices, urgent care, employment, or construction. A possible solution is establishing maximum threshold amounts for personal injury and service agreements; claims above these amounts could be made in a court action.

Richard F. Griffin

February 8, 2016