Did you read the small print? 'Infinite' arbitration clauses are on the rise
Companies tend to prefer arbitration over a jury trial for a number of reasons. In arbitration, there’s usually a quicker and quieter resolution, more confidentiality, no jury, limited appeal and discovery, and relaxed evidentiary rules. (Image from Shutterstock)
“The Happiest Place on Earth” may not have been living up to its name recently, when a forced arbitration case pushed Disney directly into the clickbait headlines.
After his wife died from a severe allergic reaction at a park restaurant last year, Disney allegedly told her widower that he had waived his right to file a class action lawsuit when he signed up for a Disney+ account in 2019 and visited the Disney World website in 2023. Instead, according to the terms that he had accepted, the case would be sent to arbitration.
The “infinite” arbitration clause used by Disney is considered to apply to related disputes against Disney and its affiliates or related entities in perpetuity, explains David N. Cinotti, a partner at Pashman Stein Walder Hayden in New Jersey.
“Such arbitration clauses are problematic in consumer agreements, which are ordinarily not negotiated between the parties, because they are not limited to disputes tied to the agreement in which they are contained,” Cinotti says.
For example, a typical clause might require arbitration instead of a class action suit against your cellphone carrier if you claim that it overcharged you in violation of the contract or consumer protection law. But a so-called infinite clause might purport to reach a claim against the employer of a driver who injured you and who happened to work for an affiliate of the cellphone carrier 10 years after you changed carriers, he says.
“They can, therefore, lead to absurd results that are far afield from what a reasonable consumer might believe an arbitration clause in a consumer agreement covers,” Cinotti says.
Terms and conditions apply
Disney’s lawyers reversed course following a public relations backlash, but forced arbitrations are still prevalent in other major organizations, from Walmart to Amazon, according to a February 2020 CNN article. These companies are using aggressive strategies to shift suits from courts to arbitration.
Companies tend to prefer arbitration over a jury trial for a number of reasons. In arbitration, there’s usually a quicker and quieter resolution, more confidentiality, no jury, limited appeal and discovery, and relaxed evidentiary rules.
“Infinite arbitration clauses are becoming an increasing problem because the average person has no idea that they agreed to arbitrate a dispute with an affiliate of the company that is completely unrelated to the contract that the person is signing,” says Tyler W. Hudson, a partner at Wagstaff & Cartmell in Kansas City, Missouri. “Companies are becoming more brazen about inserting very broad arbitration clauses into millions of consumer contracts.”
Because few people actually read the small print or understand the detailed terms in their contracts, large companies expect to save money in the long run by forcing their customers to arbitration, Hudson says.
Even if they did read the contract and understand the terms, consumers typically don’t have the bargaining power or awareness to seek to negotiate, so companies can draft dispute-resolution clauses favorable to them, Cinotti says.
“Then, when unforeseeable and unexpected tragedies happen, the victims are stunned to learn that they are left without access to a courtroom and instead must litigate in private, often-confidential proceedings,” Hudson adds.
Click ‘yes’ to accept
Disney dropped its arbitration case in late August, but the long and harsh terms in other adhesion contracts have led to judicial and legislative regulation, says Stephen J. Ware, a professor at the University of Kansas Law School.
Many states have laws or caselaw making infinite arbitration clauses unlawful, even if they’re part of a contract; however, this is not the case nationwide. Courts are split on whether these clauses are enforceable, and each case has to be evaluated under the state contract law applicable to the particular dispute, Ware says.
On a higher level, Section 2 of the Federal Arbitration Act says arbitration clauses contained in consumer agreements must be enforced unless they would be unenforceable under state contract law, Cinotti says. This is limited by the U.S. Supreme Court to the types of contract defenses that can invalidate arbitration agreements under the FAA.
Federal appellate courts have reached different conclusions about the scope and enforceability of infinite arbitration clauses. In one case decided in 2020, the 4th U.S. Circuit Court of Appeals at Richmond, Virginia, ruled that an arbitration clause in a woman’s AT&T wireless agreement covered claims that she filed against DirecTV for allegedly making unlawful telemarketing calls. The agreement broadly required arbitration for disputes with AT&T affiliates, even if DirecTV was not an affiliate at the time that the agreement was signed, Cinotti says.
In another case with similar facts, also decided in 2020, the 9th Circuit at San Francisco reached the opposite conclusion. Interpreted under California law, the wireless agreement did not cover claims against a company that became an affiliate years after the contract was signed. And in a concurring opinion, Cinotti says, one 9th Circuit judge argued that the FAA’s Section 2 does not require enforcement of arbitration clauses as to disputes that do not “arise out of” the contract where the clauses are contained.
“So the appellate courts are just beginning to address these types of clauses under the FAA, and there is disagreement on how to interpret and apply them,” Cinotti says.
In some cases, like in Disney’s case, the arbitration clauses appear to apply to conduct that has nothing to do with the contract, says Catherine Delcin, the managing attorney with the Delcin Consulting Group in Concord, California.
“In essence, these infinite contract clauses create somewhat of a servitude of sorts,” Delcin says.
This gives companies considerable leeway to draft consumer arbitration clauses that favor them, Cinotti says.
“Unless Congress amends the FAA to address consumer arbitration, courts will continue to have to work out the extent to which consumer arbitration agreements apply to particular disputes and are enforceable,” Cinotti adds.
