Is Forced Arbitration an Unconscionable Agreement?

More and more corporations are choosing to insert mandatory arbitration clauses in their contracts with consumers and in the “terms of use” that consumers must accept to utilize corporate services.  As described in the film “Lost in the Fine Print,” these forced arbitration clauses are depriving many consumers of any meaningful remedy when the corporation commits acts of negligence or violates the legal rights of consumers.  This problem is further exacerbated when the arbitration clauses require that the arbitration be conducted before an arbitration panel that is financially or philosophically biased against the consumer.

Legally speaking, these corporations are able to enforce these arbitration clauses because the Federal Arbitration Act, as interpreted by the federal courts, has an exceptionally strong bias towards finding any arbitration agreement to be enforceable, even when it is slipped into the fine print of a consumer contract, and even when the consumer has no meaningful choice in the inclusion of an arbitration clause.  Given the well-settled status of the Federal Arbitration Act, it is unlikely that Congress would amend the Act to exclude consumer contracts, especially when so many members of Congress are beholden to the corporate interests that are exploiting this law to achieve biased results in every dispute with their customers.

The problem is compounded further by recent court decisions that remove all constraints on the bias or competency of the arbitrators named in the forced arbitration clauses.  A Michigan appellate court ruled that arbitrators are not bound by the same ethical rules that would require a judge to recuse himself from a case.  In Thomas v. City of Flint, the court based its ruling on the surprising premise that “arbitrators are not similarly situated to judges” and thus were not subject to disqualification if there was “the appearance of impropriety.”  Corporations are sure to seize upon this ruling, and other similarly misguided decisions, and increase their efforts to pre-select an arbitration forum that will favor the company over its customers.

Is There Consumer Protection Against Forced Arbitration?

Given the dire state of these legal precedents, where can consumers look for protection against unreasonable forced arbitration clauses?  One possible solution lies in the definition of “unconscionable agreements.”  Under the Federal Arbitration Act, one of the few ways to void an arbitration agreement is to prove that the agreement is “unconscionable” under the standard rules applying to contract formation.  Under Texas law, an unconscionable contract is vaguely defined as a contract that is “unfair because of its overall one-sidedness or the gross one-sidedness of its terms.”  The “unconscionable” standard is expressly applicable to arbitration agreements by virtue of Section 171.022 of the Texas Civil Practices and Remedies Code.

But the problem is that Texas courts have been slow to recognize that the selection of a one-sided or biased arbitrator would meet this definition of unconscionability.  The selection of a biased arbitrator effectively changes every term of the contract, by ensuring that every obligation or requirement in the contract can be distorted or manipulated to favor the corporation over the consumer.  In Venture Cotton Co-op v. Freeman, the Texas Supreme Court intentionally side-stepped the unconscionability issue, despite the fact that a cotton cooperative’s contract required that the arbitration be performed by and in accordance with the rules of its own industry group, the American Cotton Shippers Association.

One possible solution to this problem might be for the Texas legislature to amend the arbitration provisions of the Texas Civil Practices and Remedies Code.  As noted above, Section 171.022 already states, “A court may not enforce an agreement to arbitrate if the court finds the agreement was unconscionable at the time the agreement was made.”  Unfortunately, this Section does nothing to define what might be unconscionable.  Section 17.022 could amended to clarify the term “unconscionable,” and to state that any arbitration agreement in which a contracting party has the ability to designate an arbitrator who is not neutral would be presumptively unconscionable because a biased arbitrator has the power to interpret every disputed issue in a manner that is one-sided.  These clarifications would merely codify the existing standards for unconscionable contracts in Texas, and thus should be permissible under the Federal Arbitration Act.

What Can You Do?

In the absence of some type of intervention by the courts or our legislators, we should all strive to combat the increasing use of forced arbitration clauses.  Where possible, refuse to purchase services from companies that use these clauses, and let the company know that it lost your business because of this contractual term.  When you have no viable alternatives, complain to the company, and let them know that you find the arbitration clause to be offensive.  And if you wind up in a dispute where a forced arbitration clause is being enforced against you, find a lawyer who will challenge that provision as an unconscionable agreement.


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