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Consumer Arbitration Agreements: 3.3.1 General

The Federal Arbitration Act (FAA)’s preemptive effect has been a source of considerable controversy. One commentator has argued that the entire scheme is unconstitutional: “FAA preemption is nothing more or less than procedural regulation of state courts, and . . . Congress lacks the power to regulate procedures in state courts.

Consumer Arbitration Agreements: 8.3.4 Is the “Delegation Clause” Itself Valid?

The Supreme Court held that delegation clauses—like other types of arbitration clauses—are subject to the normal rules of contract law, including defenses to contracts, under section 2 of the FAA.48 Delegation clauses are nothing more than mini-arbitration clauses. Thus the consumer can go to court to challenge the enforceability of the delegation clause. If the consumer is successful, then the court can decide the enforceability of the arbitration agreement as a whole.

Consumer Arbitration Agreements: 8.4 The Doctrine of Effective Vindication Under Federal Law

If unconscionability is the most important state-law doctrine available to challenge the enforceability of a completed arbitration agreement, the “effective vindication” doctrine is the most important federal doctrine for challenging the enforceability of an arbitration agreement. An arbitration agreement that prevents a consumer from obtaining relief under a federal statutory claim can be unenforceable because it conflicts with Congress’s purpose in enacting the statute. The United States Supreme Court has repeatedly set forth this view:

Consumer Arbitration Agreements: 8.7.2.3 Evidentiary Showing As to Costs

The key to bringing any arbitration fee challenge is a thorough presentation to the court of admissible evidence establishing the actual fees and charges likely to be involved, whether the consumer is in fact liable for those charges, and whether the consumer can afford to pay those costs. The fees required to arbitrate even relatively small consumer disputes are often prohibitively high.177

Consumer Arbitration Agreements: 8.7.2.5 Determine the Allocation of Fees Between the Parties

In general, unaffordable arbitration fees should be unconscionable and prevent vindication of federal statutory rights even if the consumer is only liable for fees if the consumer does not prevail in the arbitration. It does a consumer no good to be reimbursed fees if the consumer cannot afford to front the fees. While it may be legitimate to seek to deter frivolous or bad faith claims, it is quite different to deter claims that sometimes would, and sometimes would not, prevail.194

Consumer Arbitration Agreements: 8.7.2.6 Evidentiary Showing That Costs Are Unaffordable

Arbitration costs can be prohibitive even if the individual is not indigent. “Even a non-indigent consumer may be substantially deterred by high arbitration costs.”208 Nevertheless, courts may require the consumer demonstrate not only that arbitration costs will be high, but that the consumer cannot afford them. The failure to put before the court evidence that the consumer has insufficient economic resources to pay those costs has been fatal to some challenges.209

Consumer Arbitration Agreements: 8.7.6.6 High Arbitration Fees Accentuate Problem of Remedy-Stripping Provisions

When considering whether limitations on remedies are unconscionable, the consumer should also point out any requirement that the consumer pay hefty arbitration costs.322 One aspect of the unconscionability of a limitation on remedies is that it makes consumer litigation impractical. The high cost of arbitration fees aggravates the impact of restrictions on remedies when those restrictions also make consumer litigation uneconomical (for example, limits on attorney fees, class actions, and punitive damages).

Consumer Arbitration Agreements: 8.7.9.1 Introduction

Arbitration agreements typically designate a forum such as the American Arbitration Association (AAA) or JAMS to appoint arbitrators and administer the arbitration. But in a surprising number of cases, the designated forum is not available. At that point, the court has two choices if the parties cannot agree among themselves as to how to proceed.

Consumer Arbitration Agreements: 8.7.9.4 When Forum’s Unavailability Makes Arbitration Requirement Unenforceable

If all forums designated by an arbitration agreement are unavailable, a court has two choices: it can refuse to enforce the arbitration agreement because the agreement cannot be carried out according to its terms or, instead, it can select an arbitrator to hear the case. Section 5 of the FAA provides authority for a court to appoint an alternative arbitrator (not an alternative arbitration forum).

Consumer Arbitration Agreements: 8.7.9.6 Language Indicating That the Forum Designation Is Ancillary

Courts may find the forum designation to be ancillary to the agreement when an agreement clearly mandates arbitration, but the forum designation is not such a clear mandate; for example, when the forum designation lacks language that the forum “shall” be used or that it is the “exclusive” forum,416 or when the arbitration agreement requires arbitration “in accordance” with a set of rules specific to a forum but does not require that the arbitration be administered by that forum.417

Consumer Arbitration Agreements: 7.12 The Carmack Amendment and the FAA

The Ninth Circuit has held that the Carmack Amendment309 to the Interstate Commerce Act prohibits interstate or international freight carriers from requiring consumers shipping their household goods to arbitrate claims based on loss of, or damage to, property.310 The decision was based on Carmack Amendment provisions allowing the shipper to bring suit in any federal district court where the carrier operates or where property loss or damage occurs,311

Consumer Arbitration Agreements: 7.2.1 Coverage

The federal Truth in Lending Act (TILA) prohibits forced arbitration and similar procedures in connection with residential mortgage loans and open-end consumer credit plans secured by the consumer’s principal dwelling.36 The Truth in Lending Act defines a residential mortgage loan as “a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the consumer’s dwelling to finance the acquisition or init

Consumer Arbitration Agreements: 7.3.1 In General

As described in § 7.2, supra, the Truth in Lending Act (TILA) prohibits arbitration provisions in residential mortgage loans,60 and also provides that no provision of a residential mortgage loan or other agreement between the parties shall be applied or interpreted to bar a consumer from bringing a court action for damages or other relief in connection wit

Consumer Arbitration Agreements: 7.3.3 When the Originating Creditor Is Not the Dealer

TILA prohibits arbitration agreements from being inserted into the third-party lender’s loan documents when the loan is secured by the manufactured home. But when the dealer is not the creditor, the TILA provision does not limit arbitration requirements found in the dealer’s sales documents. Nevertheless, the limit on arbitration in the third-party lender’s loan documents still has important implications for the consumer’s ability to raise seller-related claims in court.

Consumer Arbitration Agreements: 7.4 Consumer Credit Involving Active Duty Military Personnel or Their Dependents

The federal Military Lending Act prohibits arbitration clauses in consumer credit agreements with military personnel or their dependents, or the enforcement of such a consumer credit agreement.71 An arbitration requirement is unenforceable even after the consumer is no longer a servicemember or a dependent of a servicemember, as long as the consumer was covered by the Act when the credit was originated.72 In determining whether a borrower is a covered servicemember, a safe harbor is provided

Consumer Arbitration Agreements: 7.4a.1 General

Under the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFASASHA), 9 U.S.C. § 402(a), at the election of the individual or class representative alleging sexual assault or sexual harassment, predispute arbitration agreements or predispute joint-action waivers are unenforceable with respect to cases filed under federal, tribal, or state law relating to sexual harassment or sexual assault.85