What to Know About Arbitration Clauses in Consumer Contracts
Quick Answer
Arbitration clauses appear in credit card agreements, phone contracts, software terms, gym memberships, employment agreements, and many other consumer contracts. They are among the most consequential fine print provisions for everyday consumers.
What Arbitration Is
Arbitration is a private dispute resolution process outside the court system. A neutral third party (the arbitrator) hears the case and makes a binding decision. The decision is largely final, appeals are very limited compared to court judgments.
Major arbitration providers in consumer cases include the American Arbitration Association (AAA) and JAMS. The terms of the arbitration clause typically specify which provider applies and the rules that govern the process.
How Arbitration Clauses Affect Your Rights
No jury trial. You cannot present your case to a jury of your peers.
Limited discovery. The pre-hearing process for gathering evidence is typically much more restricted than in court litigation.
Limited appeals. Courts rarely overturn arbitration decisions, even if the arbitrator made an error of law.
Class action waiver. Most consumer arbitration clauses include a provision stating you agree not to join class action lawsuits. This is legally significant: class actions are often the only practical mechanism to address small harms that affect many people. Without them, the individual harm may be too small to justify pursuing alone.
Confidentiality. Arbitration proceedings are often confidential, limiting public knowledge of a company's patterns of conduct.
When Arbitration May Actually Benefit Consumers
For genuinely small disputes, a few hundred dollars or less, individual arbitration can be faster and cheaper than court. Many arbitration clauses require companies to pay the arbitration filing fees for consumer claims below a certain amount.
The CFPB's 2017 study found that consumers who went through arbitration received an average of $5,389 in awards, compared to virtually nothing in cases that went nowhere. However, very few consumers use individual arbitration at all.
Industries Where Arbitration Is Common
- Credit cards and banking (almost universal)
- Wireless and cable providers
- Software and app agreements
- Gym memberships and fitness clubs
- Online retail terms of service
- Nursing homes and senior care facilities (CFPB has restricted some uses here)
What You Can Do
Read before signing. Arbitration clauses are enforceable when included in contracts you signed. Checking in advance is your primary protection.
Look for opt-out provisions. Some consumer contracts, particularly credit cards, include an opt-out procedure that allows you to decline the arbitration clause within a specified window (typically 30 to 60 days) after account opening. This usually requires a written opt-out notice.
Check your state's laws. Some states provide additional consumer protections that limit arbitration clause enforceability in specific contexts.
Small claims court exception. Many arbitration clauses explicitly preserve your right to file in small claims court for claims within the court's jurisdictional limits. This is often your most practical individual remedy.