Arbitration agreements one click away

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By Elizabeth Ahlin
Dolan Media Newswires

With one click of the mouse, consumers can sign away their right to pursue a claim in court or take part in a class action.

It’s a growing practice, it’s usually legal, but it’s not always popular, as General Mills officials discovered recently.

When General Mills silently changed language on its website earlier this month to indicate that consumers could be bound to arbitration by downloading coupons, joining “online communities” or participating in contests, the public reaction was negative. Consumers questioned the practice on social media sites and many wondered if General Mills had gone too far. In a matter of days, the company announced that it was reverting to its original policy which did not mention arbitration.

General Mills’ quick reversal was a lesson for all companies in how strongly consumers can react to a perceived infringement on their rights. But it is also a reminder to consumers that they need to pay attention if they want to avoid similar arbitration clauses, because the clauses are everywhere.

Professor Carol Chomsky teaches contract law at the University of Minnesota Law School. She said that she did not examine the language of the short-lived General Mills policy, but her understanding is that the controversy stemmed in part from a perception that the policy cast a “broader net in terms of who would be bound” than most similar policies do.

Arbitration policies vary greatly in how they limit consumer courses of action, said Christine Hines, a lawyer with the consumer rights group Public Citizen. Such policies can try to impose a statute of limitations, try to limit potential damages, require arbitration instead of court action and require that such arbitration comes only in the form of personal claims, not class action claims. Hines, who actively advocates against such policies, maintains a list of close to 100 major companies that impose such policies in a variety of ways.

“Those provisions should not be in those one-sided contracts,” said Hines.

While many consumers would agree with Hines, the arbitration contract clauses generally are legal, said Chomsky. But how solid a policy’s legal footing is depends on the company’s approach.

There are three main ways, Chomsky said, for a company to try to bind consumers to certain contract terms: shrink wrap, click wrap and browse wrap. With shrink wrap, a company might try to impose terms if a product is unwrapped or opened. If the warning of what contract terms a consumer is agreeing to by opening a product is displayed prominently enough, it might be upheld by the courts.

Click wrap is something most consumers have used when agreeing either to purchase or use a product or service online. The approach requires a user or consumer to click to agree to contract terms. The more successful approaches require a user to scroll to the bottom of the contract terms and click to acknowledge accepting the terms. There is no guarantee that consumers actually read or understand the terms, but that is true of almost any contract, Chomsky said.

The least successful approach, which some worried General Mills was trying to implement with its references to “online communities,” is browse wrap, which attempts to bind someone simply for viewing online material. That approach can be problematic because it does not require an acknowledgement that the user has been shown the contract terms.

“There really needs to be an affirmative step,” Chomsky said.

Another key factor can be how prominently the notice of contract terms is delivered and when, said Liz Kramer, a partner at Stinson Leonard Street who writes the blog “Arbitration Nation.” Kramer noted a case in which such a policy by U-Haul was not upheld, because the information on the arbitration clause was not provided at the time of purchase — it was tucked into a folder later when customers picked up their U-Haul.

Kramer spoke generally about arbitration clauses in contracts, noting that if arbitration agreements are not provided at the time of purchase, but are, for example, included in a later email, that likely would not be upheld in court.

“A person has to have the opportunity to see that arbitration clause at the time of sale when they are making the decision to purchase,” said Kramer.

Companies choose to include arbitration clauses for several reasons, she said. First, arbitration is confidential.

“You don’t want your dirty laundry aired in public,” Kramer said.

Second, arbitration also allows for an expert to decide the outcome of a case. For example, a construction contract could require that an arbitrator have an expertise in construction or architecture. Arbitration also offers a quicker resolution. Some state courts, Kramer noted, have large backlogs that could lead to a case dragging on for years while a general arbitration claim could be wrapped up in the course of a year.

But one of the biggest reasons for a company to require arbitration of personal claims is the chance to avoid class action suits. That, Hines said, is a problem for consumers, pointing to a 2013 Supreme Court case, American Express Co. v. Italian Colors Restaurant. In the high court’s opinion, it ruled that, under the Federal Arbitration Act, an arbitration clause cannot be barred simply because a litigant’s costs of pursuing the action would be more costly than the potential recovery in the case. Such a rule virtually guarantees that consumers — or in this case, small businesses — who cannot afford to pursue individual claims will not get relief.

“They [companies] are getting away with a lot these days,” Hines said. “The playing field is completely unleveled.”

Despite potential drawbacks for consumers, Kramer said there are many ways that companies make arbitration policies beneficial to consumers. Some companies include in the arbitration clause a pledge to pay the arbitration filing fee in the event of a claim. Because the fee is based on the amount of damages claimed, that could be worth thousands of dollars to a consumer. Companies also have said that, if claims are proven against them, they will pay all the costs of arbitration, which could run up to hundreds of thousands of dollars for big claims. In some cases, consumers are able to choose the location of the arbitration.

Even with such potential benefits, Hines said the clauses are unacceptable because they limit the avenues in which a consumer can seek relief. She wants to see such arbitration clauses limited or eliminated. While most policies are likely to be upheld in the courts, Hines said the country’s lawmakers can take action to limit the practice and restore the consumer power that comes through the use of class action lawsuits.

Taking away class action suits does limit consumer power in the marketplace, said Chomsky, but the expansion of the use of arbitration contract clauses is to be expected when companies are protecting their interests.

“We’ve seen a tendency for companies to reach out and expand their rights and limit the rights of other parties to the contract to the extent that it’s reasonable and possible to do so,” Chomsky said. “That’s what contracting parties do all the time.”

Chomsky said the General Mills case emphasized that class action suits are not the only way that consumers can band together to increase their power. They can always use publicity and the power of the pocketbook.

“If people are upset and say I’m not going to buy General Mills anymore, it’s not going to help [General Mills] to have a coupon that prevents a certain type of lawsuit,” Chomsky said.