Consumer Arbitration Agreements: Not Understanding What You Didn't Agree To

A recently posted paper, reporting on the results of an empirical study, reveals unsettling facts about consumer understanding of arbitration contracts.  Titled “Whimsey Little Contracts” With Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, the paper explores the extent to which consumers are aware of, and understand the effect of, arbitration clauses in connection with their purchases of goods and services.

The authors report “a profound lack of understanding about the existence and effect of arbitration agreements among consumers.”  Fewer than half of those surveyed recognized that a sample contract included an arbitration clause, and more than half of those respondents believed that the clause not deprive them of a right to seek judicial redress.

So in whose book is this a contract?

This work — reported by St. John’s Law professors Jeff Sovern, Elayne E. Greenberg, Paul F. Krigis and Yuxiang Liu — deprives any court of the ability to rely upon classic contract theory to enforce these “agreements” by analogy to arbitration agreements that are entered into intentionally between merchants, in collective bargaining agreements, or in other contexts.  Put simply, the authors of this paper demonstrate that, as a matter of provable fact, one party to these consumer agreements either doesn’t know that he agreed, or doesn’t know what he agreed to, or (most frequently) both.

The study involved an online survey of 668 consumers.  Each was shown a credit card contract with an arbitration clause, and asked eight questions concerning it and about “an imaginary contract containing a ‘properly-worded’ arbitration clause.”  The arbitration clause in the contract was printed in bold type and portions appeared in italics and ALLCAPS.    The arbitration section was preceded by the sentence “It is important that you read the entire Arbitration Provisions section carefully.”  Some findings:

  • Only 43% of respondents recognized that the sample contract contained an arbitration clause.  A majority of respondents either thought that they had not agreed to arbitrate, or did not know.
  • Only 14% of respondents realized that the contract banned litigation in court.
  • Less than 9% realized both that the contract had an arbitration clause, and that it would prevent them from suing in court.
  • More respondents thought an arbitrator’s decision was not final than thought it was.  Less than a fifth realized that the arbitrator’s decision would in fact be final.
  • More than 70% failed to realize that the contract prohibited class claims.

The paper contains a very tidy and responsible review of the history of arbitration and the development of American arbitration law.  It also includes — most helpfully for the purposes of the survey — data on how few consumers even read sellers’ statements of terms and conditions, much less comprehend them.  One study of 45,091 households found that only one or two shoppers out of every thousand access the license agreement when purchasing software.  And were they to do so, they would have their work cut out for them; many agreements are of daunting length.  Write the authors, “the iTunes contract is reportedly 32 feet long, even when printed in 8 font type.”

The import of this study seems simple and direct:  There may be legal foundations for binding a consumer to an agreement to arbitrate in connection with a purchase, but consent is not one.

And as the Supreme Court held in Volt Information Sciences v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 479 (1989), “Arbitration under the [Federal Arbitration] Act is a matter of consent.”

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