Pre-dispute Arbitration Agreements Research Articles

What do consumers understand about predispute arbitration agreements? an empirical investigation.

The results of a survey of 1,071 adults in the United States reveal that most consumers do not pay attention to, let alone understand, arbitration clauses in their everyday lives. The vast majority of survey respondents (over 97%) report having opened an account with a company that requires disputes to be submitted to binding arbitration (e.g., Netflix, Hulu, Cash App, a phone or cable company), yet most are unaware that they have, in fact, agreed to mandatory arbitration (also known as "forced arbitration"). Indeed, over 99% of respondents who think they have never entered into an arbitration agreement likely have done so. Over 92% of respondents report that they have never based a decision to use a product or service on whether the terms and conditions contain an arbitration agreement. When prompted, they largely endorse the following reasons: they were unaware of the arbitration clause, they did not read the terms and conditions, and they thought they had no choice but to agree to mandatory arbitration. Moreover, many respondents presume that if a dispute arises, they will still be able to access the public courts, notwithstanding that they agreed to the terms and conditions. Consumers are largely unaware of opportunities to opt out of mandatory arbitration. They generally do not pay attention to or retain information about the steps required to opt out successfully (e.g., contacting the company within a specified time period). Generally, consumers are unaware that companies like Cash App and Venmo (mobile payment systems utilized by nearly 60% of respondents) allow customers to opt out of mandatory arbitration if they act within a limited time period. Among the minority of respondents (21%) who stated that they had been given an opportunity to opt out, vanishingly few could name any of the steps required to opt out successfully. When presented with a run-of-the-mill contract, of the type consumers routinely encounter, most respondents did not take notice of the arbitration clause. Less than 5% of respondents could recall that the contract they were shown had said anything at all about arbitration. Furthermore, most consumers misperceive the consequences of signing a predispute arbitration agreement. Most mistakenly believe that, after agreeing to terms and conditions mandating binding arbitration, they can still choose to settle their dispute in court, have a jury decide their case, join a class action, and appeal a decision made based on a legal error. For instance, less than 5% of respondents correctly reported that they could neither appeal an erroneous decision to another arbitrator (or set of arbitrators) nor start all over again in court. Less than 1% of respondents correctly understood the full significance of the arbitration agreement, as indicated by their responses to questions about whether they retained the rights to sue, have a jury decide their case, access the public courts, and appeal a decision based on a legal error. In summary, consumers are generally unaware of arbitration clauses, and they tend to hold mistaken beliefs about how arbitration agreements affect consumers' procedural rights.

What Do Consumers Understand About Predispute Arbitration Agreements? An Empirical Investigation

What Do Consumers Understand About Predispute Arbitration Agreements? An Empirical Investigation

Pre-dispute Arbitration Agreements: A Bar to Access to Court?

Pre-dispute Arbitration Agreements: A Bar to Access to Court?

Is 'MeToo' Only a Social Movement or a Legal Movement Too?

This essay discusses some of the effects of the “MeToo” movement as a social movement, bringing issues of sexual assault and sexual harassment to the forefront. The essay then raises the question of whether that movement might also have implications for the law of sexual harassment. The essay discusses three elements of the law of sexual harassment—the “because of sex” requirement, the requirement that the harassment be subjectively hostile and objectively severe or pervasive, and the standard for employer liability for harassment—and explores the way that the “MeToo” movement might affect the way in which courts apply those elements. The essay then discusses other ways in which the law relevant to sexual harassment claims has been and may be changed by the movement, including with respect to mandatory pre-dispute arbitration agreements and nondisclosure agreements.

Navigating the Maze of New Regulations in the Final Rule

Navigating the Maze of New Regulations in the Final Rule

The CFPB's Arbitration Rule: The Road Ahead

In May 2016, the Consumer Financial Protection Bureau announced that it intended to exercise its authority under the Dodd-Frank Act to bar consumer financial companies from invoking pre-dispute arbitration agreements to block consumer class actions. This comment considers the most serious threats to the Bureau's arbitration rule and concludes that its prospects are bad. Under Trump, banks and credit card companies will continue to avoid class-action litigation by mandating individual arbitration and there is little that supporters of the Bureau's rule can do about it.

The Customer's Non-Waivable Right to Choose Arbitration in the Securities Industry

Arbitration has been the predominant form of dispute resolution in the securities industry since the 1980s. Virtually all brokerage firms include pre-dispute arbitration agreements (PDAAs) in their retail customer contracts, and have successfully fought off challenges to their validity. Additionally, the industry has long mandated that firms submit to arbitration at the demand of a customer, even in the absence of a PDAA. More recently, however, brokerage firms have been arguing that forum selection clauses in their agreements with sophisticated customers (such as institutional investors and issuers) supersede firms’ duty to arbitrate under FINRA Rule 12200. The Courts of Appeal currently are split on the question of whether, under general principles of contract interpretation, FINRA member firms can circumvent their duty to arbitrate by inserting forum selection clauses in their customer agreements.Most of these courts have not addressed the argument that the anti-waiver provision of the Securities Exchange Act of 1934 (§ 29(a)) bars securities firms from forcing customers to waive their right to arbitrate disputes. The Supreme Court long ago interpreted § 29(a) to apply to waivers of substantive rights arising under the Exchange Act. Is the right to arbitrate in the FINRA forum, which is heavily regulated by the SEC to promote investor protection, a right that cannot be waived? This paper will explore the interaction between the anti-waiver provision of the Exchange Act, and the right of a customer to demand a particular dispute resolution process. This paper argues that investors’ long-standing right to choose arbitration in the securities industry is a right that brokerage firms cannot force their customers to waive.

What's a Regulator to Do? Mandatory Consumer Arbitration, Dodd-Frank, and the Consumer Financial Protection Bureau

The Dodd-Frank Wall Street Reform and Consumer Protection Act addressed fundamental consumer protection issues involving securities, banking, and indeed the US economy. The act, known as Dodd-Frank, also contains language governing the use of predispute arbitration agreements (PDAAs) in consumer financial and investor contracts. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) and charged the new bureau with studying the use of PDAAs in consumer financial transactions and addressing PDAAs “if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers…” This article examines the CFPB’s mission under Dodd-Frank as it relates to mandatory use of PDAAs in consumer financial contracts. Often called “mandatory arbitration” and more recently “forced arbitration,” the subject is perhaps more nuanced than the reader may realize. The article covers what CFPB must do under Dodd-Frank, what it may do if it so chooses, and what the author thinks the CFPB should do. Predicting what CFPB will do and whether it will succeed will not be easy. As that great philosopher Yogi Berra said, “It’s tough to make predictions, especially about the future.”

Curbing the Runaway Arbitrator in Commercial Arbitration: Making Exceeding the Powers Count

Arbitration is in crisis. Under fire as an oppressive, claim-suppressing method of dispute resolution, imposed by businesses upon unsuspecting employees and consumers, arbitration is also becoming increasingly unpopular with its original designers – businesses in commercial disputes with other businesses. While academic commentators spill considerable ink assessing the propriety of businesses imposing pre-dispute arbitration agreements on consumers and employees, to date they have paid scant attention to the reasons underlying business flight from arbitration as a preferred method for resolving disputes with other businesses. Empirical research sheds some light on this issue – surveys reveal that in-house counsel believe that arbitration is no longer the dispute resolution mechanism of choice because of the risk of arbitrator compromise and the inability to appeal adverse arbitration awards to court. If arbitration is to revive as a primary dispute resolution mechanism for commercial disputes, parties must have some means for securing effective review of arbitral awards — an escape hatch for the runaway-arbitrator problem. This article proposes a new approach courts should use to evaluate arbitration agreements containing limitations on arbitrator remedial authority and choice of law. Because arbitration is a process that parties control and design, judicial review of arbitral awards must appropriately value party autonomy in process design while also ensuring that arbitration remains an efficient and economical dispute resolution mechanism. Existing federal and state arbitration acts all contain an “exceeding the powers” provision for reviewing arbitration awards. Under this provision, a losing party may challenge an adverse arbitration award on the basis that the arbitrator rendered an award inconsistent with the limitations the parties included in their agreement. Unfortunately, courts haphazardly and inconsistently apply this provision, rarely vacating an arbitration award even when the arbitrator ignored the parties’ limitations on her remedial authority or choice of law. Judicial failure to acknowledge parties’ contractual limitations may occur because the term “exceeding the powers” has no real definition. Using language adopted in other arbitration cases, this article proposes providing some definition to the term -- asserting that, in cases where an arbitrator ignores party limitations on remedies that are clearly and unmistakably articulated in the parties’ agreement, she has exceeded her powers. This proposal provides a mechanism for determining whether the parties actually intended to limit the arbitrator’s remedial authority while still honoring the traditional deference due arbitration awards. If the parties’ limits are clear and unmistakable, the next question is whether the limits should be enforced. Thus, the article also explores whether the unconscionability test courts use to evaluate party limits on judicial remedial authority could be applied to evaluate party agreements to constrain arbitrator remedial authority. The article also proposes that arbitration agreements containing choice of law clauses be evaluated in the same manner as choice of law provisions in traditional contracts, rather than under the heightened scrutiny test the courts currently use. Using this approach, a court would find that the arbitrator exceeded her powers if she ignored the parties’ choice of law, and that ignorance was apparent on the face of the award or through a review of the arbitrator’s opinion. This approach would provide consistency when courts review of these provisions and, at the same time, avoid placing an unnecessary burden on parties to prove that they really meant it when they adopted a choice of law provision. This structured approach to the exceeding the powers ground for challenging an arbitration award would acknowledge the essential role party autonomy plays in arbitration. The approach would ensure that parties receive their negotiated-for arbitration process. Arbitration is a party-designed process that parties will continue to use only if their negotiated limitations on arbitral authority, whether in the form of limits to remedial authority or choice of law, are enforced. Deference to arbitration awards, when unjustified, serves only to hasten party flight from a useful and efficient dispute resolution process.

The Past, Present and Future of Securities Arbitration between Customers and Brokerage Firms

The Financial Industry Regulatory Authority (FINRA) is, for all practical purposes, the sole arbitration forum for resolving disputes between broker-dealers, associated persons and their customers. Over the years FINRA and its predecessors have amended the arbitration rules to provide fair procedures and to reduce the influence of the securities industry. In addition, the SEC must approve FINRA's arbitration rules upon a finding that the rules are consistent with the requirements of the Securities Exchange Act and its rules. FINRA has worked hard to increase investor confidence in the arbitration process, although doubts persist because of its mandatory nature.This paper recounts the evolution of the FINRA arbitration forum as a consequence of the Supreme Court's 1987 opinion in Shearson/American Express v. McMahon and increasing recognition that investor confidence requires a fair alternative to litigation. As predispute arbitration agreements have become universal, the forum has adopted a comprehensive set of procedural rules, with some sacrifice of arbitration's original virtues of informality, efficiency and speed. With the all-public panel option, customers have less reason to complain about industry bias.This history also shows that brokerage firms, which long campaigned for mandatory securities arbitration, have not hesitated to expend their considerable resources to create an arbitration forum that served their purposes, sometimes with little regard for maintaining investor confidence in the forum. Charles Schwab is only the most recent example. Indeed, the securities industry should breathe a sigh of relief over Schwab's defeat. If the firm had been permitted to enforce its class action waiver, detractors of mandatory securities arbitration would certainly have increased the pressure on Congress and the SEC to eliminate mandatory arbitration of customers' disputes with their brokerage firms.

Opening the Door to Justice: Amending the Federal Arbitration Act to Remedy the Unjust Use of Predispute Arbitration Agreements

Opening the Door to Justice: Amending the Federal Arbitration Act to Remedy the Unjust Use of Predispute Arbitration Agreements

Arbitration in Nursing Home Cases: An Empirical Study and Critique of AT&T Mobility v. Concepcion

The use of pre-dispute binding arbitration agreements has been commonplace in variety of commercial contexts, such as brokerage agreements, insurance contracts and credit card contracts for many years. Health care had historically been one of the fields that had not embraced pre-dispute binding arbitration agreements. The reluctance to use pre-dispute binding arbitration agreements appears to be changing in at least one sector of the health care field. An examination of admission contracts used by North Carolina nursing homes and telephone survey of North Carolina nursing homes revealed that 43 percent of nursing homes now incorporate pre-dispute binding arbitration provisions into their admission contracts. All of the major nursing home chains operating in North Carolina use pre-dispute binding arbitration agreements in at least some of their facilities, while smaller operators use them sporadically.The terms of these agreements vary considerably. The large chains tend to incorporate some of the provisions in the model arbitration agreement drafted by the American Health Care Association (AHCA), the nursing home industry trade organization. AHCA’s model language includes a 30-day rescission period and language that acceptance of the arbitration provision is not a precondition to admission. Some of the large chain facilities also include a provision that the arbitration will be conducted at the facility if the parties can’t agree on another location. Some of the smaller operators include provisions that limit damages and discovery, prohibit punitive damages, and expressly condition entry to the facility on signing the pre-dispute arbitration agreement. The implications of the rising use of pre-dispute binding arbitration clauses may be significant. There are many counties in North Carolina where 50-100 percent of all of the nursing home operators use these agreements. With so many operators selecting pre-dispute binding arbitration, this may have the effect of forcing some vulnerable elders out of the public court system with all of its safeguards, and into private arbitration without those protections.Although some of these agreements contain language stating that the agreement is voluntary or may rescinded, this language, by itself, provides no guaranteed protection that facilities are enforcing the contracts as written. This study found incidents where nursing homes were requiring new residents to sign pre-dispute binding arbitration agreements as a condition of admission, even though the language in those facilities’ agreements stated that signing the agreement was voluntary. This study also found evidence of a significant amount of confusion among staff of nursing homes using these agreements about whether their facilities were using them at all and what arbitration agreements really meant.This paper also includes an analysis of AT&T Mobility v. Concepcion and concludes that Justice Thomas's concurrence is so contrary to the putative majority opinion that Concepcion may be viewed as a plurality decision without any binding precedential effect concerning the law of unconscionability outside the Discover Bank/class action context.

How to Improve Retail Investor Protection After the Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Securities and Exchange Commission the authority to deal with two issues especially important to retail investors. First, section 913 requires the SEC to conduct a six-month study on the effectiveness of existing standards of care for broker-dealers and investment advisers and specifically authorizes the SEC to establish a fiduciary duty for brokers and dealers. Second, section 921 grants the SEC the authority to prohibit the use of predispute arbitration agreements that would require investors to arbitrate future disputes arising under the federal securities laws and regulations or the rules of a self-regulatory organization. What has been overlooked in the debate over retail investor protection is the interconnectedness of these two provisions. Debate over retail investor protection after Dodd-Frank must consider these two issues together in order to achieve the goal of better retail investor protection. I make three principal arguments: First, I argue that broker-dealers and investment advisers should be held to standards of care and competence based on professionalism, rather than fiduciary duty. Second, I propose, for adoption by the SEC, federal professional standards of competence and care for broker-dealers and investment advisers. Third, I argue that SEC adoption of standards of care will not create any additional federal remedies for investors because it is unlikely that the U.S. Supreme Court will create a private damages remedy for their breach. If the SEC prohibits mandatory securities arbitration of claims based on federal securities law and SEC and SRO rules, the ability of retail investors, particularly those with small claims, to recover damages for careless and incompetent investment advice may be substantially reduced.

The Effects of Gilmer: Empirical and Other Approaches to the Study of Employment Arbitration

A forthcoming article, Christine Jolls, Accommodation Mandates, 53 Stan. L. Rev., provides a framework for analyzing the effects of employment discrimination statutes. This article extends that framework to employment arbitration to describe the effects of enforcement of employees' pre-dispute arbitration agreements. The article also critically reviews empirical studies of these effects.

The Law and Economics of Agreements to Arbitrate Employment Claims

This paper presents an economic analysis of arbitration agreements in the employment context. The goal of this analysis is first to set out, clarify, and illuminate the economics of waiver and arbitration agreements in the employment context. The fundamental economic benefits from employment arbitration can be placed in either of two categories: deterrence benefits and dispute-resolution cost savings. Arbitration enhances the deterrence benefit to the extent that it encourages greater compliance with legal and contractual employment norms. Arbitration obviously has the potential to reduce dispute resolution costs by adopting less formal mechanisms. The second goal of this analysis is to answer the normative question, should predispute arbitration agreements be enforced? I conclude they should be enforced, provided the employee has knowingly and voluntarily waived his rights.

Enforceability of Predispute Arbitration Agreements under the Federal Securities Laws: Shearson/American Express, Inc. v. McMahon

Enforceability of Predispute Arbitration Agreements under the Federal Securities Laws: Shearson/American Express, Inc. v. McMahon