Pre-dispute Mandatory Binding Arbitration

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Background

If you are doing work on Mandatory Binding Arbitration issues, please email OPDI at policy@aarp.org for additional guidance and information.

Many businesses impose pre-dispute mandatory binding arbitration (MBA) clauses in their contracts. These clauses are a condition of doing business. They force employees, patients, and customers to submit any and all future disputes to arbitration rather than the courts. Consumers and employees typically have no ability to negotiate the clauses away. Increasingly these clauses also ban consumers from seeking class action A class action combines the claims of all the people injured by a particular policy or practice into one lawsuit.  relief in court. This effectively limits consumers to individual relief through arbitration only (see also this chapter’s section on Private Enforcement of Legal Rights—Class Action Lawsuits). The U.S. Supreme Court has strictly enforced the terms of MBA agreements. This has included those that restrict access to the courts by waiving the ability to bring class actions A class action combines the claims of all the people injured by a particular policy or practice into one lawsuit.  .

According to the Consumer Financial Protection Bureau An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. ’s arbitration study, as of 2015 tens of millions of consumers are subject to pre-dispute MBA. Of these, 85 percent to 100 percent include bans on class actions A class action combines the claims of all the people injured by a particular policy or practice into one lawsuit.  . Consumers are subject to MBA through other consumer products, health care agreements, and employment contracts.

Arbitration proponents argue that it is less costly and faster than pursuing legal action. Yet arbitration has many drawbacks for consumers. This is why businesses often require customers to use arbitration rather than simply giving them the option of doing so.

Consumers can face many disadvantages in the arbitration process:

  • Arbitration may require high up-front costs that cannot be recovered.
  • Consumers and employees may need to travel long distances for the arbitration.
  • Consumers and employees may have limited access to documents and information needed to prove a claim.
  • The company that imposed arbitration in the contract may be allowed to choose the arbitrator.
  • Arbitrators are not required to follow applicable law or issue written decisions, and the proceedings typically remain secret.
  • Grounds for appealing an arbitrator’s decision are extremely limited; even mistakes of law are not typically appealable.

Arbitration works best when it is voluntary and when the two parties have equal power and both repeatedly use arbitration, for example, in employment disputes involving a union (see also this chapter’s section Voluntary Post-Dispute Alternative Dispute Resolution). MBA works much less well when it is imposed on consumers and employees before a dispute arises, because businesses gain expert-level familiarity with the system and can advocate for changes that benefit them.

Prohibiting MBA best protects consumers, but the provisions are becoming more and more common. Some are considering how to make arbitration more consumer-friendly, for example, ensuring the fairness of the arbitrator and requiring written decisions. The Financial Industry Regulatory Authority (FINRA), whose securities dispute resolution forum is the largest in the U.S., has adopted provisions that make its MBA process more consumer-friendly. For example, FINRA’s arbitration forum includes the right to an arbitration panel composed of “public” arbitrators (those without extensive securities industry experience), gives consumers the right to bring a class action A class action combines the claims of all the people injured by a particular policy or practice into one lawsuit.  in court, and provides for arbitration near where the consumer resides.

PRE-DISPUTE MANDATORY BINDING ARBITRATION: Policy

Pre-dispute mandatory binding arbitration

In this policy: FederalStateLegal Rightsarbitrationredress

Policymakers and the private sector should ensure that consumers and employees have the right to seek redress through the courts for injury or losses.

Pre-dispute mandatory binding arbitration provisions in consumer and employee contracts should be prohibited.

Policymakers should prohibit waivers of the right to bring or participate in a class action A class action combines the claims of all the people injured by a particular policy or practice into one lawsuit.  in consumer and employee contracts. 

Policymakers and the private sector should ensure that when mandatory binding arbitration is included in consumer contracts, its shortcomings are mitigated.

Provisions should be in place to:

  • ensure qualified and independent arbitrators;
  • require that they provide written explanations of decisions;
  • prohibit confidentiality requirements and protective orders that hide the outcome of the arbitration decision or settlement; 
  • require that arbitration proceedings be held reasonably near the location of the consumer or employee;
  • require businesses or employers to pay the arbitration fees and their attorneys’ fees;
  • provide the consumer or employee access to adequate discovery;
  • provide simplified procedures for small dollar value cases; and
  • expedite proceedings for consumers who are seriously ill.

If you are doing work on Mandatory Binding Arbitration (MBA) issues, please contact OPDI at policy@aarp.org for additional guidance and information.