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Enough is Enough:  Time to Eliminate the “Hidden Arbitration Clause Trick”

“A day of reckoning is coming on predispute arbitration agreements in consumer arbitration.  A dichotomy is developing between arms-length pre-dispute arbitration agreements and those imposed in an adhesion contract with consumers (and perhaps employees). This will be addressed in the next several years by the Supreme Court, Congress, the SEC or all.”
–  George H. Friedman

In keeping with my penchant for predicting the future, I uttered these words not today, or, last week, or last year, but almost 10 years ago at my law class at Fordham Law.  I have spent my entire career in the alternative dispute resolution field:  two decades at the American Arbitration, a decade and a half at the Financial Industry Regulatory Authority (“FINRA”), 18 years teaching arbitration at Fordham Law School, and the last year as a Board member at Arbitration Resolution Services. I believe in arbitration.  It performs precisely as its proponents say: it is fast, fair, and economical.  But the recent spate of hidden arbitration “agreements” being foisted on unwitting consumers causes me to conclude that the future I predicted 10 years ago has arrived.  In my opinion, the current trend cannot be allowed to persist.

The General Mills “Like Us and You’ve Agreed to Arbitrate” plan is a prime example.  The terms are breathtaking in scope: –

These terms are a binding legal agreement (“Agreement”) between you and General Mills.  In exchange for the benefits, discounts, content, features, services, or other offerings that you receive or have access to by using our websites, joining our sites as a member, joining our online community, subscribing to our email newsletters, downloading or printing a digital coupon, entering a sweepstakes or contest, redeeming a promotional offer, or otherwise participating in any other General Mills offering, you are agreeing to these terms. 

Of course, your decision to do any of these things (i.e., to use or join our site or online community, to subscribe to our emails, to download or print a digital coupon, to enter a sweepstakes or contest, to take advantage of a promotional offer, or otherwise participate in any other General Mills offering) is entirely voluntary.  But if you choose to do any of these things, then you agree to be bound by this Agreement. 

The Federal Arbitration Act Requires an Agreement to Arbitrate

The Federal Arbitration Act (“FAA”) was enacted in 1925 to counter centuries of hostility to arbitration as embodied by the Common Law. The Act has two core purposes: to limit the scope of court review of arbitration awards and to enforce agreements to arbitrate.  Over the past 50 years, the United States Supreme Court has been incredibly supportive of the FAA.  All sorts of disputes can now be arbitrated, including consumer and employment disputes.  While states can and do pass laws protecting consumers, any state law that singles out arbitration agreements for negative treatment is, according to the Supreme Court’s rulings, preempted by the FAA.  See, for example, AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).  In the wake of Concepcion and its progeny, businesses have been expanding the use of mandatory predispute arbitration agreements (“PDAAs”) in the consumer arena.  But I think those companies that have decided to hide the PDAA are skating on thin ice legally and ethically, and are misreading the Supreme Court’s intentions.  My contention goes back to the roots of the FAA: an arbitration agreement should be enforced according to its terms, but is a hidden PDAA an agreement?  I think not.

The “Hidden Ball Trick”

In baseball, there’s a ploy called the “Hidden Ball Trick.”  Basically, a fielder hides the fact that he has the baseball and eventually slaps a tag on an unwitting runner as he takes a lead off the base.  The look of bewilderment on the base runner’s face is usually priceless.  I liken the tactic of hiding the arbitration agreement from the consumer as arbitration’s version of the “hidden ball trick.”  As the unwitting consumer engages in what’s normally a benign act – for example “liking” a company on Facebook, clicking on terms of service, or entering an online contest – the company slaps a tag on them with a hidden PDAA.  Although baseball allows this tactic on the theory that baseball players should know better and have coaches to help them, I believe we should not permit “the Hidden Arbitration Agreement Trick.” Consumers have neither coaches to help them.  Nor should they know better.

Judicial Notice will Stop this Practice

There’s a legal doctrine called “judicial notice.” In lay terms, it means that there are certain commonly-known things you don’t have to prove to a court because the judge is well aware of them.  For example, one does not have to produce the federal statute establishing July 4th as a national holiday – the judge knows this.  This saves everyone time and money.  I predict the demise of the “Hidden Arbitration Clause Trick” will be judicial notice that no one actually reads terms of service before they click on them.  This, in turn will lead the courts to conclude there has been no meeting of the minds and there is no agreement to arbitrate.  And in fact this issue has actually been litigated – sort of.  Years ago, some companies started putting arbitration clauses in “stuffers” sent along with credit card bills.  Some of these cases ended up in court, with the cases holding that this was not a reasonable way to obtain an agreement to arbitrate.  In other words, “We know no one actually reads these things, so if you want to get an agreement to arbitrate, you’d must give better notice.”  Or, stated differently, a consumer engaging in a benign activity such as opening a bill, tossing the stuffers, and later using the credit card, should not later be surprised to learn that they’ve agreed to arbitrate. For example, in Kortum-Managhan v. Herbergers, NGBL, 204 P.3d 693 (Mont. 2009),  the Montana Supreme Court held “[W]e conclude that making a change in a credit agreement by way of a ‘bill stuffer’ does not provide sufficient notice to the consumer on which acceptance of the unilateral change to a contract can be expressly or implicitly found.”  The same result occurred in Badie v. Bank of America, 67 Cal.App.4th 779 (1998), Discover Bank v. Shea, 362 N.J Super. 200 (2001).  In each case, the fundamental question was whether the company had given effective notice of the PDAA.  In each case, the answer was “No.”

What should be done?

Some have proposed that the proposed Arbitration Fairness Act (“AFA”) is the cure.  I don’t think so. As I’ve already written, the AFA is a well-intended overreaction to a legitimate concern. What is needed is a requirement that there be clear notice of the PDAA.  A good model is FINRA’s Rule 2268(b)(1), which recognizes that an investor should have clear notice that they are agreeing to arbitrate.  The rule, which governs the use, content and placement of arbitration agreements, requires:

In any agreement containing a predispute arbitration agreement, there shall be a highlighted statement immediately preceding any signature line or other place for indicating agreement that states that the agreement contains a predispute arbitration clause. The statement shall also indicate at what page and paragraph the arbitration clause is located.

The rule also sets forth what can and cannot be in the arbitration clause.

Conclusion

To be clear, I am not troubled if the consumer, after getting clear notice of the arbitration agreement, choses to accept it.  When we reach adulthood, we attain the legal right to make decisions.  But allowing consumers to unwittingly agree to arbitrate is not fair and should not be allowed.  Whether relief for consumers comes from the courts or Congress, in my opinion something needs to be done.  Assuring a knowing agreement to arbitrate is a good step.  The day of reckoning I predicted years ago is upon us.  It’s time to eliminate the “Hidden Arbitration Clause Trick.”