The Arbitration Clause Hidden in Many Consumer Contracts

Last year a firestorm erupted after General Mills, the maker of Bisquick, Cheerios, and other food brands, changed the legal terms on its website, requiring that all disputes related to the purchase or use of any of its products be resolved through mandatory arbitration. Legal experts and consumers were outraged that by downloading coupons or entering a company-sponsored sweepstakes or contest they could be waiving the right to sue. General Mills ended the practice days later, writing on its blog, “We’ve listened—and we’re changing our legal terms back.”

Sound outrageous? You probably do business with many firms that tuck forced arbitration clauses into their terms and conditions. They are in hundreds of millions of consumer contracts, according to the National Association of Consumer Advocates. Amazon, Groupon, Netflix, and Verizon are among the companies whose contracts have the clauses. They’re in the fine print of terms for car loans and leases, credit cards, checking accounts, insurance, investing accounts, student loans, and even certain employment and nursing home agreements; you can be legally bound to forced arbitration by signing a contract or clicking “I agree” on a website. Once you do, if you eventually have a complaint against one of those companies, you will be obligated to take your dispute to an arbitration firm.

Businesses Have the Edge

Usually, if you are bound by a mandatory arbitration clause, the company picks the arbitrator, who is not required to have a legal background (although many do) and, unlike a judge, doesn’t have to consider legal precedent. The decision is usually private, so other consumers in the same position won’t know about the case. And there’s little basis on which the decision can be appealed, says Daniel Blinn, a consumer law attorney with the Consumer Law Group in Rocky Hill, Conn.

Arbitration clauses often restrict you from pursuing any type of litigation outside of the arbitration, including a class-action lawsuit, where a group of similarly harmed individuals can sue a company. In class actions (as well as in certain other types of litigation) lawyers generally work for a portion of eventual winnings, so participants have no out-of-pocket costs, and the company does not get to pick the judge the way it gets to pick an arbitrator.

A series of Supreme Court decisions have backed mandatory arbitration. For example, in a 2013 ruling, the court found that a company can use its arbitration agreement to stop class-action suits, even if the dispute involves a violation of federal antitrust laws. “The system is rigged against the consumer,” says Paul Bland, executive director of the consumer-rights law firm Public Justice. “The purpose is to say that even if companies break state truth-in-advertising laws, or debt collection laws, or lemon laws, there is nothing consumers can do but arbitrate.”

Arbitration Can Cost You

Proponents of mandatory arbitration say it benefits consumers. “Arbitration is a time-tested, cost-effective alternative to litigation,” says Michael Clark, vice president of marketing and public relations for the American Arbitration Association, one of the nation’s largest providers of arbitration and mediation services. But there is the potential cost of long-distance travel and filing fees. You may have to cover some of the arbitrator’s charges—generally in the range of $200 to $300 per hour. A 2012 study by InsideCounsel, a publication for legal professionals, found that arbitration may cost more than a court hearing. But it can benefit companies, which might pay less in damages than they would in litigated cases.

A few arbitration clauses offer the option to resolve a dispute in small claims court. It’s often less costly than arbitration, but the amount you can win is capped, usually at $2,500 to $25,000, depending on the state. “Companies generally only go that route when they are trying to collect a debt from you, because it saves them the arbitrator’s fee,” Blinn says.

Protect Yourself

We believe that consumers should not be forced into arbitration. The Consumer Financial Protection Bureau should use its authority to stop forced arbitration in financial services; it recently announced it's holding a hearing on October 7 in Denver to discuss the topic, and may make an announcement then. Congress should enact legislation to make arbitration voluntary in other consumer contracts. In the meantime:

Look for exceptions. It’s difficult to find a credit-card, mobile-phone, or checking-account agreement where arbitration isn’t required, but some companies don’t impose it. For example, midsized banks and credit unions are more likely to skip those clauses.

Try to opt out. Read contracts and terms of use in full to see whether you can opt out of arbitration, Blinn says. A few contracts, such as certain nursing home agreements, allow it.

Make some noise. “Companies think no one reads these clauses and that it’s not an important issue to people,” Bland says. “But the General Mills case clearly shows that when enough consumers strongly object to them, companies will reverse course.”

Editor's Note: This article also appeared in the November 2015 issue of Consumer Reports magazine.