“We hope we never have a dispute, but if we do, we agree to binding individual arbitration and not to sue in court in front of a judge or jury. Class action lawsuits, class-wide arbitrations, private attorney-general actions, and any other proceeding where someone acts in a representative capacity aren’t allowed.”
Wait, what? You are likely to have seen this message, or something like it when you upgraded Windows or installed your new storage software, but what does it mean? If you are in Europe nothing you need to worry about imminently, if you are in the US on the other hand, rather a lot.
Depending on where they are based, a consumer who has had their laptop damaged by a defective upgrade will have to bring any compensation claim to an arbitral tribunal, and not the local court, if they had accepted the notice containing the above clause prior to the installation. Arbitration is a method of alternative dispute resolution (ADR) that blocks access to the courts and entrusts consideration of claims to privately appointed tribunals. While this is based on consent by both parties and is common in commercial and trade deals, there is concern about the extension of the practice to cover every day consumer grievances. The reason is that consumers are less well informed, less likely to read the T&Cs containing the clauses, and less likely therefore to genuinely consent to losing access to courts and the opportunity of joining class actions.
This article discusses the recent spread of mandatory consumer arbitration clauses and reflects on their consequences in the US and Europe in light of the TTIP negotiations and the possibility of Brexit.
Is mandatory arbitration in consumer cases legal?
In the USA yes. The US Supreme Court has accepted the validity of these clauses at the expense of consumers in recent decisions addressing the Federal Arbitration Act (FAA), which makes agreements to arbitrate valid, irrevocable, and enforceable. In a 2012 case the Supreme Court held that the FAA statute likewise trumps other federal laws, again subordinating a consumer’s ability to pursue a statutory right or cause of action to respecting arbitration agreements on their terms. This decision as noted by one of the judges in the minority, threatens to make arbitration a mechanism that can easily block the vindication of meritorious federal claims and insulate wrongdoers from liability. In a 2015 case, another minority opinion suggested that it has become routine for powerful economic enterprises to write into their standard form contracts with consumers and employees “no class-action” arbitration clauses.
The EU position:
The EU seeks to promote use of ADR. Its various types ranging from ombudsmen to negotiation, mediation and arbitration are well established across the continent, and especially here in the UK. Nonetheless, EU legislation prohibits mandatory consumer arbitration clauses. Of course a consumer and supplier can choose to arbitrate a dispute, but this can happen only after the dispute has arisen via a separate agreement. This is very different from the US position described earlier.
According to Directive 2013/11, the EU law which aims to promote the use of ADR, arbitration provisions will not apply in cases where the trader initiates a claim. It seems to be the intention of the EU-legislator to expressly exclude pre-dispute arbitration clauses. Further, arbitration is limited to actions in contract (with the exception of non-economic services of general interest), excluding actions in tort and restitution. Injunctions against illegal behaviour of traders sought by consumer associations are also excluded. The reason for this ‘distaste’ towards consumer arbitrations is the Unfair Terms Directive 93/13, which forms the basis of the Consumer Rights Act 2015 in the UK. A consumer cannot be drawn into arbitration against his will because the clause would be regarded as unfair. Unfair terms in contracts are invalid and do not bind the consumer even if the remainder of the contract is operational.
Why should we care then?
The reason why the evolution of the law in the US is worrying for us here in Europe is two-fold. First, we are discovering that the attempt to harmonise standards in order to improve trade through the TTIP negotiations risks bringing over a lot of unpleasant practices from across the pond. The main concern with dispute resolution under the TTIP is currently on investment arbitration between corporates and states. Yet, the emphasis on the big disputes may lead lesser things, like consumer arbitrations, to pass under the radar. There is no official discussion to date of importing mandatory consumer arbitrations with the TTIP, but one should not be surprised if this aspect of ‘harmonisation’ joins the debate in the coming months.
Second, this is of domestic significance in the UK in light of the EU Referendum. The Leave campaigns are highlighting ‘ending the supremacy of EU law’ as a reason to leave the Union. Yet EU law shields us, citizens and consumers from a series of major and minor evils. Amongst the countless examples of how EU law protects consumers and workers, not being dragged in front of a tribunal when the new smartphone sets fire to your desk is a good one.