7 Biggest Mistakes When Attacking an Arbitration Requirement

Much consumer litigation today deals with mandatory arbitration requirements. This article describes seven of the biggest mistakes consumer litigants make in responding to arbitration provisions. More detail on each issue is found in NCLC’s Consumer and Worker Arbitration Provisions. All cites in this article are to subsections in that treatise unless otherwise noted, and the cites link directly to the subsection in the digital version for more detail and case law.

1. Failing to Explain Why the Court, Not an Arbitrator Decides an Arbitration Challenge 

Buried in most arbitration provisions is language that takes away from the court the ability to rule on the arbitration provision’s enforceability, delegating this decision to the arbitrator (called a “delegation clause”). Other times there is no such language, but courts find the mere reference to the rules of the arbitration provider (such as AAA or JAMS) enough to delegate arbitrability to the arbitrator. NCLC’s Consumer and Worker Arbitration Provisions § 2.3.3a.2. 

One of the biggest mistakes a consumer litigant can make in challenging an arbitration provision is not first convincing the court that it can decide enforceability and not the arbitrator. There are usually excellent grounds for the court to do so, but too often consumer litigants focus only on enforceability of the main arbitration provision and do not attack the delegation clause. The result is that the court sends the case to arbitration to decide arbitrability when—if properly presented—the court would have decided that the arbitration provision was unenforceable.

Here are the main grounds for a court to decide arbitrability despite a delegation clause:

• The court should always decide if the arbitration provision was validly formed, such as that the consumer never consented to the provision. Id. § 4.2.4.
• Courts should determine whether a defendant not listed in the arbitration provision can enforce the provision and whether a consumer not listed in the arbitration provision is subject to it. Id. § 5.5.3.
• Courts generally determine whether the defendant has waived the right to enforce the arbitration provision by its conduct in the court litigation or by not participating in the consumer’s filed arbitration proceeding. Id. §§ 6.3.1, 6.4.2.
• Where a federal statute (such as the Military Lending Act) prohibits arbitration for certain transactions or consumers, the court generally determines whether the federal statute prevents enforcement of the arbitration provision. See, e.g., id. § 7.4.1b.
• A delegation clause is never enforceable if it is not clear and unmistakable that it applies to the consumer’s challenge to the arbitration requirement. Id. § 2.3.3a.1.
• The delegation clause itself can be attacked as unenforceable on any grounds that apply to the arbitration provision itself, such as unconscionability. After striking down the delegation clause, the court determines arbitrability of the main provision. Id. § 2.3.3b.

2. Jumping to File a Case in Federal Court Without Considering State Court

Before deciding whether to file in federal or state court, a prime factor must be the implications for an arbitration requirement. It makes no sense to base the decision on which court is better to litigate a case where the arbitration provision may force the case out of the preferred court.

Often consumer litigants have more success attacking an arbitration requirement in state court rather than federal court. State court judges often are more skeptical of arbitration provisions than federal judges are.

Perhaps the most significant factor though is that appellate review of a court’s arbitrability decision is stacked against the consumer in federal court, but less so in state court in about half the states. Many states have more even-handed appellate rules than federal courts.

In federal court, if a consumer wants to appeal a judge’s decision staying a case and sending it to arbitration, the consumer must first complete the arbitration proceeding before it can appeal the decision to send the case to arbitration. To avoid arbitration, the consumer must first go to arbitration. NCLC’s Consumer and Worker Arbitration Provisions § 2.7.3. In almost half the states, after a state court ruling favoring arbitration, the consumer can appeal immediately. Id. § 2.7.5.1.

On the flip side, in federal court if the consumer defeats the arbitration requirement, the defendant has a right to an immediate interlocutory appeal. Moreover, the court has no discretion, but all aspects of the case are stayed during the appeal. Id. § 2.7.2. In state court, the judge may have discretion to continue discovery and other aspects of the case while the case is on appeal, or the defendant might not even have an interlocutory right to appeal the ruling denying enforcement of the arbitration requirement. Id. § 2.7.5.2.

Often a case can be filed in state court alleging only state claims and avoiding federal diversity jurisdiction. Even if a federal claim is added, the consumer can still file in state court and seek remand if removed to federal court. For example, a federal court should remand to state court if there is no federal court standing.

3. Failing to Aggressively Challenge Electronic Consent 

Increasingly, consumer contracts are consummated on the web in electronic form, with the consumer’s consent being obtained by a mouse click or other electronic action. The arbitration provision itself may be visible only if the consumer clicks a hyperlink. Electronic contracts are not limited to web-based transactions, but increasingly are occurring during in-person transactions consummated on the business’s tablet or similar device. 

This leads to new business abuses and to new consumer opportunities to challenge enforceability of an electronic arbitration provision. The defendant has the burden to prove that there exists an agreed-upon arbitration requirement. Such formation issue is always for the court, despite any delegation clause. There are any number of ways to contest a consumer’s electronic consent to an arbitration provision.

Wrong Arbitration Provision Introduced in Court: The business may put into evidence the wrong arbitration provision, not the one visible when the consumer visited the business’s website. The defendant may have multiple versions of its arbitration provision as it changes over time or even as found on different websites. To rebut the version of the terms presented to the court, use the Internet Archive’s “Wayback Machine” to see if the contract the business produced matches the version that the Wayback Machine recorded as present on that website on the date the consumer is said to have visited the site. NCLC’s Consumer and Worker Arbitration Provisions § 4.3.4.1. 

Website Actions Do Not Indicate Consent: Extensive case law has developed about when a consumer’s electronic actions on a website indicate consent to the arbitration provision or other terms and conditions found via a hyperlink. Is the hyperlink located near where the consumer takes an electronic action? Is the electronic action logically associated with consent to the terms and conditions? Is the link conspicuous? Are the terms and conditions themselves conspicuous? Id. § 4.3.4.

Someone Else Visited the Site: The defendant must prove the identity of the consumer that visited a website and took the electronic action indicating consent, while the consumer may counter that it was an identity thief or a click farm. The defendant will present identifying information about the consumer, that the transaction included the entry of the consumer’s address, phone number, email address, however, much of that information is often available for sale on the dark web, or elsewhere, and should not be considered conclusive. Businesses may also have a recording of a person’s keystrokes on the site, entering the information and clicking on a checkbox. Even that is not necessarily evidence that it was the consumer performing the recorded keystrokes and not someone else. Id. § 4.3.4.2.

To overcome evidence the business presents that it was the consumer who visited the site, present credible evidence to the contrary. A consumer might allege being a recent victim of a data breach that included the identifying information used on the site, and that this identifying information was used by an unknown person to engage in other transactions in the consumer’s name. 

Another explanation for a website having a consumer’s identifying information is that the consumer had supplied the information to one website, and a marketer used bots and “human click farms” to enter the consumer’s data from the first site into a second website that the consumer has never visited. The marketer has an incentive to do so where it is paid by website clicks to drive customers to the second website. This abuse is surprisingly widespread. 

Abuses Related to In-Person Electronic Transactions: Particularly suspect are point-of sale electronic transactions, such as solar panel contracts consummated in the consumer’s residence using the seller’s tablet or car sales at the dealership where all documents are disclosed and signed electronically. Id. § 4.3.4.6. The consumer’s consent may be forged by the salesperson, either on the spot or when the consumer is no longer present. Look for evidence that the consumer could not have clicked on the device at the time indicated. Check the IP address used to sign the documents to see whether or not it is suspicious. The company can even copy and paste the consumer’s electronic signature from one document to another. 

Similar issues arise where the sales representative scrolled through the contract and arbitration provision at breakneck speed until a signature page is reached, not giving the consumer a chance to understand what they were signing. Did the seller create an email address for the consumer for the consumer later to receive disclosures—this indicates the amount of control the seller had over the transaction. 

4. Failing to Read Arbitration Language with a Fine-Tooth Comb

Arbitration is a matter of contract. An arbitration provision only entitles the defendant to force a consumer into arbitration as to its exact terms. Arbitration is not a super contract always favoring arbitration, but is to be interpreted like any other contract. See Morgan v. Sundance, Inc., 596 U.S. 411 (2022). 

The first step is to read the arbitration provision that was presented to the consumer, not some other version of the company’s arbitration provision. See #3, supra, at “Introduction of the Wrong Arbitration Provision.”

The next step is to parse the language to see what persons and what disputes are listed as being covered by the provision. Then look for conflicting or ambiguous language indicating the contract does not mean what it seems to mean. 

Don’t limit potential conflicts just to the arbitration provision itself but look at it in relation to the rules of the arbitration provider specified in the agreement, usually AAA or JAMS. For example, the arbitration provision may refer to AAA’s Commercial Rules, but AAA rules indicate that the AAA will instead apply its Consumer Rules to most consumer transactions, which dramatically changes the nature of the arbitration.

Consider also the practical implications of the arbitration language. Is neutral language about covered disputes likely to have the practical effect of forcing consumer disputes into arbitration but not the business’s disputes? Will the arbitration have to take place in a distant forum? Are there limits on claims, damages, other remedies? Do claims have to be filed earlier than would be the case in court?

Often the arbitration language will not be artfully drafted, leading to surprising results if interpreted literally. In one recent case a class action in court could go forward because the arbitration provision required individual cases to go to arbitration and prohibited class arbitration, but did not prohibit class actions in court.

5. Underestimating the Power of TILA, MLA Limits on Arbitration 

Particularly for class actions, do not underestimate the utility of both the Truth in Lending Act (TILA) and Military Lending Act (MLA) in eliminating arbitration requirements. Except for purchase money loans, the MLA generally prohibits arbitration requirements involving credit extended to the millions of active-duty personnel and their dependents. NCLC’s Consumer and Worker Arbitration Provisions § 7.4.1. The MLA not only prohibits arbitration involving MLA violations, but any consumer claims related to a covered credit agreement. Id. § 7.4.1a. 

Remember that the MLA and consumer credit laws apply to credit, even if the lender claims the transaction is not credit. If the scheme is indeed credit, there is no arbitration requirement and there can be hefty damages for a class limited to active-duty military and their dependents. A good example is earned wage payday loans where courts are finding MLA coverage, that the arbitration provision is void, and violations of the MLA, TILA, and other credit laws.

TILA prohibits arbitration in closed-end loans secured by a residence and open-end loans secured by a principal residence. This limit applies to any credit taking a security interest in manufactured homes, boats, RVs, and even other vehicles if used as a residence. Id. § 7.2.1. Because the arbitration provisions are unenforceable, consumers can bring any claim, not just TILA claims, involving such loans. TILA, like the MLA, covers disguised credit that claims not to be credit. The TILA prohibition may be particularly useful involving home equity “investment” loans (HEI loans) and other new lending schemes seeking to evade mortgage loan regulation.

6. Failing to Proceed to Individual Arbitration in Appropriate Cases

There are many reasons to consider bringing an individual arbitration proceeding, either after a case has been referred to arbitration or even before bringing the action in court, if there is a fear that litigating arbitrability will take up too much time and resources:

• Filing consumer arbitration with AAA or JAMS will cost the consumer a total of about $250 for the whole proceeding. It can cost the business well over $5,000. This may lead the business to settle or fail to pay its filing fees. The latter should result in the business’s waiver or default of the arbitration requirement, allowing the consumer to go into court with an individual or possibly class action. NCLC’s Consumer and Worker Arbitration Provisions § 6.4.
• If the court refers the issue of enforceability of the arbitration provision to the arbitrator, as the first order of business in an arbitration, ask the arbitrator to find the arbitration provision unenforceable, returning the case to court. This costs the consumer $250, while the business pays thousands of dollars to have this issue resolved. If the consumer loses, there will be no additional cost for the consumer to proceed in arbitration on the merits, but the business will have to keep paying out arbitration costs.
• Consumer attorneys are regularly winning five, six, and even seven figure arbitration awards, and there will be few grounds for any appeal to vacate the award. Id. § 9.1.1.4.
• A punitive damages award in arbitration is far more likely to be upheld than a jury award, since a jury award will be reviewed by the trial and appellate courts and must meet due process standards. An arbitration proceeding is private and should not have to meet due process standards, and there are very limited grounds to vacate an arbitration award. Id. § 11.7.
• As a proceeding established by contract, there are no federal or state court standing requirements in arbitration.

7. Misjudging That Arbitration Prevents Broad-Based Relief 

Avoiding widespread consumer relief is a principal reason companies utilize arbitration provisions, forcing consumers into individual arbitration. There are still three options for obtaining widespread relief against a company despite an enforceable arbitration requirement: public injunctions (in California), mass arbitration, and class arbitration. 

Public Injunctions: In California, consumers have a right to seek a broad-based public injunction against a business, despite the arbitration requirement. A business can obtain the consumer’s waiver from bringing a public injunction action either in arbitration or in court, but the California Supreme Court and the Ninth Circuit have ruled the consumer cannot be forced to waive both options. The consumer must have the right to bring a public injunction either in court or in arbitration. Id. § 10.6.2.

Public injunctions have as a primary purpose the prohibition of unlawful acts that threaten future injury to the public, and they are an available remedy under the California Consumers Legal Remedies Act, the California Unfair Competition Law and the California False Advertising Law. California courts allow actions for broad public injunctions to be heard in arbitration, and businesses usually prefer to allow public injunction actions to be heard in court and not in arbitration. They often draft arbitration provisions to allow for court actions for public injunctions. California courts also find that an individual bringing a court action only to benefit the public still may have standing in California courts.

Mass Arbitration: Another option to obtain widespread relief despite an enforceable arbitration requirement is mass arbitration. Mass arbitration involves numerous individual claimants bringing largely identical individual arbitration claims against the same defendant at the same time, before the same arbitration provider, through the same lawyers. The practice is aided by technological advances in case and client management software that have made sophisticated, large-scale tracking and communication, cheaper, easier, more reliable, and more effective, even for mass arbitrations involving thousands of individuals. NCLC’s Consumer and Worker Arbitration Provisions § 10.7.

Businesses want to avoid mass arbitration. Total filing fees and arbitration costs can be expensive, and the arbitrations can lead to significant liability. The procedure can be expensive and complex for the consumer attorneys as well and should not be tried lightly. When successful, mass arbitration may be preferable even to a class action. Id. § 10.7.2.

• Even if a consumer loses the first individual arbitration, succeeding individual cases can be refined until they begin to get excellent results.
• The best evidence can be used in each individual case, not just the common evidence.
• Individualized damages such as personal injuries and emotional distress can be recovered.
• Attorney fees can be based on a contingent fee agreement.
• Settling a mass arbitration only binds clients participating in the settlement and does not release the claims of any other consumers.

Practice tips on conducting mass arbitration and tactics to counter business attempts to avoid mass arbitration are discussed in id. §§ 10.7.3, 10.7.4, 10.7.5.

Class Arbitration: Most arbitration provisions prohibit class arbitration, and such provisions are enforceable. Id. § 8.7.6.1. But not all arbitration provisions clearly prohibit class arbitration and then the arbitration provision must be construed to determine if there is an intent to allow class arbitration. Id. § 10.2.3. 

When the provision includes a delegation clause, this determination is usually for the arbitrator. Id. § 10.2.2.2. If the arbitrator construes the arbitration provision as allowing for class arbitration, then the consumer can seek class certification from the arbitrator. An arbitrator’s decision construing the provision, certifying the class, and issuing a final award are subject to very limited judicial review. Id. § 10.4. There is evidence that businesses fear class arbitration more than a class action in court.