What’s In Your Consumer Contract? Beware the Mandatory Arbitration Clause.

Have you read any good labels recently? These days, many of us are in the habit of checking the ingredients list of the food we buy, especially if it’s a new purchase or brand we haven’t tried yet. Most would agree it’s important to take a little time before that purchase to read the label and really know what we are buying. It’s a good “rule of thumb,” that applies whether we purchase food, a new smart phone, lease a vehicle, or buy any number of other goods and services.

That consumer information usually will include the company’s contact information, should we have a question or issue with the item or service. With larger purchases, we’ll get a user manual or owner’s guide that includes this information. We may have to sign the company’s contract or agreement … and often never give it a second thought.


The contract you sign may have you giving up your right to recourse through our legal system. By agreeing to the terms stipulated in that contract, you may be waiving your right to a jury trial in the event of a problem. You may not have realized it, but you have agreed to mandatory arbitration.

While most of us have heard the term in relation to high profile sports figure contracts, this practice hits much closer to home than we might think.

The first step, of course, is to take the time to read and try to understand the total agreement/contract.

The Fine Print

I have previously written about the inherent unfairness of mandatory arbitration clauses in regard to nursing home admittance agreements. Anyone considering or entering into such a move needs to understand what they are giving up if there is mandatory arbitration language in the document.

Did you know that such arbitration clauses also can be found in contracts associated with:
Credit cards
Checking accounts
Car loans and leases
Home building
Insurance policies
Investing accounts
Student loans
Employment agreements

The list of companies, depending on product or service offered, can include such well-known brands as:

Many have never noticed this clause in the “fine print” in terms of agreement. Companies may call the condition “binding mandatory arbitration,” “arbitration,” or “dispute resolution mechanism.”

Signing up for a credit card or opening a bank account may often mean signing away your right to take the company to court if things go wrong. You can be legally bound to forced arbitration by signing your name or clicking “I agree” on a website.

Distinguishing Between Voluntary and Forced

Not all arbitrations are mandatory. In voluntary arbitration, both sides in the dispute agree to submit their disagreement after it arises, and they have an opportunity to investigate their best options for resolving the claim.

In mandatory arbitration, a company requires an employee or consumer to submit any dispute that may arise to binding arbitration as a condition of employment, or buying a product or service.

The Downsides

Consider what happens when “agreeing” to forced arbitration. Arbitration is a private system without a judge, jury or right to an appeal. Individual arbitrations can be very costly to the aggrieved or injured consumer, who may have to act on their own behalf in “small dollar,” single-case injuries. Forced arbitration frequently costs more than going to court. Individuals often have to pay a large fee simply to start the arbitration process. If they are able to get an in-person hearing, individuals sometimes have to travel thousands of miles on their own time and expense to attend the arbitration. In the end, the loser – often the consumer/individual – may wind up having to pay the company’s legal fees.

Finally, arbitration outcomes are usually kept private, preventing similarly injured parties from learning about possible corporate malfeasance and defective products.

How 1925 Still Resonates Today

How did we get to this point? The 1925 Federal Arbitration Act was implemented with the belief it would speed up legal remedies. However, many legal professionals – attorneys and arbitrators alike – say mandatory arbitration clauses are now embedded – some would say even hidden – in many common consumer contracts. Under a series of U.S. Supreme Court decisions, the FAA even preempts state laws granting consumer private rights to act individually or as classes in the courts.

With so many companies in favor of mandatory arbitration today, is it really a matter of “speeding up the process”… or of entrenched corporate interests tipping the scales in their favor right from the start in disputes with employees, customers and clients?

New Legislation Needed

Unfortunately, if you want that cell phone, car loan or job, you may not have much of an alternative other than signing the contract. While it is difficult to find an agreement for these products and services that does not impose mandatory arbitration, midsized banks and credit unions are somewhat more likely skip these clauses.

You can also try to opt out. Just as you would with food ingredients labels, READ the terms of use in full to see whether you can opt out of arbitration.

Finally, legislation must be passed banning forced arbitration.

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