Mandatory Binding Arbitration Frequently Asked Questions
The Consumer Task Force For Automotive Issues
12-04

What is arbitration?
Arbitration is an alternative method of resolving disputes in which two parties present their individual sides of a complaint to a arbitrator or panel of arbitrators. The arbitrator, who is supposed to be neutral, then weighs the facts and arguments of both parties and decides the dispute. Arbitration may be voluntary or mandatory.

What is voluntary arbitration?
In voluntary arbitration, both sides in the dispute voluntarily agree to submit their disagreement to arbitration after it arises and after they have an opportunity to investigate their best options for resolving their claim.

What is mandatory binding arbitration?
In mandatory binding arbitration, a company requires a consumer to agree to submit any dispute that may arise to binding arbitration prior to completing a transaction with the company. The consumer is required to waive their right to sue, to participate in a class action lawsuit, or to appeal.

Are these clauses easy to find in the paperwork?
Generally not. Some dealerships print them in boxes, and a few have you sign a separate sheet of paper which contains the clause. But many dealerships simply makes the clauses an extra paragraph of fine print in their contracts.

Is “Mandatory Binding Arbitration” always the name of the clause?
Definitely not! Some dealerships call these clauses “Dispute Resolution Mechanism” and other equally hard-to-understand names.

What's wrong with arbitration?
Nothing, if its “voluntary” arbitration! In fact, voluntary arbitration can be a great thing in preventing lawsuits. In fact, you always have the right to arbitrate. But you never want to give away the right to sue if arbitration dos not work. Dealers want you to give away that right.

Do dealers use mandatory binding arbitration in their own disputes with each other and the automobile manufacturers?
No, they use voluntary arbitration. As a matter of fact, dealers were so afraid of mandatory arbitration for their own disagreements that they spent millions lobbying Congressmen and Senators to pass a federal law that prohibits automobile manufacturers from requiring mandatory binding arbitration in disputes related to dealership franchise agreements. The law passed in 2002.

Why are so many consumer groups opposing mandatory arbitration in automotive transactions?
Many mandatory binding arbitration clauses are written to protect the dealer. Here are problems and dangers noted by consumer advocates.

• Consumers are often unaware they've agreed to binding arbitration. Whether the mandatory binding arbitration clauses is tucked in a paragraph of fine print or provided as a separate form, dealerships often don't mention it until the consumer is ready to sign and take the new vehicle home. A few dealers may "forget" to mention the arbitration requirement at all. These tactics deprive consumers of their right to make an informed decision.
• Mandatory binding arbitration severely limits consumer options for resolving a dispute. Before any problem arises, you lock yourself into only one option—binding arbitration—for resolving all future disputes or problems. The contract typically also names the arbitration company that must be used.
• Mandatory binding arbitration clauses generally bind the consumer—not the dealership. The way most mandatory arbitration clauses are written, the seller retains its rights to take any complaint to court while the consumer can only initiate arbitration.
• Arbitration does not follow clear, well-established, consistent rules and procedures such as those required for litigation in the court system. For example, arbitrators aren't required to follow procedures that enable one side in a dispute to request information from the other (what the courts call "discovery"). The result is that consumers, who usually have limited resources, may have difficulty getting information needed to support their claims. In addition, nothing absolutely requires arbitrators to take the law and legal precedent into account in making their decisions although they are supposed to do so. Most decisions cannot be appealed, and there are generally no review bodies or other oversight to ensure that arbitrators follow fair procedure or the law.
• The dealership generally picks the arbitration company—"the judge." In theory, both parties agree to the selection of a neutral, independent arbitrator. In reality, the dealership designates the arbitration company in the contract. This situation can definitely affect the impartiality of the arbitrator. Studies show that any time one company depends on another company for a large percentage of their business livelihood, some systematic bias in favor of that company may develop.
• Mandatory binding arbitration frequently costs more than taking a case to court. One of the benefits usually claimed for binding arbitration is that it costs less than litigation. Frequently this is not true. In many cases, for instance, a consumer may have to pay a large fee simply to initiate the arbitration process. This can deter a consumer from even bringing a complaint. Or on a small claim total fees for arbitration can easily exceed the amount you might be awarded if you win the dispute. (For details see "The Costs of Arbitration," prepared by Public Citizen's Congress Watch.)

Do dealerships require mandatory binding arbitration even with cash purchases?
Yes.

Are there dealerships that don't require mandatory arbitration clauses?
Yes. There are plenty of good dealerships that refuse to require mandatory binding arbitration. These are usually the dealerships with the fewest consumer complaints.

What can I do about the problem?
Don't deal with any dealerships that require a mandatory binding arbitration clauses. Before spending time with any dealership or buying service—whether in person or online—ask the seller if they require a mandatory binding arbitration clauses. If the seller does require an agreement, tell the seller you won't buy from them and why.

If a seller requires that you sign a mandatory binding arbitration clauses, refuse to sign it. Stick with your decision. Be prepared to leave without completing the purchase.

For more information on mandatory binding arbitration clauses in auto contracts:

The arbitration trap: How consumers pay for 'low cost' justice
Consumer Reports discusses issues related to arbitration and what consumers can do to protect themselves.

Auto Dealers and Consumers Agree: Mandatory Arbitration is Unfair
Public Citizen takes the arguments that auto dealers made to Congress about why they should be protected from manufacturer's requirements for mandatory binding arbitration and shows how and why consumer arguments for the same protections are similar. At the end of this article, Public Citizen offers links to a number of other articles related to arbitration.

Automobile Dealers Push to Arbitrate: Buyer Would Give Up Right to Lawsuit
This article by Christopher Jensen of Newhouse News Services as printed in the Times-Picayune is reprinted by the Trial Lawyers for Public Justice. It quotes authorities and experts on both sides of the issue.

For more information about mandatory binding arbitration issues in other types of contracts such as employment, credit, telecommunications services, and insurance:

Mandatory Arbitration Clauses: Undermining the Rights of Consumers, Employees, and Small Businesses from Public Citizen's Congress Watch describes several unique characteristics of mandatory arbitration that makes it harder to individuals to prevail in a dispute with a business.

Consumer and Media Alert: The Small Print That's Devastating Major Consumer Rights
Most Consumers Never Even Notice "Mandatory Arbitration Clauses," Now Being Slipped Into Everything from Bills to Contracts from the National Consumer Law Center describes the impacts of mandatory arbitration clauses on consumers.

The Costs of Arbitration prepared by Public Citizen's Congress Watch, details the various potential costs of arbitration, shares case stories, and compares arbitration and court costs for similar cases.

Fact Sheet: Mandatory Arbitration—Taking away big rights with small print
A summary of potential problems with mandatory arbitration from the Association of Trial Lawyers of America.

Arbitration Q&A from Public Citizen's Congress Watch provides answers to questions such as: Isn't arbitration a cheaper alternative than filing suit in court?, Why do businesses use arbitration clauses?, and What are the differences between a judge and a private arbitrator hearing a case?

Resolving Consumer Disputes: Mediation and Arbitration from the FTC describes mediation and voluntary arbitration in general.

Consumer Due Process Protocol from the American Arbitration Association
The American Arbitration Association, one of the big three administrative agencies, processes arbitration cases in a number of areas including "finance, construction, labor and employment, insurance and technology." This document sets forth the standards this agency believes should be met in business-to-consumer arbitration agreements.