Direct to Arbitration:Enforcing Arbitration in Consumer Contracts

The Supreme Court has agreed to review a class action lawsuit brought by consumers challenging DirecTV’s early termination fees. At issue is whether DirecTV’s customer agreements, which require consumer disputes to be settled through private arbitration as opposed to litigation, are enforceable.

Most recently, the Second District California Court of Appeals ruled against DirecTV, finding that consumers were “not bound” by DirecTV’s contract provision forcing disputes to be settled through private arbitration rather than litigation. In upholding the decision, the California Supreme Court denied review, stating that “California law forbids arbitration agreements that include a class action waiver.” DirecTV petitioned for a writ of certiorari, arguing that the Federal Arbitration Act (“FAA”) preempts state law, and therefore company contracts barring class action lawsuits are enforceable.

DirecTV, and many businesses, favor arbitration because the process generally lowers  litigation costs, and more efficiently resolves customer disputes. Unlike litigation, the arbitration process is much quicker, permitting companies to spend “less time fighting, and more time actually running their businesses.”

Arbitration is also less adversarial than litigation. This assists in resolving disputes while preserving ongoing customer and business relationships. One of the most compelling advantages of arbitration is the ability to keep both disputes and resolutions private. Arbitration proceedings are usually private, and parties generally agree to keep both the proceedings and terms of the resolution confidential. Accordingly, companies attain invaluable benefits through arbitration if a dispute concerns commercially sensitive and/or embarrassing matters.

Consumers claim that the increased use of arbitration denies individuals their rightful opportunity to vindicate their claims in court. Plaintiffs’ attorneys assert that because arbitration occurs “behind closed doors,” arbitration is stacked in favor of the companies. Unlike a judge in the courtroom, an arbiter’s final decision is neither constrained nor guided by law, statutes, or precedent. As a result, both the lack of transparency and public accessibility of arbitration proceedings and resolutions may undermine the credibility and integrity of the process, and any final decisions of a presumed “objective” arbiter. Furthermore, unlike arbitration, litigation encourages and permits extensive discovery and full disclosure of evidence to all parties involved in a dispute.

Perhaps, the most important difference between litigation and arbitration is the right to appeal. In arbitration, the arbitrator’s decision is generally not subject to review. Accordingly, consumers disapprove of arbitration because they believe that “mistakes are made frequently,” and that the right to request a “second look” is both vital and  important. The process of litigation preserves such rights through the appeals process.

Given the pros and cons of either arbitration or litigation, it is unclear which process is better for settling disputes and reaching resolutions. However, the Supreme Court will determine whether arbitration clauses barring class action lawsuits are enforceable, when it hears DirecTV Inc. v. Amy Imburgia, et al. this fall. This determination should hopefully settle the dispute once and for all.