Arbitration Clauses May Not be Enforceable

Brien Roche

Arbitration clauses are quite the rage these days.  There is a question as to whether either party can enforce them.  In contracts between people of equal standing, they likely can be enforced by either party.  However with contracts between people who are not of equal standing, there is a question as to whether they can be enforced.  The purpose of the arbitration clause is to take the case out of court.  Therefore workers and consumers do not have the right to file suit.  They do not have a right to a jury trial.

Widespread Use

The Consumer Financial Protection Bureau (CFPB) reports that such clauses are in 44% of checking account contracts, 83% of prepaid card contracts, 86% of private student loan contracts, 99% of mobile wireless contracts and 99% storefront payday loan contracts.  Those who are most likely to be victims have to arbitrate if they have a dispute about the contract they have signed. Call, or contact us for a free consult.

Arbitration Clauses May Be Subject to Dispute

The U.S. Supreme Court has allowed contracts that require arbitration.  In a 2010 decision, the Court held that these clauses can stand even where they are part of a contract that is not legal.  Also the Court has held that class action bans in contracts can be enforced.  In 2013 the Court allowed a contract to stand that required arbitration that had the effect of denying any redress under U.S. law.

The CFPB has said that class action bans do not provide for faster or better means of ending disputes but rather they simply kill those claims.  That of course is the goal of the parties seeking to enforce these contracts.  In May of 2016 the CFPB released new rules that ban these clauses that waive the right to bring class actions in consumer contracts.

The Federal Arbitration Act (FAA) was passed in 1925. It was written to resolve disputes between businesses.

There is however a saving clause in the FAA which provides an agreement in writing to arbitrate is enforceable. AT&T Mobility, LLC v. Concepcion, 563 U.S. 333, 344 (2011)

In June of 2023 the Supreme Court held that litigation must be stayed automatically when there is an appeal on a Motion to Compel Arbitration. Coinbase, Inc. v. Bielski, 143 S.Ct. 1915, 1923

Arbitration Clauses May Not Be Enforced For A Number of Reasons

There are a number of reasons why arbitration clauses may not be enforced.  They are:

• Do the basics of a contract exist?  That is, is there an offer?  Has someone accepted the offer? Is there any fraud?  Is there any duress?  Is there a quid pro quo?  Are the parties legally able to enter into the contract?
• Does the clause calling for arbitration apply to the claim at issue?
• Waiver may exist. That is, has suit already been filed by the other party?
• Is there a lack of balance in the contract?  That is, is the contract unconscionable?  In one contract referenced by the CFPB it called for the parties to arbitrate before a member of an Indian tribe and according to that tribe’s rules.  It turns out there were no such rules.  There was no tribe member who could arbitrate and as such there was no means to resolve this dispute.  The whole thing was a sham. The unconscionability may come in the form of procedural or substantive unconscionability. The procedural aspect may be seen in terms of whether or not the contract is one of adhesion, do the terms fall outside the reasonable expectations of the weaker party and was there pressure applied to that weaker party. Substantive unconscionability hinges principally on whether the terms are unduly oppressive or unfairly one-sided. Sanchez v. Valencia, 353 P.3d 741, 748 (Cal. 2015)
• Is there a required payment of fees up front that voids any call to arbitrate.  Likewise an attempt to apply the law of a state that has no contact with the contract may void the contract.
• If the supposed arbitration clause was signed by a decedent or by a trustee of a trust, then there may be some question as to whether or not the other beneficiaries are bound by it.  Boyle v. Anderson (2022- Virginia Supreme Court).
• Is there adequate consideration for the arbitration requirement? In Cheek v. United Healthcare, 378 Md. 139 (2003), the court stated that the arbitration clause in an employment contract was not supported by consideration and therefore not valid.

Nursing Home Contracts

On September 28, 2016, the Centers for Medicare and Medicaid Services (CMS) issued a final rule barring nursing homes from forcing patients to arbitrate in their contracts dated after November 28, 2016.  The rule controls all skilled nursing homes that receive money from CMS.  Therefore this includes most nursing homes in the U.S.

Class Actions

Many of these clauses requiring parties to arbitrate defeat class actions claims.  Without a class action many people cannot pursue their legal rights.  A recent case of that nature is the Wells Fargo fraud.  In these cases Wells Fargo opened phony accounts.  Then Wells Fargo fought claims brought by clients.  They argued that the parties must arbitrate.  In addition Wells said that class actions are subject to this same clause.

Both the American Association for Justice and the CFPB issued reports in 2016 dealing with this issue.  The research done shows that forced arbitration hurts consumers.  According to CFPB, consumers won in only 20% of these cases.  Even those contracts that have an opt-out clause are harmful because people don’t know what this opt-out lingo means.  As a result they simply do not pursue their claim.

7th Amendment Issues

The 7th Amendment to the U.S. Constitution and the Declaration of Independence enshrine the importance of jury trials. Indeed in the Declaration of Independence it is expressly stated that one of the grievances against King George III was that he had deprived the Colonists of the benefits of trial by jury.

The 7th Amendment to the Constitution says that “In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any court of the United States, than according to the rules of the common law.” The state of Virginia likewise has enshrined the right to a jury trial. Mandatory arbitration deprives the plaintiff of that right.

Call, or contact us for a free consult and see the pages on Wikipedia. Some plastic surgeons are inserting arbitration clauses into their contracts. See plastic surgery and also the pages on nursing homes herein.