Arbitration Clauses Can Protect Consumer-Facing Businesses, but They Can Be a Double-Edged Sword

By Matt Sportini & Lily Pickett

In an increasingly litigious society, companies that provide products and services directly to the public worry about the potential high costs of litigation. In an attempt to limit their exposure, many consumer-facing businesses include arbitration provisions in their customer contracts. However, as some high-profile businesses have discovered, the use of arbitration clauses can backfire and wind up costing them more.

Arbitration Clauses

Binding arbitration is an out-of-court alternative method for resolving disputes. In these quasi-judicial proceedings, both sides present their arguments and evidence before a neutral third party, known as an arbitrator, who then renders a binding, legally enforceable decision. Arbitration offers certain advantages for both sides, including that it is generally less costly and takes less time than litigation. The average arbitration case takes seven months, while litigation averages between 23 to 30 months, depending on the court schedule, according to the American Bar Association. In some arbitrations, a final decision can be rendered within weeks. Arbitration is more efficient partly because the discovery process is protracted, the proceedings are not dependent on the court’s schedule, and the appeal options are much more limited than litigation.

Many companies write arbitration provisions into their commercial contracts, compelling the parties to use binding arbitration to resolve any conflicts.

Some Companies Backpedal from Arbitration Policy

Amazon previously had an arbitration provision written into its terms and conditions, requiring that customers agree to the use of arbitration for dispute resolution to use any Amazon service. In 2021, however, Amazon changed its terms of service. As part of the new terms, consumers are required to bring any claims in relation to their use of any Amazon service, including the e-commerce website, streaming services, and Echo smart devices, in the courts of King County, Washington, where Amazon is based.

Amazon’s 180-degree shift was most likely in response to the high volume of arbitrations initiated by consumers alleging that their Amazon Echo devices recorded their communications and violated their privacy. Amazon faced roughly 75,000 individual arbitration claims submitted on behalf of consumers to the American Arbitration Association. Unlike litigation, arbitration cases are heard individually and generally are not combined into a class action. While a single arbitration case is generally less expensive than a litigation case, the filing fees, lawyer fees, and arbitrator compensation for 75,000 cases likely would have cost the retail giant many millions of dollars. Amazon decided to roll the dice with litigation, where similar cases can be combined into a class action. Further, Amazon is likely betting that bringing a court case in its home state presents a greater barrier to the average consumer than filing an arbitration claim.

Similarly, DoorDash tried to avoid the costs associated with thousands of arbitrations brought by its drivers, who claimed they were improperly classified as independent contractors instead of employees. DoorDash had required drivers to agree to an arbitration provision and then tried to avoid paying its share of the arbitration fees. In 2020, a federal court ruled that DoorDash was bound by its agreement and had to arbitrate more than 5,000 claims separately.

Defending Arbitration Clauses

While some companies have moved away from arbitration clauses, others continue to see the benefit in them, and some have gone to court to enforce their arbitration provisions. Recently, FLB Law lawyers Thomas Lambert and Matt Sportini successfully represented a cable service provider in litigation and an appeal brought by a customer seeking a declaration that the arbitration agreement in his service agreement was unenforceable.

The plaintiff responded to a promotional offer for internet telephone service. He accepted the offer, and the internet service was installed, but the plaintiff was unable to receive incoming telephone calls. This persisted for several months, and the plaintiff sued the cable company to fix the problem and for additional remedies. The company moved to stay proceedings and compel arbitration in accordance with the terms and conditions applicable to the service agreement.

The plaintiff argued that he never agreed to accept the cable service provider’s terms and conditions because he was not aware of them, did not sign a contract, and that he accepted the promotional offer in reliance on the statement that there was “no contract.”

However, the plaintiff was notified of conditions with his service agreement at several junctures, including when he was offered the services when he signed up to receive services online, and when the services were installed. He was provided with the hyperlinks necessary to access the general terms and conditions, which included the arbitration provision, but he failed to follow the hyperlinks or read the notices. He was also invited in large print to visit the company’s homepage for more details. The plaintiff did visit the website for details on the offer, which he accepted online, but he testified that he did not read the fine print.

Citing a past case, the court stated, “[T]he general rule is that where a person of mature years and who can read and write, signs or accepts a formal written contract affecting his pecuniary interests, it is [that person’s] duty to read it and notice of contents will be imputed to [that person] if [that person] negligently fails to do so…. There was no evidence of coercion, fraud, or mistake. Thus, the defendant had a duty to read the guarantee and cannot now plead his self-induced ignorance of its contents.” 

The plaintiff further argued that the terms and conditions were unconscionable in that it is unreasonably favorable to the cable company. The court, however, concluded that the provision is “not so one-sided as to be unconscionable” and that it is not “unreasonably favorable to the defendant.” It pointed out that both sides are equally bound to arbitrate any covered disputes.

The court stated the arbitration provision in the terms and conditions is a “classic contract of adhesion in that they are part of [the cable company’s] standard agreement for services offered on a ‘take it or leave it’ basis. The plaintiff had no leverage to bargain about the arbitration provision.” The court went on to state that today’s electronic commerce depends on similar contracts of adhesion, where the consumer is required to accept standardized terms of service to order products or services. “That [the] plaintiff was not required to submit an electronic signature or check a box to accept the terms…does not establish procedural unconscionability because [the] plaintiff retained the ability not to accept or to terminate the order if the disclosed terms were unacceptable,” the court stated.

The Takeaway

Companies must carefully weigh whether an arbitration provision is in their best interest. If they go this route, they should have a comprehensive arbitration strategy, which includes consulting with counsel and effectively managing contracts to ensure appropriate messaging and procedures around arbitration provisions and consistency across all platforms. 

Attorney Matthias Sportini, who focuses on litigation and transactional matters, is a partner at FLB Law in Westport, Conn. Lily Pickett is a law clerk in the Litigation Practice. Contact Matt at sportini@flb.law or 203.635.2200. For more information about FLB Law, click here.