By: Jon Noyes, Associate Attorney
Recently, General Mills has come under fire for inserting clauses into its website’s Legal Terms that force binding-arbitration on its customers. Customers who joined General Mills’ online community, signed up for coupons on its website, or signed up for its mailing list would be forced to waive their right to a legal claim in state or federal court in favor of arbitration. After significant backlash, General Mills retracted these terms and apologized to the public. Although the end result turned out well, it begs the question for the average consumer: What is binding-arbitration and what is all the hoopla about?
Binding-arbitration is an alternative dispute resolution method where the parties agree to have their legal dispute settled outside of court with an arbiter, who acts as judge and jury. Both sides submit their claims and defenses to the arbiter and the arbiter makes a decision regarding who is at fault, if anyone, and what the compensation should be. That decision is legally binding on both parties, meaning it is generally not appealable to a court. Arbitration is often quicker and cheaper than a full-blown lawsuit.
On paper, this does not sound so bad. However, unlike a judge and jury, the arbiter is usually paid by the company forcing arbitration. Because the company decides who will be the arbiter, it has the ability to hire someone that is more likely to look at its arguments favorably. Also, because it is the company that does all the hiring, a truly neutral arbiter can be blacklisted if he or she does not reach a decision that the company believes is reasonable. Thus, although not every arbiter is biased towards the hiring company, arbitration itself provides the company with a clear advantage over a consumer.
Additionally, these forced arbitration clauses often contain terms that prohibit class-wide arbitrations. Class-wide lawsuits are one of the best tools for holding corporations and businesses accountable for their actions. For example, say your cell phone company overcharges you and 100,000 other people $50.00 over the course of a year and refuses to pay the money back. It is unlikely that a person will file a lawsuit to recover this money because it is not economically feasible to hire an attorney and finance a lawsuit over $50.00. As a result, not only are you and 100,000 people out $50.00, the cell phone carrier is free to continue overcharging its customers without suffering any consequences. Class actions fix this problem by allowing all 100,001 people to bring their claims as one class. So instead of 100,001 economically unfeasible claims for $50.00, there is one feasible claim for $5,000,050.00. Customers are able to get their money back and the cell phone carrier is held accountable for its actions. By inserting a clause that requires all disputes to be arbitrated but prohibits class-wide arbitrations, a company shields itself from these claims.
Worst of all, many people have entered into these arbitration agreements without knowing it. These terms are often found in what are referred to as “shrink-wrap agreements” – the sprawling series of terms and conditions that one must agree to in order to join an online community or install software. They are long, arduous, full of legalese, and rarely read by the average consumer.
Although General Mills retracted its binding-arbitration clause, other companies may assume the publicity risk of these terms for a greater legal advantage. Because these terms can be so easily hidden, it is important for consumers to be vigilant about what they agree to and hold companies accountable for their actions. Otherwise, the consumer could sign away their rights without even knowing it.