Upholding or striking consumer mandatory arbitration clauses—What is the current trend?

In the first year of the Trump Administration, significant public attention was directed to certain controversial legislation, most notably in the areas of health care and changes to the tax code. These issues involved enormous hours of public debate and vitriolic comments.

Less well-known, and far less discussed, are the changes the administration made in the realm of alternative dispute resolution—particularly in the consumer products field. Of course, because few actually read the fine print in their credit card agreements or other consumer paperwork, virtually no one even knows they should be focusing on this topic impacting individuals’ rights.

For years many consumer contracts—auto loans, credit, cell phone, and cable TV agreements, for example—have provided that disputes are to be arbitrated rather than litigated. The Federal Arbitration Act promotes arbitration as an efficient means of resolving disputes, and was often cited as the basis for upholding those provisions. The Supreme Court weighed in on several occasions, and upheld mandatory arbitration clauses. The trend clearly was moving toward more arbitration of consumer matters, and less litigation. Additionally, these clauses were generally touted as consumer friendly, as individuals were able to afford arbitration but might not be able to finance costly litigation against large corporations.

However, around 2007, limitations on mandatory arbitration clauses in consumer agreements began appearing. Congress passed the Military Lending Act which prohibited mandatory arbitration clauses in some loans made to service-members. Then Dodd Frank prohibited mandatory arbitration clauses in most residential mortgage transactions. As part of Dodd Frank, in 2010, the Consumer Financial Protection Bureau (CFPB) was charged with rulemaking relative to mandatory arbitration clauses in consumer financial products, and was instructed to conduct a study to determine whether arbitration was in reality more beneficial or detrimental to consumers. There was a concern mandatory arbitration clauses reflected a deliberate effort to both limit companies’ exposure and discourage consumers from enforcing their rights.

The CFPB released its preliminary report in 2013 and then in May 2017, it finally promulgated its rules, which among other recommendations, prohibited companies from barring class actions when the applicable consumer agreement requires mandatory arbitration. The rule was set to become final in November, 2017, but was revoked by Congress in H.J Res. 111, which was then signed by President Trump in late October, 2017.

What does this mean for our court systems? Recent cases have addressed situations which call into play the issues raised by mandatory arbitration clauses and class action waivers in ‘form’ agreements.

On January 4, 2018, the 5th Appellate District in Illinois issued an opinion following an interlocutory appeal of the denial of a motion to compel arbitration in an assignee’s suits for unpaid credit card charges. Midland Funding, LLC v. Raney, 2018 IL App (5th) 160479 (January 4, 2018). The assignee, Midland, sued 2 Sears credit card holders for unpaid balances. Both Defendants filed counterclaims for violations of the Collection Agency Act (225 ILCS 425/1 et seq.), the Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.), and the Fair Debt Collection Practices Act (15 U.S.C. §1692 et seq.), based on Midland’s alleged practice of filing suits with insufficient proof of ownership of the debt. Id., 6.

Midland responded by moving to dismiss the counterclaims on the basis the credit card agreements contained a class action waiver and to compel arbitration pursuant to the credit card agreements’ mandatory arbitration provisions. Both plaintiffs testified in depositions that they had not read the updates which added the relevant provisions, and the documentation Midland produced did not include any proof of delivery to plaintiffs. After the cases were consolidated, Midland’s motion to dismiss and compel arbitration was denied, and Midland appealed. The appellate court first reiterated the long-standing principles that arbitration is favored, arbitration agreements are enforceable, and agreements to arbitrate are to be construed as any other contracts. Id., ¶¶ 19-22. However, in this case, the Appellate Court found Midland “did not demonstrate when or how the generic Card Agreement containing the arbitration provision pertained to [plaintiffs] or that it was communicated to [plaintiffs] prior to the subsequent credit card use.” Id., 24.

Additionally, Midland had argued the Circuit Court was not entitled to determine the validity of the Card Agreement or its arbitration provision but instead that issue was itself subject to arbitration. Id., 26. This claim was rejected at the trial level because there was no clear agreement to arbitrate anything, according to the Court. Id., 27. The Appellate Court affirmed the denial of the motion to dismiss and to compel arbitration. Id., 28.

Likewise, in November, 2017, the Supreme Court of Appeals of West Virginia reviewed a denial of a motion to dismiss and to compel arbitration in a dispute relative to a gas lease which contained an arbitration provision. SWN Prod. Co., LLC, v. Long, 2017 W.Va. LEXIS 892 (November 7, 2017). Using the Federal Arbitration Act (9 U.S.C. §2) as its starting point, the Court began with the premise that “only if a party to a contract explicitly challenges the enforceability of an arbitration clause within the contract as a whole . . . is a trial court permitted to consider the challenge to the arbitration clause.”Id., at p.1. The property owners sued the gas lessee for allegedly unpaid payments. SWN brought a motion to dismiss and compel arbitration. The owners responded that references in the lease to “any court of competent jurisdiction” and “a civil action” invalidated the arbitration provision. Id., at p. 3. The trial court agreed, but the appellate court reversed and remanded to be sent to arbitration.

SWN argued the language the owners referred to was in other, unrelated sections of the agreement at issue (the severability and forfeiture clauses), and hence, did not create any ambiguity sufficient to make the arbitration provision unenforceable. The owners argued the entire contract had to be read together, and the use of contradictory terms could allow unsophisticated parties to not understand what arbitration meant in light of the various terms in the contract. The Appellate Court found the actual arbitration clause was not ambiguous, and therefore it was unnecessary to look to the remainder of the contract to determine its meaning, and hence, whether it was enforceable. Id. at pp. 11-12. The court relied on a decision interpreting the same provision out of the United States District Court for the Northern District of West Virginia, which came to the same conclusion. Dytko v. Chesapeake Appalachia, LLC, No. 5:13CV150, 2014 U.S. Dist. LEXIS 73706, 2014 WL 2440496 (N.D.W.Va. May 31, 2014).

And, earlier in 2017, the Supreme Court sent a case back to the Supreme Court of Kentucky (the second such case out of Kentucky) holding that the Kentucky Court’s refusal to uphold a mandatory arbitration clause in a nursing home contract was improper. In Kindred Nursing Centers Limited Partnership v. Clark, 137 S.Ct. 1421 (2017), the Justices took the Kentucky state court to task for its refusal to enforce a consumer arbitration agreement. At issue was whether Kentucky Supreme Court’s ‘clear statement rule’ that in order for an agent to waive a principal’s state constitutional rights to a trial by jury and access to the courts, the power of attorney must specifically include the power to enter into arbitration agreements violated the Federal Arbitration Act.

In Kindred Nursing, the pre-dispute arbitration contracts were between nursing homes and residents, but many residents had not personally signed the agreement, their agents under powers of attorney did. The Kentucky court refused to enforce the agreements, claiming that the powers of attorney were not broad enough to include arbitration agreements, which involved waiving a fundamental constitutional right to a trial by jury. The nursing homes argued to the Supreme Court the decision ‘discriminated’ against arbitration agreements in violation of the Federal Arbitration Act (9 U.S.C. 1 et seq.).

In a 7-1 decision, the Supreme Court firmly rejected the state court decision which adopted a clear-statement rule under which a general power of attorney, valid to authorize the execution of contracts generally, would not validly authorize execution of an arbitration agreement unless the power of attorney explicitly addressed that topic. A leading legal pundit on Supreme Court decisions noted: “the opinion shows a Supreme Court bristling at the lack of candor shown by state courts that disagree with its favorable treatment of pre-dispute arbitration agreements.”1

The take away from Kindred Nursing is that a law which prohibits arbitration of a particular type of claim, as well as “any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements” is unenforceable.

These cases, and the revocation of the CFPB rules limiting arbitration provisions in consumer contracts, continue the growing trend to remove many types of cases from the traditional litigation arena, when arbitration was contracted for between the parties. It remains to be seen whether consumers will take advantage of the alternative dispute forums or simply forego their rights due to the financial reality of pursuing a nominal claim. Likewise, one wonders whether arbitration will ultimately work to consumer’s benefit, or even indirectly benefit the court system by removing any significant volume of cases. What is most likely is very few consumers realize they may be agreeing to waive their rights to litigate, jury trials, or participate in class actions. One thing is certain: there appears to be insignificant discussion of the meaning and implication of arbitration clauses in consumer contracts, and the impact of legislation and regulations impacting the rights of businesses and individuals.


1. Ronald Mann, Opinion analysis: Justices rebuff Kentucky rule invalidating arbitration agreements signed under power of attorney, SCOTUSblog (May. 15, 2017, 4:44 PM), http://www.scotusblog.com/2017/05/opinion-analysis-justices-rebuff-kentucky-rule-invalidating-arbitration-agreements-signed-power-attorney/.

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February 2018Volume 48Number 8PDF icon PDF version (for best printing)