In April 2014, the media ignited a firestorm of controversy over
General Mills' decision to modify its online Privacy Policy and
Legal Terms to include a mandatory arbitration provision. The
proviso required consumers who downloaded or printed coupons,
"joined an online community," subscribed to an e-mail
newsletter, redeemed a promotion, or participated in any
"offering" to forego their right to sue the company in
court and instead submit to private, binding arbitration to resolve
any disputes with the company. In the face of the outcry over this
policy change, the company reversed course and restored its prior
legal terms, which contained no mention of arbitration.
The media's vilification of the policy change once again brings
to the forefront the tension and competing interests between class
action litigation and the freedom to contract to arbitrate. This
tension has existed since the Federal Arbitration Act was enacted
in 1925 and, much to the chagrin of class action litigation
proponents, the expansive reach of mandatory arbitration has gained
a strong foothold in recent years, due to the overwhelmingly
pro-arbitration precedent established by the Supreme Court in its
Concepcion and Italian Colors decisions, which express a clear
federal policy in favor of enforcing class action waivers contained
in arbitration agreements.
Public perception of mandatory arbitration provisions is
unquestionably negative. Detractors of this method of dispute
resolution largely deride it as an "anti-consumer"
practice that allows big corporations to escape all liability by
unconscionably and covertly tricking unsuspecting, unsophisticated
consumers into clicking away their federally protected legal
rights. The mandatory arbitration system is also criticized for
establishing a climate where large groups of consumers cannot seek
redress for small claims because the individualized nature of the
proceedings makes it prohibitively expensive to seek relief.
Yet, an examination of the present consumer class action litigation
system reveals its numerous failings, namely that the current
structure often results in little or no relief to class members
while providing exorbitant compensation to the attorneys involved.
Literature on the subject also reveals that the vast majority of
consumer class actions simply do not provide a monetary benefit to
class members whose interests the system is designed to protect,
especially where the members cannot be identified. If implemented
properly, mandatory arbitration may actually provide a better
mechanism for advancing and protecting consumer rights for
legitimate small claims than class action litigation. It is
critical for practitioners counseling corporations on this issue to
advise their clients that they must use "TACT"
(Transparency, Agreed-upon terms, Clarity about costs, and
Thoroughness) when enacting arbitration policies.
FAA and the Supreme Court's Pro-Arbitration Progeny
Prior to the enactment of the Federal Arbitration Act (FAA) in
1925, arbitration agreements were met with hostility by the United
States judiciary and courts generally refused to enforce such
agreements. The FAA, however, ushered in a new era in which
arbitration agreements are considered to be presumptively
enforceable (so long as the parties have contracted fairly), thus
putting agreements to arbitrate on equal footing with other
contracts.
In the years following the FAA's passage, the U.S. Supreme
Court has repeatedly upheld the FAA and, in the recent landmark
decisions, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740
(2011) and Am. Exp. Co. v. Italian Colors Rest., 133 S. Ct. 2304
(2013), the Court has further solidified its pro-arbitration stance
by determining that the FAA expresses a clear federal policy in
favor of enforcing class action waivers contained in arbitration
agreements.
In Concepcion , the Court struck down a California common law rule
that invalidated class waivers in consumer arbitration agreements
(including contracts of adhesion) as unconscionable because the
rule conflicted with the pro-arbitration policy of the FAA. Two
years later, the Court continued its pattern of enforcing
arbitration agreements according to their terms in the Italian
Colors decision. In that case, the Court held that a class action
waiver contained in an arbitration agreement was enforceable even
though the plaintiffs showed that the waiver effectively prevented
them from bringing their federal antitrust claims because
litigating the claims individually would be prohibitively
expensive.
The clear presumption of enforceability of arbitration clauses
propounded by the Supreme Court has raised serious concerns about
the use of class waivers by corporations in form contracts because
such waivers have the potential to insulate corporations from
virtually all liability for actions that allegedly create small
harm to large groups of consumers.
Failings of the Class Action Litigation System
Class action litigation serves two primary purposes. First, as a
matter of economic efficiency, it provides a mechanism for large
numbers of consumers who have suffered similar small harms to
aggregate their claims where the cost of litigation outweighs the
potential recovery to individual consumers. Second, pursuant to the
notice requirement of Federal Rule of Civil Procedure 23(b)(3)
actions, the device benefits society as a whole by alerting
consumers to potential, small-scale injuries that they may have
suffered, and opening up a discourse about the legal relief
available to these consumers.
While the individual, privatized nature of mandatory arbitration
and the Supreme Court's enforcement of class action waivers in
arbitration agreements appear to thwart the very important
principles underlying class action litigation, existing literature
on the subject reveals that, all too often, the consumer class
action mechanism simply does not deliver meaningful benefits or
relief to class members.
Literature on consumer class action lawsuits reveals that, in those
cases that do result in settlement, the recoveries achieved for the
class are minimal. See Ronald J. Levine and Sharon A.
O'Shaughnessy, Class Actions: Where's the Beef? LJN's
Product Liability Law and Strategy, Vol. 32, No. 1 (July 2013)
(available at http://bit.ly/1vCQByq).
This is especially true in consumer class action settlements in
which there are no records of the names and addresses of the
consumers and where the individual payments are relatively low. It
is difficult to advise a consumer public that settlement has been
reached, especially where there are unregistered purchases, and
even if consumers are aware of the settlement, it is questionable
whether a consumer will go to the effort of filling out the claims
forms.
While class action settlements often leave class members with
awards of little or no value, the current structure of the system
frequently results in a monetary windfall to class counsel.
Although class action settlements are judicially scrutinized to
ensure procedural and substantive fairness (due to the fact that
class members are bound by them), the scarce publicly available
data discussing how much cash relief class members receive
post-settlement paints a disturbing picture: Often, attorney fees
are approved without an inquiry as to the actual value of class
recovery, and while plaintiffs' lawyers are well-compensated
(often in the millions of dollars), only a small percentage of
settlement awards actually goes to consumer class members, and only
a small fraction of the class may take home any cash relief.
These findings confirm what critics of the class action litigation
device have long suspected: The vast majority of consumer class
actions where members cannot be identified simply do not benefit
class members whose interests the system is designed to
protect.
The Virtues of Consumer Arbitration
General Mills' implementation of its mandatory arbitration
policy was attacked by the media as an attempt to trick consumers
into forfeiting their legal rights by the mere act of interacting
with the company's brands online. The method by which the
company rolled out the policy detracted from the fact that, in
practice, the company's mandatory arbitration policy was
actually quite generous to consumers and had the potential to
provide meaningful relief to consumers with small
claims.
In the ensuing media storm, detractors of mandatory arbitration
seized upon the opportunity to criticize the arbitration process.
While it is true that arbitration reduces procedural rights such as
appeals and jury trials, and immunizes large companies from public
proceedings due to its private nature, the benefits of arbitration
can far outweigh the downsides in the consumer context. If properly
executed, arbitration may actually provide a better mechanism for
advancing and protecting consumer rights for small claims than
class action litigation.
In practice, the arbitration forum is an efficient, streamlined
mechanism for pursuing small fee claims that has the potential to
be far more advantageous to consumers than class action litigation
for six distinct reasons.
First, in light of the abysmal monetary relief that is awarded to
individual consumers when a consumer class action with unidentified
members actually results in a settlement, consumers have a higher
likelihood of garnering real, tangible benefits through
arbitration.
Second, despite public perception to the contrary, the arbitration
process actually does provide robust protections to consumers'
due process rights. For example, the American Arbitration
Association (AAA) has a "Consumer Due Process Protocol"
in place that requires corporations' arbitration agreements to
comply with certain notice and process requirements. If an
arbitration agreement does not comply with the Consumer Due Process
Protocol, the AAA will provide the company with an opportunity to
revise the clause. If an arbitration containing a non-compliant
arbitration clause is filed, the AAA will return the arbitration
filing information to the consumer with instructions to pursue
other remedies and will refuse to administer any of the
company's other cases until the arbitration agreement is in
compliance. JAMS has also enacted a "Policy on Consumer
Arbitrations Pursuant to Pre-Dispute Clauses Minimum Standards of
Procedural Fairness."
Third, arbitration is cost-effective. Many corporations will
actually pay all arbitration fees for claims that fall below
certain monetary thresholds. For example, General Mills, in its
mandatory arbitration policy, offered to pay all fees for consumer
claims totaling less than $5,000.
Fourth, arbitration provides much more autonomy to consumers. While
class actions are binding on class members, oftentimes consumers
have the ability to opt out of arbitration clauses and may instead
pursue their claims in local small claims court, provided the claim
meets the court's jurisdictional limits.
Fifth, arbitration is a much more expeditious process than class
action litigation, which can often take years.
Finally, there is less red tape involved in arbitration and often
it is not even necessary for attorneys to be involved.
Use 'TACT'
The backlash that General Mills endured from the media over the implementation of its mandatory arbitration policy provides a teachable moment for all practitioners who counsel large companies that are considering utilizing mandatory arbitration procedures. When enacting policies for resolving consumer fee claims, practitioners must advise their clients to use TACT in implementing all arbitration agreements:
Transparency: Broadcast the policy. State the policy clearly and visibly, and disseminate its terms far and wide.
Agreed-Upon Terms: Corporations should capture clear evidence of agreement to avoid an enforceability challenge down the line. For instance, if a corporation revises its online legal terms to include an arbitration clause, it is a best practice for consumers to agree to the clause through electronic signature.
Clarity About Costs: Corporations should make painstaking efforts to communicate their arbitration fee policies explicitly, especially if the policy will cover a consumer's arbitration costs.
Thoroughness: The agreement should: 1) include a class action waiver; 2) ensure that the arbitration clause complies with AAA's and JAMS' due process protocols; and 3) emphasize the benefits of arbitration and highlight its expeditiousness, cost-effectiveness, consumers' ability to opt out, and the higher likelihood of obtaining relief.
In addition to ensuring that any consumer arbitration agreement meets the foregoing standards, it is also prudent for practitioners to counsel their corporate clients to implement further procedural safeguards in an effort to avoid getting embroiled in class action litigation. These procedures include settling risky individual lawsuits that have the potential to develop into class actions, implementing a system to isolate and monitor unorthodox customer requests or complaints to determine if the consumer is working with class counsel to create documentation for a lawsuit, and tracking pending class actions that have been initiated against similar companies in the industry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.