Mandatory arbitration clauses often appear as pre-dispute provisions in standard form contracts and generally are not negotiable by consumers.

From a public policy perspective, the question is whether powerful corporations should be permitted to be able to force individual citizens, with limited financial and legal resources, to submit to mandatory arbitration after a dispute arises because it was included as a standard form term in a contract of adhesion (ie. a take it or leave it contract prepared by corporate lawyers with numerous provisions in the fine print that few consumers read or understand; such as contracts for cell phones, credit cards, internet services, etc.).

The cases involve low-value claims that are not practically litigated on an individual basis.  The cost and uncertainty of litigation outweigh a recovery for any individual claimant. However, small claims of less than $100 multiplied over millions of customers, add up to billions of dollars in profits for these corporations.

The practical reality is that Corporate imposed arbitration clauses on their consumers is “often nothing more than  a guise to avoid liability for widespread low-value wrongs that cannot be litigated individually, but when aggregated, form the subject of a viable class proceeding”.

“Companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers,” said Richard Cordray, director of the U.S. Consumer Financial Protection Bureau.  

[Ken Sweet, Consumer Financial Protection Bureau moves to curb forced arbitration, a contentious practice, Associated Press, CanadianBusiness.com, Oct. 7, 2015]

The effect of these unilateral mandatory arbitration clauses is to eliminate any liability Corporations may have for class action proceedings. This raises the question of whether or not a unilateral contractual provision that mandates arbitration, and bars class action proceedings, will promote or impair the public policy goal of protecting consumers who are in a weaker and vulnerable bargaining position.

From a public policy perspective, it is respectfully submitted for consideration that such Corporate imposed provisions are contrary to the public good, and should not be enforceable against citizens and consumers that are in a vulnerable bargaining position to that of a corporation. In understanding and framing the question as one of consumer protection, and thereby isolating contracts of adhesion from true negotiated contracts, there is a recognition that a contract of adhesion is a product of unequal bargaining power, and therefore requires heightened scrutiny and increased protection of our citizens.

What is the solution? That corporations not be permitted to unilaterally remove a citizen’s right to have potential future legal disputes heard in a Court of law.  The only exception is if a citizen agrees to resolve the matter by arbitration after the dispute arises.

“I’m not much of an expert on courtrooms. I’ve always tried to avoid them.”

“I love them. It’s the only place where the little guy can go toe-to-toe on a level field with a big … corporation. A person with nothing – no money, no power – nothing but a set of facts can file a lawsuit and force a billion-dollar company to show up for a fair fight”.    

[Novelist: John Grisham, Gray Mountain (page 164)]

New York Times investigation

The New York Times, an influential newspaper in the United States, ran a series of articles in October and November 2015 on the actual use of mandatory arbitration clauses by corporations and “how they are immunizing them against lawsuits by forcing plaintiffs to take their disputes to arbitration instead of regular court”:

Over the last 10 years, thousands of businesses across the country — from big corporations to storefront shops — have used arbitration to create an alternate system of justice. There, rules tend to favor businesses, and judges and juries have been replaced by arbitrators who commonly consider the companies their clients, The Times found.

The change has been swift and virtually unnoticed, even though it has meant that tens of millions of Americans have lost a fundamental right: their day in court.

“This amounts to the whole-scale privatization of the justice system,” said Myriam Gilles, a law professor at the Benjamin N. Cardozo School of Law. “Americans are actively being deprived of their rights.”

All it took was adding simple arbitration clauses to contracts that most employees and consumers do not even read. Yet at stake are claims of medical malpractice, sexual harassment, hate crimes, discrimination, theft, fraud, elder abuse and wrongful death, records and interviews show.

…

Unfettered by strict judicial rules against conflicts of interest, companies can steer cases to friendly arbitrators. In turn … some arbitrators cultivate close ties with companies to get business.

…

’Private judging is an oxymoron’, Anthony Kline, a California appeals court judge, said in an interview. ‘This is a business and arbitrators have an economic reason to decide in favor of the repeat players’.

In interviews with the New York Times, more than three dozen arbitrators described how they felt beholden to companies. Beneath every decision, the arbitrators said, was the threat of losing business.

• “An employment arbitrator in Pasadena, California, acknowledged the potential for conflicts of interest but said she thought most arbitrators, many of whom are retired judges, could remain fair”. “Elizabeth Bartholet, an arbitrator in Boston [and law professor at Harvard] … agreed that many arbitrators had good intentions, but she said that the system made it challenging to remain unbiased”.
• “Victoria Pynchon, an arbitrator in Los Angeles, said plaintiffs had an inherent disadvantage. ‘Why would an arbitrator cater to a person they will never see again?”.
• “Fearful of losing business, some arbitrators pass around the story of [Arbitrator] Stefan M. Mason as a cautionary tale. They say Mr. Mason ruled in favor of an employee in an age discrimination suit, awarding him $1.7 million, and was never hired to hear another employment case”.
• “More than 30 arbitrators said in interviews that the pressure to rule for companies that give them business was real”.

[Jessica Siver-Greenberg and Michael Corkery, In Arbitration, a ‘Privatization of the Justice System’: Beware the Fine Print, The New York Times, Nov. 1, 2015]

The New York Times offered this explanation for the reason for the implementation of mandatory arbitration clauses in consumer contracts:

By inserting individual arbitration clauses into a soaring number of consumer [ie. credit card contracts, cell phone contracts] and employment contracts, companies like American Express devised a way to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices.

…

Some state judges have called the class action bans a “get out of jail free” card, because it is nearly impossible for one individual to take on a corporation with vast resources”.

…

By banning class actions, companies have essentially disabled consumer challenges to practices like predatory lending, wage theft and discrimination, court records show.

This is among the most profound shifts in legal history’, William G. Young, a federal judge in Boston…, said in an interview. ‘Ominously, business has a good chance of opting out of the legal system altogether and misbehaving without reproach’.

…

“Law enforcement officials … say they have lost an essential tool for uncovering patterns of corporate abuse. In a letter last year [2014] to the Consumer Financial Protection Bureau, attorneys general in 16 states warned that ‘unlawful business practices’ could flourish with the proliferation of class action bans”.

In October, the bureau outlined rules to prevent financial firms from banning class actions. Almost immediately, the U.S. Chamber of Commerce galvanized forces to stop the move.

[Jessica Siver-Greenberg and Michael Corkery, Arbitration Everywhere, Stacking the Deck of Justice: Beware the Fine Print, The New York Times, Oct. 31, 2015]

In May 2016, the  Consumer Financial Protection Bureau continued to move forward, releasing a proposed rule for consumers to obtain new powers to sue banks and credit card companies. The Bureau’s proposal specifically restricts the use of arbitration clauses in consumer financial contracts. [Yuka Hayashi and Christina Rexrode, Proposed Rule Would Allow Consumers to Sue Banks, Credit-Card Companies: current mandatory arbitration clauses in contracts force customers into private negotiations to solve disputes, The Wall Street Journal, May 5, 2016]

Decisions of the US and Canadian Supreme Courts

The Supreme Courts of both the United States and Canada have considered the enforceability of mandatory arbitration clauses in consumer contracts. Both cases involved contracts with wireless telecommunications services, in particular mobile telephone consumer contracts, that required all disputes by its consumers to be resolved by mandatory private arbitration, and specifically excluded the jurisdiction of the courts.

The cases in the United States and Canada involved low-value claims that are not practically litigated on an individual basis.  The cost and uncertainty of litigation outweighed a recovery for any individual claimant.

“One federal judge remarked in an opinion that ‘only a lunatic or a fanatic sues for $30”.

[Jessica Siver-Greenberg and Michael Corkery, Arbitration Everywhere, Stacking the Deck of Justice: Beware the Fine Print, The New York Times, Oct. 31, 2015]

The issue under consideration in both cases involved an important issue of public policy, and directly raised the question of the relationship between mandatory arbitration and access to justice.

In recent years, there has been a growing acceptance by American and Canadian courts of the legitimacy of alternative dispute resolution and arbitrators. Courts lean to the point of view that private dispute resolution such as mediation and arbitration provides an “efficient and effective access to justice mechanism.”

United States Supreme Court decision

In April 2011, the United States Supreme Court released its decision in AT&T Mobility v. Concepcion [131 S. Ct. 1740].  In a narrow 5-4 ruling, the U.S. Supreme Court decided that the U.S. Federal Arbitration Act pre-empted State law—in that case California—prohibiting enforcement of arbitration clauses inhibiting consumers from pursuing class actions.  The decision in Concepcion essentially struck down State consumer protection laws, and held that US companies could in fact rely upon their unilateral arbitration clauses in their standard form contracts to prevent class proceedings. Justice John Roberts was the Chief Justice of the US Supreme Court.

“The Supreme Court’s rulings amounted to a legal coup for a group of corporate lawyers who figured out how to twin arbitration clauses with class action bans. The lawyers represented [Corporate] clients that had paid billions of dollars to resolve class actions over the years”.

[Jessica Siver-Greenberg and Michael Corkery, Arbitration Everywhere, Stacking the Deck of Justice: Beware the Fine Print, The New York Times, Oct. 31, 2015]

According to the New York Times, in the US, “more than a decade in the making, the move to block class actions was engineered by a Wall Street-led coalition of credit card companies and retailers”.  “Strategizing from law offices in Park Avenue and in Washington, members of the group came up with a plan to insulate themselves from costly lawsuits”. One of the players behind the scenes was, at that time, prominent corporate defense lawyer John Roberts, “who as a private lawyer representing Discover Bank unsuccessfully petitioned the Supreme Court to hear a case involving class action bans”.

“By the time the [US] Supreme Court handed down its favorable decisions, [John Roberts] was the Chief Justice”.

[Jessica Siver-Greenberg and Michael Corkery, Arbitration Everywhere, Stacking the Deck of Justice: Beware the Fine Print, The New York Times, Oct. 31, 2015]

Supreme Court of Canada decision

March 18, 2011, the Supreme Court of Canada released its decision in Seidel v. Telus Communications Inc. [2011 SCC 15].  The Plaintiff relied upon a British Columbia consumer protection statute (similar to the California statute struck down by the US Supreme Court), arguing that Telus engaged in deceptive business practices in violation of various provisions of the Business Practices and Consumer Protection Act [S.B.C. 2004, c. 2].  The decision, like in the US, was a narrow 5-4 ruling, but in this case to the benefit of citizens and not corporations. The Court interpreted the Act as creating a right to bring a class action as a “public interest plaintiff” with the intention to “shine a spotlight on allegations of shabby corporate conduct.” The Court held that the policy behind this provision would not be served by private arbitrations. However, the narrow, five-judge majority of the Court only permitted the class action to proceed with respect to one statutory claim notwithstanding the arbitration clause.

The majority of the Supreme Court of Canada held that the claims for a declaration and injunction could be advanced in the proposed class proceeding, but the claims for personal damages had to proceed as required by the arbitration clause. The dissent would have required all of the claims to proceed pursuant to the arbitration clause.

Despite these differences, all of the Judges of the Supreme Court of Canada agreed on the following general principles:

• The choice to restrict or not to restrict mandatory arbitration clauses in consumer contracts is a matter for the legislature.
• Absent legislative intervention (a legislative override), the courts will generally give effect to the terms of a commercial contract freely entered into, including a mandatory arbitration clause.
• The above principle applies to standard form contracts (contracts of adhesion). A standard form contract requiring that the parties arbitrate is not contrary to public policy. To find otherwise would be tantamount to finding that dispute resolution by arbitration is itself contrary to public policy.
• A particular mandatory arbitration clause could be worded such that it offends public policy, or some other legal doctrine, such as unconscionability. Generally speaking, mandatory arbitration clauses are permissible.

The SCC was unanimous that restricting mandatory arbitration clauses is a choice for legislatures. [Supreme Court of Canada Clarifies Use of Mandatory Arbitration Clauses in Standard Form Consumer Contracts, MacPherson Leslie & Tyerman LLP, Spring 2011]

Unfortunately, the Supreme Court of Canada has upheld the ability of companies to use lawyerly worded mandatory arbitration clauses in consumer contracts, provided such a practice is not restricted by their provincial legislature. The Supreme Court of Canada regrettably approved of the use of standard form contracts of adhesion to accomplish this result. Although the type of consumer contract and provincial legislation will need to be considered in each case, the Supreme Court of Canada – following the US Supreme Courts direction –  opens the door for companies to use mandatory arbitration clauses in consumer contracts to avoid Court review, and protect themselves against class action litigation. [Supreme Court of Canada Clarifies Use of Mandatory Arbitration Clauses in Standard Form Consumer Contracts, MacPherson Leslie & Tyerman LLP, Spring 2011]

Unfortunately, the Supreme Court of Canada has upheld the ability of companies to use lawyerly worded mandatory arbitration clauses in consumer contracts, provided such a practice is not restricted by their provincial legislature. The Supreme Court of Canada regrettably approved of the use of standard form contracts of adhesion to accomplish this result.

Legislatures’ Required to Protect Citizens/Consumers against Corporate Arbitration Clauses

The Ontario Court of Appeal best outlined the concern surrounding Corporate imposed arbitration clauses in consumer contracts [Griffin v Dell Canada Inc. (2010), 98 O.R. (3d) 481 (C.A.)]:

• The Corporation’s preference for arbitration is often nothing more than a guise to avoid liability for wide spread low-value wrongs that could not be litigated individually but when aggregated formed the subject for a viable class proceeding.
• When consumer disputes are in fact arbitrated through bodies such as National Arbitration Federation (NAF) that sell their services to Corporate suppliers, consumers are often disadvantaged by arbitrator bias in favour of the dominant and repeat-player corporate client.

Notwithstanding the Supreme Court of Canada’s unfortunate acceptance of mandatory alternative dispute resolution and arbitrators in consumer contracts, some provincial governments in Canada have acted proactively to restrict private dispute resolution in consumer contracts. Legislatures in at least two provinces have passed legislation that access to justice does in fact require access to the Courts.

The Supreme Court of Canada in Telus rightfully noted that Corporations’ unilateral arbitration clauses in consumer contracts are prohibited in Ontario. In Alberta, the government must specifically approve them. In Saskatchewan’s Consumer Protection Act there is no explicit ban, so a purposive and contextual assessment would need to occur.

The legislative protection to preserve dispute resolution through the courts is most apparent in Ontario’s prohibition on the use of arbitration clauses in consumer contracts.  In particular, it applies to mandatory arbitration clauses in consumer adhesion contracts that force consumers to waive their right to participate in class action litigation in favour of a private dispute resolution process.

From a public policy perspective, all provincial governments across Canada should closely review this situation, and – in our respectful view – as required in each province, pass or update appropriate legislation to protect consumers.

Legislative intervention is necessary to ensure that citizens and consumers across Canada retain access to their choice of court proceedings, including class proceedings. Appropriate legislation should be updated and/or implemented, expressly stating that a mandatory arbitration clause in a consumer agreement is invalid or prohibited. Legislation should be put in place expressly stating that all citizens and consumers may commence or become a member of a class proceeding despite any consumer clause or agreement to the contrary. The Ontario Consumer Protection Act regarding the invalidation of mandatory arbitration in consumer agreements may be an appropriate model for similar reforms to consumer protection legislation across Canada. Only in cases where a citizen agrees to resolve a consumer matter by arbitration after the dispute arises should the arbitration forum and resulting decision or settlement be binding.

There are times where Corporations lobby federal and provincial governments to amend laws to their benefit.  It is recommended that the current laws in place to protect consumers, in particular in Ontario, be protected for the benefit of all citizens.

Eric Sigurdson

Also See:

Lawrence E. Thacker, Mandatory arbitration, class proceedings and access to justice, Practicallaw.com, March 1, 2012

Jennifer Doman, Supreme Court of Canada Allows Parties to Escape Arbitration Clause and Pursue Class Action, Osler, Hoskin & Harcourt LLP, Osler.com, March 24, 2011

Michael Schafler and Amer Pasalic, Is Canada Ready for Class Arbitration, October 25, 2013

Ken Sweet, Consumer Financial Protection Bureau moves to curb forced arbitration, a contentious practice, Associated Press, CanadianBusiness.com, Oct. 7, 2015