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Binding Mandatory Arbitration Scrutinized

Dennis Cuevas, Project Director and Chief Counsel, Consumer Protection

Dennis Cuevas, Project Director and Chief Counsel, Consumer Protection

In 1925, Congress passed the Federal Arbitration Act, which allowed merchants of equal bargaining power to agree to arbitration after a dispute arose and mutually choose an arbitrator to resolve the dispute. For many companies, arbitration was conceived as an informal, expedited process for resolving routine disputes, without having to turn to the courts for resolution. Soon thereafter, arbitration expanded to a wide range of contractual issues.

Many contracts these days for goods and services contain a binding mandatory arbitration provision. In mandatory arbitration, companies require consumers to agree to submit any dispute that arises to binding arbitration prior to completing a transaction with the company. Consumers are required to waive their right to sue, to participate in a class action lawsuit, or to appeal. Binding mandatory arbitration differs from other forms of alternative dispute resolution, such as mediation or non-binding arbitration, in that agreements to use them are made after a dispute arises and not before and as a condition of receiving the goods or services.

According to consumer advocacy groups, binding mandatory arbitration is unfair to consumers for many reasons. First, consumers are often unaware they have agreed to binding arbitration, thus depriving them of their right to make informed decisions. Binding mandatory arbitration provisions are tucked in paragraphs of fine print or provided as a separate form among many forms. Companies rarely mention or highlight the provision. If they do, it is often presented on a “take it or leave it” basis. Binding mandatory arbitration also limits consumer options for resolving a dispute. Before a problem arises, consumers are locked into binding arbitration for future disputes or problems.

Mandatory arbitration generally binds the consumer and not the businesses. Most mandatory arbitration agreements are written in such a way that companies retain their rights to take any complaint to court while consumers can only initiate arbitration. Consumer advocates also argue that arbitration does not follow well-established rules and procedures, such as those required in the court room. For example, arbitrators are not required to follow rules of discovery, which results in consumers experiencing difficulty in getting information they need to support their claims. Moreover, arbitrators are not required to take the law and legal precedent into account in making their decisions, although they are supposed to do so. Decisions typically cannot be appealed, and there are no oversight bodies to ensure that arbitrators follow fair procedure or the law.

Consumer advocates also argue that binding mandatory arbitration frequently costs more than taking a case to court. In many cases, consumers have to pay a large fee simply to initiate the arbitration process, which can deter them from even initiating a complaint. Often these fees are seldom less than $750.[1] In addition, these fees do not cover the arbitrator’s hourly charges, which range from $200-$300 per hour and split by both parties. Lastly, consumer advocates argue that arbitrators are biased. Arbitration service providers are organized to serve businesses, not consumers. Tremendous incentives exist to rule in favor of businesses if arbitrators want to be retained for future arbitrations.

Conversely, proponents of mandatory arbitration argue that it is an efficient and cost-effective way to resolve disputes. As mentioned earlier, mandatory arbitration procedures do not include extensive discovery which, in turn, affords both consumers and businesses a cheaper method to resolve their disputes. These cost savings make arbitration more accessible to lower-income claimants. In many cases, arbitration is the only dispute resolution alternative to expensive lawsuits. Another argument in favor of mandatory arbitration is that companies are able to reduce their own dispute resolution costs, which allows the firms to pass on the savings to their customers in the form of lower prices.

Mandatory Arbitration of Credit Disputes in Flux

In July 2009, Minnesota Attorney General Lori Swanson filed suit against National Arbitration Forum of Minnesota (Forum), the largest arbitration company in the country for consumer credit disputes. Attorney General Swanson alleged that the Forum represented to consumers and the public that it was independent and neutral, operated like an impartial court system, and was not affiliated with and did not take sides between the parties. The lawsuit further alleged that the Forum, while holding itself out as impartial, worked behind the scenes—alongside creditors and against the interests of ordinary consumers—to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appoint the Forum to decide the disputes. The Forum allegedly paid commissions to executives whose job it was to convince creditors to put mandatory arbitration clauses in their customer agreements. A week after filing suit, Attorney General Swanson reached an agreement with the Forum. While denying any wrongdoing, the Forum will get out of the business of arbitrating credit card and other consumer collection disputes. Under the settlement, the Forum will stop accepting any new consumer arbitrations or in any manner participate in the processing or administering of new consumer arbitrations. The company will permanently stop administering arbitrations involving consumer debt, including credit cards, consumer loans, telecommunications, utilities, health care, and consumer leases.

A few days later, another major arbitration firm, the American Arbitration Association, said it would stop arbitrating consumer debt collection until the process is reformed. Recently, Bank of America announced that it too will drop the requirement that forces consumers with disputes on credit cards and other accounts into an arbitration process. Bank of America’s new policy applies to credit card, auto, marine, and recreational vehicle loans, as well as deposit accounts. With these recent announcements and possibly others considering dropping mandatory arbitration, there appears to be much uncertainty as to how credit card disputes will be resolved under current contracts.

Legislative Initiatives

As consumer groups and law enforcement continue to address issues with binding mandatory arbitration, Congress also continues to work on reform. The Arbitration Fairness Act first introduced in 2007 was reintroduced [H.R. 1020] by U.S. Rep. Hank Johnson (Ga.) in February 2009. U.S. Sen. Russell Feingold (Wis.) introduced companion bill, S. 931. The bill, amending the Federal Arbitration Act, would prohibit mandatory pre-dispute binding arbitration in consumer, employment, and franchise disputes. It would also void pre-dispute agreements to arbitrate disputes arising under any statute intended to protect civil rights. Parties to a dispute would still be able to choose arbitration over court, but individuals would be given a choice. The bill would overturn the strong presumption in favor of arbitration that has been supported by U.S. Supreme Court decisions and the Federal Arbitration Act, at least as applied to consumer, employment, and franchise disputes. The House version is currently pending before the House Judiciary Subcommittee on Commercial and Administrative Law. The Senate version is pending before the Senate Judiciary Committee.

Lastly, a provision in H.R. 3126, the Consumer Financial Protection Agency Act of 2009 gives the new agency the authority to ban pre-dispute mandatory binding arbitration clauses. Section 125 of the legislation states, “the Agency, by regulation, may prohibit or impose conditions or limitations on the use of agreements between a covered person and a consumer that require the consumer to arbitrate any future dispute between the parties arising under this title or any enumerated consumer law if the Agency finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of consumers.”


[1] “Mandatory Arbitration Clauses: Undermining the Rights of Consumers, Employees, and Small Businesses,” Feb. 24, 2005, available at http://www.citizen.org/congress/civjus/arbitration/articles.cfm?ID=7332, Public Citizen

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