Pre-Dispute Mandatory Binding Arbitration


If you are doing work on arbitration, please e-mail OPDI at for additional guidance and information.

Pre-dispute mandatory binding arbitration (MBA) clauses in contracts are increasingly common. MBA 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. In most cases, they also ban consumers from seeking class-action relief in court (see also Private Enforcement of Legal Rights—Class-Action Lawsuits). Consumers often are not aware of these clauses at the time of purchase and only become aware when something goes wrong. Even if they are aware, MBA clauses are typically non-negotiable. The U.S. Supreme Court has strongly upheld MBA clauses. It has even permitted an arbitrator to decide whether a class action is banned if the arbitration clause is silent about class actions. According to the Consumer Financial Protection Bureau’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.

Proponents argue that arbitration is less costly and faster than pursuing legal action. However, one study found that consumers paid an average of $161 to file a claim in arbitration, while joining a class action generally costs nothing. The typical wait in arbitration was nominally faster, 150 versus 215 days. However, consumers obtained relief in only 9 percent of arbitration disputes. This is why businesses often require customers to use arbitration rather than merely 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, the two parties have equal power, and both repeatedly use arbitration. For example, it is more effective in employment disputes involving a union (see also Voluntary Alternative Dispute Resolution). MBA works much less well when it is imposed on consumers and employees before a dispute arises. Businesses gain expert-level familiarity with the system. As a result, they can advocate for changes that benefit them. Consumers do not develop this expertise.

Prohibiting MBA best protects consumers. Nevertheless, MBA is becoming more and more common. Some are considering how to make arbitration more consumer-friendly. Ensuring the fairness of the arbitrator and requiring written decisions are two options. 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 so-called public arbitrators. (These are arbitrators without extensive securities industry experience.) It gives consumers the right to bring a class action in court and provides for arbitration near where the consumer resides.



Pre-dispute mandatory binding arbitration

Policymakers and the private sector should ensure that consumers and employees have the right to seek redress through the courts for injury or losses. Any efforts that limit or circumvent that right should be prohibited.

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

Policymakers should prohibit waivers of the right to bring or participate in a class action in consumer and employee contracts.

When MBA is included in consumer contracts, shortcomings must be 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 working on arbitration, please contact OPDI at for additional guidance and information.