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Boiling Down Consumer Arbitration

Business Conflict Blog by Peter Phillips

By now I’ve attended or participated in quite a few task forces, speeches, conference panels and other occasions in which the issue of class action waivers in consumer arbitration clauses has been discussed.  Just about each time, just about each speaker has been either smarter or better informed than I am — often both.  Two more events are on the horizon:  at the ABA Business Law Section Annual Meeting and at a CLE at New York Law School, where I teach.  And perhaps it is an indication of my learning — or my not learning enough — that the kernel of the concern reduces itself to a few very simple propositions:

Arbitration Derives its Authority From Informed Consent.  Just like Thomas Jefferson said about governments, arbitrators’ power is created and confined by the agreement of the parties.  Folks who didn’t agree that an arbitrator should decide a particular dispute are not required to arbitrate that dispute.  Almost without exception, “consumer arbitration” involves parties who didn’t agree to arbitrate, and didn’t even understand what agreeing to arbitrate means.

Class Actions Are Experienced as a Form of Threat, Not Redress.  The AT&T dispute mechanism clause is a good example of a perfectly suited consumer redress mechanism.  So are EBay and Paypal.  Use the internet to advise the company that you believe you’re owed money, and the company pays 100% of the money owed, and assumes 100% of the transaction costs, or else risks harsh consequences for failing to do so.  The fact that a lawyer in San Diego thought his client was not sufficiently covered by this policy, and initiated a class action instead, confirms what businesses fear: That class actions are being used for purposes other than consumer redress, by a self-interested bar.

Arbitration Clauses Are Distorted as Vehicles for Class Action Waivers.  It would be unlikely that an agreement purporting to require purchasers of an iPhone to waive Rule 23 of the FRCP would be enforceable.  Yet an identical provision of an arbitration agreement has been held to be enforceable.  Therefore arbitration appears in many consumer “agreements,” not with the prospect that claims for redress will be arbitrated, but rather that claims asserted by class action lawyers will be dismissed.

The confluence of these three trends puts us where we are now, which is to say no one’s interest is being met.    Rational consumer redress mechanisms are discouraged; businesses’ efforts to manage litigation risk are being regulated to the point of prohibition; and the process of arbitration — a mercantile method of centuries’ lineage and continuing utility — is being mangled and distorted.

How to fix it?  As Viola says in Twelfth Night, “It is too hard a knot for me t’untie!”



F. Peter Phillips

F. Peter Phillips is a commercial arbitrator and mediator with substantial experience providing consultation on the management of business disputes to companies around the globe. A cum laude graduate of Dartmouth College and a magna cum laude graduate of New York Law School, Mr. Phillips served for nearly ten years… MORE >

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