Arbitration Litigation Cheat Sheet

Much consumer litigation today must deal with arbitration requirements. This arbitration litigation cheat sheet provides a quick listing of consumer options when faced with an arbitration demand—including both options to challenge the enforceability of the arbitration requirement as well as how to proceed in arbitration if that is the only remaining or even preferred option.  All section references are to NCLC’s Consumer Arbitration Agreements.

Is There a Properly Consummated Arbitration Agreement?

• There can be no arbitration requirement unless the defendant produces the arbitration provision and proves that the consumer has consented to that provision. The burden of proof is on the defendant. §§ 4.2.1, 4.2.2.
• State contract law determines if the arbitration agreement is validly formed.  § 4.2.3.
• The signed document must contain the arbitration clause or make specific reference to the arbitration clause in another document that is provided to the consumer.  § 4.3.2.
• The signature cannot be a mere acknowledgment of the document’s receipt, but must signify an intent to be bound by the agreement.  § 4.3.3.
• The enforceability of a digital agreement often turns on the text surrounding the consumer’s mouse-click, and whether the agreement is a click-wrap, sign-in-wrap, or browse-wrap agreement.  § 4.3.4.
• Duress, lack of capacity, and mistake are all defenses to the enforceability of an arbitration provision. § 4.3.8.
• Fraud in the factum is a defense to an arbitration provision’s enforceability. An arbitration provision also is not enforceable where the arbitration provision was induced through misrepresentation, but the arbitrator determines if the whole contract was induced through misrepresentation. § 4.3.7.
• Implied consent to an arbitration provision by conduct (such as continuing to use a product or service) requires the business to meet its burden of proof that the consumer was conspicuously notified that certain conduct would imply consent, that the consumer was conspicuously notified of the terms of the arbitration provision, and that the consumer engaged in that conduct that implies consent.  For example, there is no consent if the consumer did not use a credit card after notice of new card terms. § 4.4.
• An arbitration provision may not be enforceable when sent unilaterally after the agreement has been reached.  § 4.5.
• The arbitration provision a consumer is consenting to must be clear and unambiguous. § 4.8.

When Does an Arbitration Provision Cease to Be Binding?

• In a yo-yo vehicle sale or other transaction in which the agreement is not final until a condition precedent occurs, the arbitration provision is not enforceable if the condition precedent does not occur.  §§ 4.3.5, 4.10.3.
• An arbitration provision in a sales contract may no longer be effective when the contract is superseded by a retail installment contract not containing an arbitration provision. § 4.9.
• Some arbitration provisions allow the consumer to opt out and then the provision is no longer enforceable if the consumer’s opt-out is timely. § 4.10.2.
• When an agreement is rescinded or canceled under the Truth in Lending Act, a Federal Trade Commission rule, or state cooling-off period statutes. See § 4.10.1.
• Depending on the terms of an arbitration provision, it may no longer be effective when the contract has expired.  § 4.10.4.
• Can an originating party enforce the agreement after assigning the agreement to another? See § 4.10.5.
• An arbitration provision may not be enforceable where it no longer can be complied with according to its terms, such as where the designated arbitration provider is not available to arbitrate the claim. § 8.7.9.

How to Challenge Arbitration Provisions That Include a Delegation Clause

• Unless there is a delegation clause, enforceability and other gateway arbitration issues are for the court.  § 2.2.2.
• A major mistake is to challenge the arbitration provision in court where there is a clear and unmistakable clause delegating to the arbitrator the provision’s enforceability. Instead, initially challenge to delegation clause itself and not the whole arbitration provision. § 2.2.3.
• Delegation clauses do not apply to formation issues which are always for the court. §§ 2.2.3, 4.2.4.
• Many issues that consumers normally raise to defeat an arbitration clause, particularly those involving an unfair arbitral process, apply equally to a challenge to the delegation clause, but the consumer should specifically challenge the delegation clause initially and not the whole arbitration provision.  § 8.3.4.

Has The Defendant Waived the Arbitration Requirement?

• A defendant initially litigating the case in court and only later seeking to enforce an arbitration provision may have waived the arbitration requirement. § 6.3.
• The Supreme Court has ruled that to establish the defendant’s waiver of the arbitration provision, the consumer need not show prejudice from the defendant’s actions. § 6.3.3.
• If the consumer initiates an arbitration proceeding with AAA or JAMS, the defendant must pay almost all the arbitration costs. The defendant’s refusal to pay costs or participate in the arbitration can waive the arbitration requirement, allowing the consumer to sue in court. § 6.4.
• A creditor bringing a court collection lawsuit may waive the arbitration provision’s application to the consumer’s closely related action against the creditor. § 6.3.2.3.
• Arbitration agreements cannot limit the court’s ability to find waiver.  § 6.5.

Does the Arbitration Provision Apply to the Dispute and the Parties?

• Some disputes, such as tort claims, have so little relationship to the contract that the parties could not have intended the arbitration requirement to apply.  § 5.4.2.3.
• Check to see if the arbitration provision has a narrow scope, such as applying only to disputes regarding the contract. § 5.4.2.4.
• An arbitration clause may not apply to events occurring prior to the clause’s consummation or after the clause has expired.  § 5.4.3.
• Unless equitable estoppel, third-party beneficiary, or agency theories apply (they often do not), non-signatories to an arbitration provision cannot enforce it and non-signatories cannot be held subject to the arbitration requirement. § 5.5.
• Debt buyers and other assignees can generally enforce the assignor’s arbitration clause, but only if they are assigned the contract and not just receivables.  § 5.6.3.
• Whether debt collectors, servicers, and collection attorneys have rights under the creditor’s arbitration provision may depend on the wording of the arbitration provision and whether a party is the creditor’s agent or an independent contractor. § 5.6.3.3.
• Was a nursing home resident competent to sign an arbitration agreement? Is a resident or the resident’s estate bound by another person signing for the resident? The designated arbitration forum may not even handle nursing home disputes. See § 5.6.4.
• Credit reporting agencies cannot take advantage of a creditor’s arbitration provision.
• Manufacturers cannot take advantage of a retailer’s arbitration provision. § 5.6.2.
• Less clear is whether a payment processor can take advantage of an arbitration agreement entered into by the party receiving payment. § 5.5.3.2.5.

Is the Arbitration Provision Unconscionable?

• Courts have discretion to strip the offending provision or find the whole arbitration requirement to be unenforceable where arbitration provisions are unconscionable. § 8.8.
• Provide evidence not just of substantive but also procedural unconscionability, such as an adhesion contract, surprise, or lack of choice. 
• Substantive unconscionability can be found where the consumer’s arbitration fees and costs are unaffordable; present evidence of the fees and their unaffordability.  § 8.7.2.
• “Loser pays” rules may be unconscionable.  § 8.7.3.
• One-way arbitration clauses may be substantively unconscionable even if adequate consideration for the provisions is found.  § 8.7.4.
• It can be substantively unconscionable to require consumers to waive federal or state statutory rights. § 8.7.5.
• It can be substantively unconscionable to limit statutory remedies, such as punitive or multiple damages, attorney fees, or equitable relief, or to shorten the applicable statute of limitations. § 8.7.6.
• It can be substantively unconscionable to require arbitration in an inconvenient venue.  § 8.7.7.
• Substantive unconscionability can be found by an overreaching arbitrator selection process, unfair arbitration rules, excessive secrecy requirements, or excessive limits on discovery.  §§ 8.7.8, 8.7.10, 8.7.11.

Does the Arbitration Provision Prevent Vindication of Federal Statutory Rights?

• Procedural unconscionability need not be shown to challenge an arbitration provision as preventing vindication of federal statutory rights. § 8.4.
• Grounds to challenge that an arbitration provision prevents vindication of federal statutory rights are often the same as those establishing substantive unconscionability. § 8.4.
• Where an arbitration provision prevents vindication of state statutory rights, the better approach is to claim the provision is unconscionable. § 8.5.

Do Federal Statutes or Regulations Restrict the Arbitration Requirement?

• Arbitration provisions and their enforcement are prohibited in mortgage transactions and most manufactured home credit transactions.  See §§ 7.2, 7.3.
• Arbitration requirements are prohibited in non-purchase-money, non-mortgage credit involving active-duty military or their dependents.  See § 7.4.
• Arbitration requirements are prohibited if involving claims of sexual harassment or sexual assault. See § 7.4a. 
• Effective July 1, 2023, arbitration requirements are limited where a school participates in the federal Direct Loan program.  See § 7.6.
• The law is unsettled as to arbitration involving written warranties—whether mandatory arbitration is inconsistent with the Magnuson-Moss Warranty Act, whether the arbitration provision must be disclosed in the warranty, and whether an arbitration provision can require a particular arbitration provider. See § 7.9.
• Bankruptcy courts have discretion to ignore arbitration requirements in bankruptcy court litigation, at least in certain contexts.  See § 7.10.

The Federal Arbitration Act Does Not  Preempt All State Law

• Subject to exceptions listed immediately below, the Federal Arbitration Act (FAA) generally preempts state law limiting the enforceability of an arbitration provision. § 3.3.
• The FAA does not preempt state insurance law that restricts arbitration because of the operation of the McCarran-Ferguson Act. § 3.5.3.
• A California statute that provides consumer options and remedies when the business does not participate in a filed arbitration proceeding has been held not preempted.  § 9.4.1.4.
• State law regulation of arbitrator ethics or of arbitration providers may avoid FAA preemption. § 3.5.6.
• There is limited jurisdiction to hear in federal court actions to enforce, vacate, or confirm an arbitration award. When brought in state court, generally these actions will need to comply with state arbitration law, not the FAA. §§ 2.3, 11.2.2.
• Other possible non-preempted state law limits on arbitration are presented in NCLC's Model State Consumer & Employee Justice Enforcement Act.

Appeals of Arbitration Rulings

• Defendants have the right to an interlocutory appeal where a federal court refuses to enforce the arbitration requirement; the federal court litigation must be stayed until the appeal is resolved. § 2.6.2.
• The same may not apply to state court litigation. Other approaches to avoiding this delay in the litigation are examined in this article.
• Where a federal trial court enforces an arbitration agreement and dismisses the case, the consumer can appeal that ruling.  When the federal court only stays the court case pending arbitration, there is no right to an interlocutory appeal.  State law may be different. § 2.6.3.
• There are advantages where a case is only stayed, such as where the defendant fails to pay arbitration filing fees or participate in the arbitration.  The consumer can ask the court to lift the stay.  § 6.4.

Individual Arbitration Proceedings

• Most consumer cases are best heard before a court. But adequate client representation may require the consumer filing an individual arbitration if an arbitration provision is enforced or the consumer wants to avoid delays while litigating the arbitration agreement’s enforceability. Before the right arbitrator, consumers may obtain excellent relief in arbitration.
• Businesses are surprised at the costs they must pay in consumer arbitrations, which can lead to settlement or the business refusing to participate in the arbitration. AAA consumer rules require the consumer to pay $200 and the business $750 for the AAA to review the arbitration provision (unless the provision is already registered) plus $1,700 in initial fees.  The business then pays all hearing costs—$2,500 a day plus a $500 hearing charge. §§ 6.4, 9.3.3.
• California legislation gives the consumer powerful remedies if a business fails to pay its filing fees or participate in the arbitration. § 9.4.1.4.
• In other states, the consumer can get a court order for the business to participate or ask the court to view the non-participation as waiver of the arbitration requirement. § 9.4.
• In conducting an arbitration, the preliminary hearing provides the first impression before the arbitrator—the ultimate fact finder and decision maker. At the first hearing and through every conference, email, and telephone call with the arbitrator, act as if speaking to a jury. § 9.6.
• Aggressive advocacy with the arbitrator often allows for a certain amount of discovery in arbitration—failure to allow discovery can be grounds to vacate the arbitrator’s decision on the merits. § 9.7.
• Arbitrations do not follow strict court rules and procedures as to evidence and witness presentations, and consumers can turn this to their advantage.  §§ 9.8, 9.9.
• The closing brief is a conversation with the arbitrator and a “call to justice,” as one would to a jury. Also provide a legal brief dealing with any remaining legal issues. Present favorable related consumer decisions and verdicts and explain the true measure of damages in these cases. § 9.10.
• In appropriate cases, ask the arbitrator to award punitive damages.  The arbitrator has wide discretion as to the size of such an award. Moreover, Supreme Court due process standards limiting the size of punitive damages do not apply to private arbitrations, and there is limited court review of any punitive damages award. §§ 9.11, 11.7.6. 
• Although even less in some states, a business’s motion to vacate an arbitration award usually must be filed within 90 days. § 11.2.3.
• An arbitration award does not have the force of a court judgment until a court confirms it. Waiting 90 days to seek confirmation of the consumer’s award may foreclose a business’s motion to vacate if not filed prior to that date. § 9.12.
• A business has limited grounds to oppose a motion to confirm an arbitration award. Ch. 11.

Class Arbitration

• Businesses may fear class arbitration more than class actions in court. An arbitrator’s ruling on class certification and on the merits may be more unpredictable, and there is less judicial review of either ruling.
• Many but not all arbitration provisions explicitly ban class arbitration; this ban is not unconscionable.  § 8.7.6.1.
• If an arbitration provision does not explicitly ban class arbitration, whether class arbitration is allowed is a matter of contract interpretation. § 10.2.2.
• The majority (but not exclusive) view is that, absent a delegation clause, it is for the court to interpret whether there is an intent as allow class arbitration. § 10.2.1.1.
• Most arbitration agreements delegate to the arbitrator “gateway” issues, and then the arbitrator, not the court, determines whether a provision allows class arbitration.  § 10.2.1.3.
• There are solid arguments why certain arbitration clauses, while not mentioning class arbitration, show an intent to allow for class arbitration.  It is not unusual for arbitrators to allow class arbitration.  §§ 10.2.3, 10.2.4.
• Arbitrators may make three awards—construing the arbitration provision as allowing for class arbitration, certifying a class, and ruling on the merits.  Grounds for a court to vacate any of the three awards are limited. § 10.2.5.

Mass Arbitration

• Widespread relief may be possible even when arbitration provisions prohibit class relief in court or in arbitration. Thousands of consumers can file individual arbitrations with similar claims before the same arbitration provider, called mass arbitration.
• Under AAA and JAMS consumer arbitration rules, a business pays almost all the arbitration costs in an individual case.  When multiplied by thousands of claims, the business can owe millions or even tens of millions of dollars in arbitration costs. § 9.3.3.
• If a business refuses to pay these fees or participate in the “mass arbitration,” consumers can obtain a court order requiring the business to participate in the individual arbitrations. See 9 U.S.C. § 4 and similar state statutes.
• Failure to participate in the individual arbitrations may be viewed as waiving the arbitration requirement, allowing a class action to proceed in court. § 6.4.
• Courts typically refer a business’s challenge to mass arbitration to the arbitrator, so that the business still must pay the filing fees and other arbitration costs to be heard by the arbitrator.
• Businesses are beginning to amend their arbitration provisions to create special procedures for mass arbitration or switch to new arbitration providers that tailor their mass arbitration rules to favor businesses. Consumers can challenge these new mass arbitration procedures as unconscionable.
• Where an arbitration provision includes a delegation clause, first challenge the delegation clause as unconscionable because it requires use of the same unfair mass arbitration procedures that the consumer wishes to challenge concerning the mass arbitration procedures themselves. The arbitrator also may not be an impartial arbiter of the rules of the very arbitration provider that hired the arbitrator.