GUEST-POST: “Alternative” Dispute Resolution, the Rhetoric of Naming, and the Emerging Trend to Invalidate Mandatory Arbitration Clauses and Class Action Waivers in Consumer Agreements

By Peter Friedman

Part One – The Problem: Mandatory Arbitration clauses that preclude class relief in consumer agreements make arbitration a means of precluding consumers from obtaining any feasible relief.

Calling “Alternative Rock” a certain style of music some students at liberal arts colleges enjoy has long given the music a sheen of integrity, the kind of integrity parodied as pretense by calling those fans “granola eaters” who wear Birkenstocks. I’ll confess – I love Alternative Rock, and I find Birkenstocks thoroughly comfortable (albeit too expensive). (And granola is too sweet for my taste). But I recognize the rhetoric of naming when I see it. Precisely the same connotations that adhere to alternative rock seem to apply to the term “alternative dispute resolution,” a term so well established its acronym, ADR, is the conventional way of referring to arbitration and mediation. Calling these procedures “alternative” connotes integrity and goodness, especially in contrast to what they are an alternative to – litigation. Litigation, of course, is the dispute resolution procedure desired by the big, bad wolves of our country – the corporations that use their amoral BigLaw lawyers to grind the everyday little guy (the wholesome guy with integrity) into dust.

I see this reaction all the time in my students. So, for example, this last semester I gave an exam in a course in lawyering skills that was based on a hypothetical in which the business client the students were supposed to be representing was entering into a contract to have its photocopiers and printers serviced. This particular question asked whether the students would recommend to the client a contractual clause requiring mandatory arbitration of all disputes arising under the service contract or mandatory litigation in the client’s home state under that state’s laws.

Most of the students, including all of the brightest ones, identified as a principal goal of the client the negotiation of the disputes. But then almost all of the students did a funny thing – they recommended that the client insist on the mandatory arbitration clause. Why? From the explanations the reasoning was clear – arbitration is faster and cheaper. Faster and cheaper is always better. And a negotiated resolution is better than resolution by means of an adversary proceeding. Since arbitration is faster and cheaper and “alternative” to the system preferred by the big, bad wolves, it’s more like negotiation than is litigation. Thus, the arbitration clause is the better choice.

This chain of reasoning doesn’t work as a matter of logic, and, though it seemed paradoxical to my students, the proper answer was precisely the opposite: the contractual provision that would force negotiated resolution of disputes under the contract was the mandatory litigation provision. Many of the students recognized that the disputes under the contract — over payment for allegedly inadequate service to the client’s photocopiers and printers — would hardly be worth litigating. But they did not think through, first, that our client could withhold payment if it were dissatisfied with performance, and, second, that therefore the service provider would be the one who would have to commence any adversary proceeding necessary to an adversarial resolution of its insistence that it should be paid in full. Since the disputes were likely to be so small it would be irrational for the service provider to begin a lawsuit to be paid in full, it would be forced by a mandatory litigation clause to negotiate resolution of the disagreement. But they were prevented from realizing that, by requiring litigation as an adversary means of resolving these small value disputes, all the disputes would be resolved by negotiation. In contrast, arbitration would be affordable enough that the service provider could force some of those disputes into the adversarial arbitration process.

A similar dynamic is often at work in construction contracts. My father, who at 85 is in his 59^th year of practice, recommended long ago that a client property owner engaged in a small development project remove a mandatory arbitration clause in the draft construction contract for the project. First, he pointed out that, since the client would be paying the contractor in installments, the client’s remedy for inadequate performance would be simply to withhold payment. The contractor, on the other hand, would be the one who would have to force the issue on any dispute in order to get paid. If the contractor had the burden of filing a complaint in court and pursuing a remedy through litigation, he would only do so if there was a lot at stake and a high likelihood he would succeed. Thus, requiring litigation of disputes would force the contractor to negotiate resolutions to almost every complaint he had. The client was convinced, and, lo and behold, the client gratefully saw that the number of adversarial disputes it had to defend drop precipitously. My dad had earned a client for life.

So let’s be clear: in some cases, alternative dispute resolution is not necessarily better dispute resolution.

Nowhere is the inappropriate nature of mandatory arbitration more apparent than in agreements governing consumer transactions and, especially, online consumer transactions. Every online purchase agreement I can recall includes a mandatory arbitration clause. Thus, for example, if you own a Kindle and want to sue Amazon for deleting George Orwell’s 1984 and Animal Farm from your electronic reading device, the Kindle’s End User License Agreement (“EULA”) requires that you instead commence arbitration against Amazon in Seattle, Washington. You might be interested in doing so because Amazon seems to be in breach of the Kindle’s EULA in deleting 1984 without your consent; Amazon had agreed your purchase of the eBook entitled you “ to keep a permanent copy of the applicable Digital Content and to view, use, and display such Digital Content an unlimited number of times.” (emphasis added)

But why would you go to the trouble of hiring a lawyer in Seattle to file an arbitration petition when you’ve suffered virtually no harm from the breach? Even had Amazon not refunded the amount you paid for 1984, it would be even more irrational for you to go to the trouble of starting an adversary proceeding than it would have been for the service provider in my exam’s hypothetical to sue over a disputed charge for fixing a client’s photocopiers and printers.

What’s the solution to this problem? It’s by now an old solution: the class action. As Wikipedia explains:

[A] class action may overcome “the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) (quoting Mace v. Van Ru Credit Corp., 109 F.3d 388, 344 (7th Cir. 1997)). “A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone’s (usually an attorney’s) labor.”Amchem Prods., Inc., 521 U.S. at 617 (quoting Mace, 109 F.3d at 344). In other words, a class action ensures that a defendant who engages in widespread harm – but does so minimally against each individual plaintiff – must compensate those individuals for their injuries. For example, thousands of shareholders of a public company may have losses too small to justify separate lawsuits, but a class action can be brought efficiently on behalf of all shareholders. Perhaps even more important than compensation is that class treatment of claims may be the only way to impose the costs of wrongdoing on the wrongdoer, thus deterring future wrongdoing.

But, of course, class actions are not always available in arbitration, and many consumer arbitration clauses contain class action waiver provisions that expressly preclude class action relief in arbitration or litigation. That’s why companies that sell products and services over the internet require agreement to mandatory arbitration of disputes arising out of those transactions, and sometimes include an express waiver of class action arbitration and litigation. If they were corporate entities dealing with customers next door, it might be unwise to require arbitration – it would create more disputes that could not be negotiated to resolution. But make arbitration itself inconvenient, and forbid class action arbitration and litigation, and you take care of that problem – why would someone in Ohio or Texas file an arbitration petition in Seattle unless there were (at a minimum) tens of thousands of dollars at stake (a risk that is virtually non-existent in consumer transactions)?

Furthermore, arbitration provisions that are silent as to class arbitration may be determined, judicially or by arbitrators, to preclude class actions. By insisting on mandatory arbitration that bars class actions, the online seller nullifies the risks posed by the class action device. A mandatory arbitration clause that is silent on the question the online seller is at least raising the risks the buyer faces that he will not be able to seek class relief. It is a very neat trick: at one and the same time online sellers appear to promote the kinder, gentler alternative to litigation and actually minimize or eliminate the downside of corporate malfeasance.

Is there any solution, any impulse towards what now, fifty years since the rise of consumer protection legislation, seems to be an old fashioned impulse toward giving consumers an even chance? That is a subject we shall explore tomorrow in Part Two of this post.

Peter Friedman is a Visiting Assistant Professor at the University of Detroit Mercy Law School, where he teaches Contracts and Core Concepts. Peter also teaches U.S. Contract Law at the University of Windsor and the Universiteit van Amsterdam. He is currently on leave from the Case Western University School of Law, where he has been on the faculty since January 1996. Prior to his entry into academia, Peter practiced law for eleven years as a commercial litigator in New York City, most recently as a partner in the New York City office of Akin Gump Strauss Hauer & Feld. He graduated with his J.D. from the University of Michigan Law School in 1984 and his A.B. in Ancient Greek and Latin from Brown University in 1981.

Peter also writes a blog, Ruling Imagination: Law and Creativity, which explores the ways law affects creative endeavors and the ways creativity informs the practice of law. Prior to beginning Ruling Imagination, he authored What is Fair Use?, a blog exploring issues pertaining to copyright and fair use.

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