Arbitration Clauses in Consumer Contracts May Soon be Banned

As a consumer you may be under the impression that if you should have a dispute with a company about its products or services, you are always free to file a lawsuit against them to recover damages for your losses. Not so in some cases. In fact, you have likely already signed a contract or two that contain mandatory arbitration clauses tucked away in the fine print. By signing an arbitration agreement, you become legally bound to enter into arbitration should you have any dispute with them.

What is an arbitration agreement?

The arbitration agreement that is included in many consumer contracts is usually a clause or a provision in the contract stating that by signing the contract you are agreeing to submit to arbitration in the event that there is a dispute. In order for it to be binding, both parties must agree. When you sign the contract you are indicating that you agree with and accept the terms. When you sign a contract containing an arbitration clause, you restricted from filing a lawsuit or participating in a class action.

An arbitration clause becomes, in effect, a “free pass” for companies to deny consumers the right to obtain relief through the courts, and it also allows these companies to sidestep the legal system and continue to pursue those practices that can be harmful to consumers and violate the law while producing profits for themselves.

Proposed rules to curb the use of arbitration clauses in consumer contracts

The Consumer Financial Protection Bureau (CFPB), which is the U.S. consumer’s watchdog agency, has announced a plan to create new rules that ban the use of arbitration clauses in consumer contracts that prevent participation in class actions. If enacted, the new rule would require that consumer contracts explicitly state that the arbitration clause does not prohibit participation in class action cases. Additionally, companies would be required to submit to the CFPB any claims filed against them in consumer financial arbitration disputes.

In an article on the agency website, CFPB Director Richard Cordray said, “Consumers should not be asked to sign away their legal rights when they open a bank account or credit card. Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

The benefits of the proposed rules would include the following:

• Consumers would be able to get their day in court
• The new rule would act as a deterrent and create an incentive for companies to comply with the law to avoid a lawsuit.
• The proposals would increase the transparency of the arbitration process.

A full outline of the proposed regulations can be found on the CFPB website.

Learn more about arbitration clauses

If you want to learn more about the dangers of arbitration clauses, and how they may affect you in more way than one, you might want to read the three-part series by the New York Times, or check out this latest piece by NPR about the potential loss of your Constitutional rights.

Consumers must realize how vital it is that they read and understand a contract before they sign it. Review the contract and if it contains an arbitration agreement clause find out if there is the option to opt out. If you find language in the contract that you take exception to, ask questions about it. Bring it to the company’s attention and make your objections known. If you do not understand the implications of the language, contact a West Virginia or Washington, D.C. consumer protection attorney who will explain the terms of the contract to you.