A Limit on Enforcement of Arbitration Agreements in Consumer Transactions

Federal law and the law of most states encourages arbitration. The courts have heavy caseloads, and if people agree to have an arbitrator hear their case, the courts will usually enforce the agreement. Many businesses now include in their agreements with customers a clause calling for arbitration of related disputes, and the courts usually allow these if the deal is not extraordinarily unfair. A recent case from a federal appellate court, however, limits the reach of arbitration clauses to the identified parties to the agreement.

An unemployed man hired a debt relief agency for help with his student loans. Although the agency withdrew over $8,000 from his bank account during the eleven months that the agency worked for him, he received no offers from creditors. When he canceled the contract, the agency retained about $2,800 for fees and $170 to pay the service that actually handled the money. The plaintiff filed a class action against the company that handled the money – but not against the agency – for violation of the federal racketeering law and Washington’s consumer protection law and laws regulating debt relief agencies.

The company that handled the money tried to force the case into arbitration, relying on a clause in the contract. The court said no, basically pointing out that they contract hadn’t identified it as having any rights under the contract and therefore not entitled to enforce it. It also said that because the plaintiff based his claims on state statutes and not the contract itself, it wasn’t unfair to allow the plaintiff to try to get out of the arbitration clause as applied to the company that handled the money.

I think it’s also possible the court would have ruled the debt relief agency couldn’t rely on the arbitration clause. The contract was 13 pages long, and the plaintiff discussed it with a salesperson for only about two minutes after it was e-mailed to him before he signed. If that discussion included a hard sell, the court might have ruled the deal was unfair and thrown out the arbitration clause.

If you signed an agreement with an arbitration clause in it, and you don’t want to arbitrate, check first to see if the other side in your dispute is actually named in the contract. If not, and your dispute isn’t to enforce the contract itself, then you may be able to avoid arbitration. (This may be of value. For example, in the case in question, the arbitration would have been held in Florida, which is a slight disincentive for someone in Tacoma.) If the other side is on the contract, you may want to talk to a lawyer about the circumstances under which you signed. In rare cases, you might be let out of the arbitration requirement, but it’s not easy to do, and very strong evidence will probably be necessary.

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