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75 Ways to Challenge an Arbitration Requirement

A new NCLC Arbitration Practice Checklist, free and accessible to the public, is found at NCLC’s Consumer Arbitration Agreements § 1.2a.  It not only lists 75 ways to defeat an arbitration requirement, but also considers procedural issues in such a challenge, including who decides enforceability and timing of appeal rights. The checklist also explains options to proceed in arbitration—individual, class, and mass arbitration.

This article sets out the highlights of the Arbitration Practice Checklist, including a dozen lesser-known ways to defeat an arbitration requirement, and another dozen challenges that apply more often than you think. The article discusses the three biggest errors in challenging an arbitration requirement and tips on various types of arbitration proceedings. All citations below are to NCLC’s Consumer Arbitration Agreements unless otherwise noted.  The article, checklist, and treatise are geared to both consumer and worker challenges to arbitration.

A Dozen Lesser-Known Ways to Defeat an Arbitration Requirement

  1. The Servicemembers Civil Relief Act (SCRA) explicitly provides that there is a right to bring a class action for SCRA claims notwithstanding any other agreement (for example, an arbitration agreement) to the contrary. The SCRA further provides extensive consumer rights, including a 6% interest rate cap on credit consummated before active service.  As a result, class actions bringing SCRA claims can avoid the arbitration requirement. § 7.4b.
  2. Courts have held that the FAA does not apply to a business’s arbitration requirement when the business is acting as an agent of the government, such as when it is enforcing bad check laws or other aspects of criminal justice debt. Since the FAA does not apply, state law will determine the enforceability of the arbitration requirement. See §
  3. The Carmack Amendment prohibits interstate movers from requiring arbitration of disputes involving the loss or damage of consumers’ household goods. See § 7.12.
  4. A federal rule restricts arbitration agreements involving nursing homes and other long-term care facilities that receive Medicare or Medicaid funding. While a stricter rule was revoked, the replacement rule still includes requirements that the facility clearly inform the resident or representative that signing the arbitration agreement is not a condition of admission and the agreement can be rescinded within 30 days, among other consumer protections. § 7.7.
  5. Courts have found assignors no longer have rights under an arbitration agreement after assigning the agreement to another party. For example, a car dealer can be sued in court after it has assigned to a creditor the agreements containing an arbitration clause. § 4.10.5.
  6. The FAA applies to a “written provision … to settle by arbitration a controversy thereafter arising out of such contract or transaction … .” As such it does not apply to a dispute not “arising out of such contract or transaction.”  If a customer cancels a contract and the seller later robocalls the customer to sell another product, that should not be arising from the contract or transaction.  Instead, state law will determine the enforceability of the arbitration agreement. §
  7. While two circuit courts and the FTC have opposite views as to whether a written warranty claim can be forced into arbitration, less well known is that the only circuit court to rule on the issue has found that the arbitration requirement is not enforceable if not found in the written warranty itself. § 7.9.2.
  8. Despite a past rule that was rescinded and litigation about the current rule, it appears that a Department of Education rule is in effect requiring schools participating in the federal Direct Loan Program to sharply limit the extent to which they can require arbitration.  § 7.6.1a.
  9. When bringing federal claims, there are advantages to challenge an arbitration requirement not just as being unconscionable, but also as preventing vindication of federal statutory rights or remedies. § 8.4.
  10. Arbitration agreements consummated by an individual’s click or other actions on a website are open to various challenges.  The defendant must prove it was the consumer or worker who visited the website (and that the person’s information not provided as the result of a click farm or the individual visiting a different site). The individual’s mouse click must be logically associated with conspicuous arbitration terms. The defendant should be listed in the arbitration agreement the plaintiff entered with the website owner.  The federal E-Sign statute sets out detailed “consumer consent” requirements where law requires that information in the terms of use agreement be disclosed in writing. This may even apply to the arbitration provision itself which the FAA requires to be in writing to be covered by the FAA. See §§,,
  11. A collector bringing a collection action in court may waive its right to require arbitration when the debtor brings a second action against the collector in which the facts are integrally related to the collector’s collection lawsuit.  §
  12. While the FAA preempts a state agency’s attempt to limit the enforceability of an existing arbitration agreement, the state agency can provide regulatory approval or the provision of state benefits or state purchases on the condition that the company not include an arbitration agreement in its contracts. § 3.5.1.

A Dozen Challenges That Apply More Often Than You Think

  1. The Truth in Lending Act prohibits arbitration agreements in mortgage loans. This prohibition applies not just to loans secured by homes, but also to manufactured homes and trailers, and even boats used as a residence.  It also applies to sale-leaseback transactions, reverse mortgages, HELCs on primary residences, and mortgage loans on vacation homes, condominiums, and cooperatives.  The TILA prohibition also provides that federal claims are not subject to arbitration where the requirement is found in any document “related to” a mortgage loan, such as third-party agreements for the processing of mortgage payments. This provision applies not just to arbitration provisions, but to any provision that limits the consumer’s ability to bring a federal law damages claim or to seek other relief from the courts, such as contractual notice requirements or limits on remedies or class actions. §§ 7.2, 7.3.
  2. The Military Lending Act not only prohibits arbitration in most credit transactions involving active duty servicemembers, but also their dependents, defined to include a spouse, children under 21, and under certain conditions parents, parents-in-law, and children over 21. If an individual was covered by the Act when the credit was originated, then the arbitration prohibition continues to apply even after the individual is no longer a servicemember or a dependent of a servicemember. § 7.4.
  3. Under the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, arbitration agreements are unenforceable with respect to cases that include claims involving sexual harassment or sexual assault. Where a case includes such claims, other claims in the same case are also not subject to arbitration.  The statute also provides that a court and not an arbitrator determines enforceability, even when an arbitration agreement contains a clause delegating to the arbitrator questions of enforceability. § 7.4a
  4. Because of operation of the federal McCarran-Ferguson Act, state insurance law can prohibit arbitration in insurance contracts despite the FAA. Surprisingly, fourteen jurisdictions prohibit arbitration in all lines of insurance and other states prohibit it for certain lines of insurance. See § 3.5.3.
  5. While courts often reject unconscionability challenges based on the cost to the individual of the arbitration proceeding, even the Supreme Court has said it is a valid unconscionability challenge if the individual proves the actual costs that will be incurred and presents evidence that those costs are unaffordable.  §§ 8.7.2,
  6. There are a surprising number of situations where an assignee cannot take advantage of the assignor’s arbitration agreement.  An assignee, such as a debt buyer, must prove an unbroken chain of assignments from the original party entering into the arbitration agreement all the way to the defendant seeking to enforce the agreement. The rights assigned must be rights to enforce the contract and not just the right to receivables. The defendant must produce the specific arbitration agreement to which the individual has assented, which may be difficult for some assignees, especially for debt buyers. §§ 5.6.1,,
  7. The FAA does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Whether a particular worker is covered depends not on whether the worker personally engaged in interstate commerce, but whether a class of workers to which the complaining worker belongs is so engaged. While the class of workers must be actively engaged in transportation via foreign or interstate commerce, workers need not personally ever cross state borders. The FAA exemption applies not just to employees but to independent contractors. §
  8. Most courts find that an individual subject to an arbitration requirement can still bring a federal False Claims Act case in court.  Less well known is that over half the states have state false claims acts, and state courts may be even more receptive that arbitration agreements do not apply to individuals as relators in cases under the state statutes.  § 3.5.2; NCLC’s Federal Deception Law §§ 10.5, 10.10.
  9. Where an arbitration agreement lists a sole arbitration provider (such as AAA), and that provider is not available to arbitrate the claim, the arbitration requirement is unenforceable where the provider selection is integral to the agreement.  This applies to a surprising number of situations, such as where the agreement does not conform to AAA’s consumer due process protocols or where AAA has intentionally excluded a defendant for refusing to participate in the arbitration of another matter.  Arbitration providers may cease to exist or cease handling certain types of cases. § 8.7.9.
  10. It is also surprising how often defendants, after requiring arbitration in their agreements, refuse to participate in arbitrations or pay the arbitration fees after they discover how expensive it will be for them.  A California statute gives workers and consumers strong remedies in this situation. In other states the individual should then be able to claim the non-payment or non-participation as the defendant’s waiver or default of the arbitration requirement. § 6.4.1.
  11. A consumer reporting agency (CRA) typically cannot require arbitration since it has no contractual relationship with the individual. The CRA cannot rely on the arbitration clause of an affiliate credit monitoring service unless the arbitration agreement explicitly applies to affiliates and the CRA can prove that was the version of the credit monitoring contract that the individual assented to and not some earlier version that did not mention affiliates.  CRA’s cannot rely on arbitration agreements between the individual and a furnisher or user of consumer reports.  § 5.6.3a.  National CRAs cannot require arbitration when individuals utilize the centralized source to obtain a free annual credit report. § 7.7a.
  12. Often temporal considerations can be important.  In a yo-yo car transaction or any other agreement that does not go into effect until financing is approved or some other condition occurs (a condition precedent contract), if the condition is not met, the arbitration requirement never goes into effect. § 4.3.5. In addition, courts generally hold that an arbitration requirement does not apply to disputes arising prior to the consummation of the agreement.  § 5.4.3.  If some disputes are within the scope of the arbitration provision and other related disputes are not, then these latter disputes need not be subject to arbitration. See § 5.4.5.  Disputes arising after the parties’ relationship has ended sometimes are not subject to the arbitration requirement either.  The same is true with a contract that has been superseded by another not containing an arbitration agreement. § 4.10.  A prior arbitration agreement may not apply to a subsequent, separate agreement entered into by the parties. § 5.4.4.

Biggest Errors in Challenging an Arbitration Requirement

The arbitration practice checklist lists items of importance as to the process of challenging the arbitration requirement: who decides the challenge, the court or arbitrator; jurisdiction and venue issues; right to discovery and a jury trial as to enforceability of arbitration agreement; and appeals of court decisions. The three biggest errors consumers and workers can make in challenging the arbitration requirement are:

Error # 1: Ignoring a clause in the arbitration agreement delegating enforceability determinations to the arbitrator, and the individual asking the court to throw out the arbitration requirement. This sets the consumer or worker up to lose a winnable challenge as the court may just rule it will be up to the arbitrator. Instead, always present the court reasons the court should decide enforceability despite the presence of a delegation clause:

  • Whether the arbitration agreement was ever formed is for the court and never for the arbitrator. §§ 2.2.4, 4.2.4.
  • Can an issue of the arbitration agreement’s scope be re-defined as one of the agreement’s formation, to avoid the delegation clause? § 5.5.6.
  • Questions of the defendant’s waiver of the arbitration requirement based on the defendant’s litigation conduct are usually for the court, despite the delegation clause. § 6.3.1.
  • Whether a non-party to the arbitration agreement can enforce the arbitration requirement should be for the court because the same issue will be present whether the non-party can enforce the delegation clause. § 5.5.6.
  • Delegation clauses are enforceable only if they are clear and unmistakable. §§ 2.3.2, 8.3.3, 8.3.4.
  • Delegation clauses can be challenged on any of the same grounds that an arbitration clause can be challenged—waiver, unconscionability, prohibited by federal statute or regulation, etc.

Error # 2: Not thinking it through when the court enforces the arbitration requirement whether the plaintiff wants the case dismissed or stayed:

  • If a court dismisses a case, instead of staying it, the individual can appeal that ruling. §§, 
  • If a court stays a case, instead of dismissing it, and the individual then proceeds to arbitration, the defendant may refuse to pay arbitration fees or otherwise participate in the arbitration proceeding.  This will allow the individual to go back to the same court to lift the stay.
  • Courts consider various factors as to whether to stay or dismiss a case after finding the arbitration requirement enforceable. §

Error #3: Letting the arbitration enforceability decision be decided in federal court.

  • When a federal court declines to enforce an arbitration requirement, the defendant has a right to an interlocutory appeal and the case must be stayed pending resolution of that appeal. § 2.6.2.
  • When a state court declines to enforce an arbitration requirement, the court may have discretion whether to stay the case while the ruling denying enforceability is appealed. §
  • If a federal court stays the case and sends it to arbitration, the plaintiff has no right to an interlocutory appeal. §
  • If a state court case stays the case and sends it to arbitration, the plaintiff may have a right to an interlocutory appeal. §
  • If the case is brought in state court, the FAA does not provide federal jurisdiction for a separate federal case to enforce the arbitration requirement. § 2.3.2.
  • There are special rules as to whether there is federal diversity jurisdiction to enforce an arbitration requirement in federal court. § 2.3.3.
  • Even if there is federal jurisdiction to enforce an arbitration requirement, there may be issues as to abstention or the Rooker-Feldman doctrine. §§ 2.3.4, 2.3.5.

Three Different Options in Bringing a Case in Arbitration

Individual Arbitration: When an arbitration requirement is sure to be enforced or where litigation over enforceability will be protracted, the only practical way to obtain relief for a client may be to proceed directly in arbitration. In many consumer and employment arbitration cases, the defendant will have to pay almost all the hefty arbitration costs, which may lead the defendant to refuse to arbitrate, allowing the individual to bring the case in court.

If the case proceeds in individual arbitration, before the right arbitrator, with the right case and plaintiff, excellent results can be obtained—numerous six and even seven figure arbitration awards have been issued for individual consumers and workers. Punitive damage awards have limited court review and due process standards may not even apply. § 9.11.  Step-by-step advice on conducting an individual arbitration is found at §§ 9.19.10.

Class Arbitration: While it will be difficult to proceed in a class arbitration, succeeding in doing so will place enormous pressure on the defendant, who may fear class arbitration more than class actions in court. § 10.1. If an arbitration agreement does not clearly prohibit class arbitration, then the agreement can be construed as allowing class arbitration.  Cases are divided whether it is for the court or arbitrator to determine whether an arbitration clause can be interpreted as allowing class arbitration. But if there the arbitration agreement has a clause delegating gateway issues to the arbitrator, the decision to allow class arbitration should be for the arbitrator. § If an arbitrator determines the agreement’s intent is to allow class arbitration, then a court is unlikely to overrule that determination. § 10.2.5.

Mass Arbitration: Mass arbitration is an increasingly utilized approach to providing relief for large numbers of workers or consumers, particularly where a court or arbitration class action is not available. Mass arbitrations bring individual cases for each of thousands of workers or consumers who all have similar claims against the same defendant before the same arbitration provider and represented by the same attorneys. Practitioners even point to advantages of bringing mass arbitration instead of class actions in court. § 10.7.2.

Modern technology and other techniques make mass arbitration far more practical than one would expect, allowing thousands of workers or consumers to obtain relief. § 10.7.3. Depending on the arbitration provider and the arbitration agreement, the mass arbitration filing may require the business to pay large filing fees, even in the millions of dollars, although recent AAA and other arbitration provider rules limit this significantly. The threat of such fees may encourage settlement and if a business refuses to pay filing fees or otherwise participate in the mass arbitration, the plaintiffs have strong options to respond to this business conduct. § 10.7.5.

A successful mass arbitration may require the plaintiffs to challenge various unfair mass arbitration procedures required by the business or by the arbitration provider selected by the business. § 10.7.4.

Other Free NCLC Practice Checklists

Chapter one of each NCLC treatise is free and open to the public, and NCLC often includes practice checklists in a treatise’s chapter one.  The following practice checklists are free and open to the public:

Arbitration Practice Checklist

Automobile Litigation Checklist

Motor Vehicle Repossessions Checklist

Warranty Law in a Nutshell

Student Loans Checklist

Debt Defense Checklist

Consumer Credit Litigation Checklist

Truth in Lending Quick Reference

Analyzing a Foreclosure Case

Mortgage Lending Checklist

Payment Systems in a Nutshell

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