Remar's Review - Mandatory Binding Arbitration Clauses in Auto Contracts Limit Consumer Rights

More and more automobile dealerships across the country are adding mandatory binding arbitration clauses to contracts for new and used vehicles as well as to financing contracts.

In an automotive contract, the information about required arbitration may be included as a clause in the contract (typically in fine print, often on the back of the form) or as a separate form. In either case, signing the contract or form usually means that a consumer agrees to binding arbitration to settle any future dispute. The consumer also waives the right to sue or appeal – even if the dealership committed fraud.

Dealerships requiring mandatory arbitration claim that using arbitration to settle disputes is quicker, easier and less expensive than taking the problem to court. That usually includes small claims court as well as larger lawsuits.

Although voluntary arbitration can be a good tool in certain circumstances when disputes arise, mandatory, pre-dispute arbitration poses several real dangers to consumers. In fact, the dealers must agree it poses dangers: they fought hard for a federal law that prohibits automotive manufacturers from requiring that dealers agree to mandatory binding arbitration in contracts between the manufacturers and dealers!

Arbitration is an alternative method of resolving disputes in which two parties present their sides of a problem, complaint or grievance to an arbitrator or panel of arbitrators. The arbitrator, who is supposed to be neutral, then weighs the facts and arguments of both parties and makes a decision about the dispute. The decision may be binding (the usual case) or not. The arbitrator, who is often a retired judge or attorney, is paid a fee to resolve the dispute.

Arbitration may also be voluntary or mandatory. In voluntary arbitration, both sides in the dispute voluntarily agree to submit their disagreement to arbitration after it arises and they have an opportunity to investigate their best options given the nature of the claim. In mandatory arbitration, a company requires a consumer to submit any dispute that may arise in the future to binding arbitration and to waive their right to sue, to participate in a class action law suit, or to appeal.

Consumer advocates point to the following problems and dangers.

Consumers are often unaware they've agreed to binding arbitration.

Whether the mandatory arbitration agreement is tucked in a paragraph of fine print or provided as a separate form, dealerships often don't tell you about it until you're ready to take your new vehicle home. They know you're more likely to sign at that point. "Oh, if you don't sign it, we can't sell you the car," they're likely to say. A few dealers may "forget" to mention the arbitration requirement at all.

These tactics deprive you of your right to make an informed decision. In the law, they deprive you of making a "knowing, intelligent, and voluntary" decision.

Mandatory arbitration severely limits your options for resolving a dispute.

Before any problem arises, you lock yourself into only one option binding arbitration--for resolving any future disputes or problems about anything. The contract typically also names the arbitration company that must be used.

Mandatory arbitration clauses generally bind you – not the dealership.

The way most mandatory arbitration agreements are written, the seller retains its rights to take any complaint to court while the consumer can only initiate arbitration.

Arbitration does not follow clear, well-established, consistent rules and procedures such as those required for litigation in the court system.

For example, arbitrators aren't required to follow procedures that enable one side in a dispute to request information from the other (what the courts call "discovery"). The result is that consumers, with limited resources, may have difficulty getting all the information needed to support their claims. In addition, nothing absolutely requires arbitrators to apply the law and take legal precedent into account in making their decisions although they are supposed to do so. Most decisions cannot be appealed and there are generally no review bodies or other oversight to ensure that they follow fair procedure or the law.

The dealership generally picks the arbitration company – "the judge."

In theory, both parties agree to the selection of a neutral, independent arbitrator. In reality, the dealership designates the arbitration company in the contract. This situation can definitely affect the impartiality of the arbitrator. It's called "repeater bias" because the dealership gives the arbitration company repeat business. In real life, anytime one company depends on another company for a large percentage of their business livelihood, some systematic bias in favor of that company may develop.

Mandatory arbitration frequently costs more than taking a case to court.

One of the benefits frequently claimed for binding arbitration is that it costs less than litigation. Frequently this is not true.

In many cases, for instance, a consumer may have to pay a large fee simply to initiate the arbitration process. This can deter a consumer from even bringing a complaint. Or on a small claim total fees for arbitration can easily exceed the amount you might be awarded if you win the dispute. A recent report, The Costs of Arbitration prepared by Public Citizen's Congress Watch, details the various potential costs of arbitration, shares case stories, and compares arbitration and court costs for similar cases.

How should you handle this problem when buying a car?

Remember that everything at a dealership is negotiable. Ask a dealership in advance if they require a mandatory binding arbitration agreement. If they require one, and if you don't want to sign it, tell the dealer your decision, and stick to it. If the dealership wants your business badly enough, they won't make you sign the agreement.

If the dealership won't budge, ask yourself why this has become so important to them. Have their customers been so dissatisfied they've had to resort to legal action? Think about it.

A cautionary note about a different type of arbitration: Under the Magnuson-Moss Warranty Act (that may apply to some aspects of an automotive purchase), consumers may be required to submit their complaint first to arbitration, but this arbitration is not binding. Consumers may reject the decision and take their claim to court. According to Public Citizen, this is the type of non-binding arbitration offered free by the Better Business Bureau. Watch out for confusion; don't let any dealership suggest that a blanket mandatory binding arbitration clause is Magnuson-Moss arbitration.

Stay alert for mandatory arbitration clauses in other consumer contracts.

Automotive dealerships aren't the only companies using these clauses. Credit card companies, sellers of computers, electronic equipment and cell-phone services, insurance companies, home contractors and home development companies, and employers of all types are just a few of the types of companies that have begun slipping such clauses into their sales, employment, or service agreements.

Where the potential claims are small, that may not be much of a problem but where your investment is large such as in a new home or home renovations or a major appliance or expensive equipment the potential cost of waiving your right to sue may be very large. Stay alert and question such requirements in those agreements.

The following resources provide more information about various aspects of and issues in mandatory arbitration.

The arbitration trap: How consumers pay for 'low cost' justice – Consumer Reports discusses issues related to arbitration and what consumers can do to protect themselves.

Auto Dealers and Consumers Agree: Mandatory Arbitration is Unfair – Public Citizen takes the arguments that auto dealers made to Congress about why they should be protected from manufacturer's requirements for mandatory binding arbitration and shows how and why consumer arguments for the same protections are similar. At the end of this article, Public Citizen offers links to a number of other articles related to arbitration.

Automobile Dealers Push to Arbitrate: Buyer Would Give Up Right to Lawsuit – This article by Christopher Jensen of Newhouse News Services as printed in the Times-Picayune is reprinted by the Trial Lawyers for Public Justice. It quotes authorities and experts on both sides of the issue.

Consumer Due Process Protocol from the American Arbitration Association – The American Arbitration Association, one of the big three administrative agencies, processes arbitration cases in a number of areas including "finance, construction, labor and employment, insurance and technology." This document sets forth the standards this agency believes should be met in business-to-consumer arbitration agreements.

Mandatory Arbitration: Taking away big rights with small print – A summary of potential problems with mandatory arbitration from the Association of Trial Lawyers of America.