Besides something you often have to agree to, but limits your access to the courts.
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A mandatory arbitration clause is a contract provision that requires the parties to resolve certain disputes through arbitration rather than by filing a lawsuit in court. These clauses are common in employment agreements, consumer contracts, credit card agreements, cell phone contracts, software terms of service, nursing home admissions, franchise agreements, and many commercial contracts.
Arbitration is a private dispute-resolution process in which a neutral third party (the arbitrator) hears evidence and issues a decision.
The typical process is:
- A dispute arises.
- Instead of filing a lawsuit, one party demands arbitration.
- An arbitrator (or panel of arbitrators) is selected.
- The parties exchange evidence, usually through more limited discovery than in court.
- A hearing is held.
- The arbitrator issues an award.
- Courts generally enforce the award and have only limited authority to overturn it.
Why it is called "mandatory"
The clause is "mandatory" because the parties agree in advance that arbitration will be the exclusive forum for resolving covered disputes.
For example: "Any dispute arising out of or relating to this Agreement shall be resolved exclusively by binding arbitration."
If such a clause is enforceable, a court will usually dismiss or stay a lawsuit and require the parties to arbitrate instead.
Common features
- Mandatory arbitration clauses often specify:
- whether arbitration is binding or non-binding (most are binding)
- which disputes are covered
- where arbitration will occur
- which arbitration organization will administer the case
- how arbitrators are selected
- who pays the arbitration costs
- what law governs the dispute
- whether appeals are permitted (usually they are very limited)
Many also contain class-action waivers, preventing consumers or employees from participating in class-action lawsuits.
Advantages
Supporters argue arbitration offers several benefits:
- Faster resolution
- Lower litigation costs
- Greater privacy
- Flexible procedures
- Decision-makers with subject-matter expertise
- Less formal than court
Businesses often argue that arbitration reduces legal expenses and discourages frivolous litigation.
Criticisms
Critics argue mandatory arbitration can:
- Limit access to the courts
- Restrict discovery
- Make appeals extremely difficult
- Favor repeat corporate participants over one-time consumers or employees
- Keep disputes confidential, reducing public accountability
- Prevent class actions, making small-value claims economically impractical
Whether arbitration is actually less expensive than litigation varies depending on the type of dispute and the arbitration provider's fee structure.
Legal basis in the United States
The principal federal law is the Federal Arbitration Act (FAA), enacted in 1925.
The FAA establishes a strong federal policy favoring enforcement of arbitration agreements. It generally requires courts to enforce valid arbitration clauses according to their terms, subject to traditional contract defenses such as fraud, duress, or unconscionability.
Important Supreme Court decisions
Several Supreme Court decisions have expanded enforcement of arbitration agreements:
AT&T Mobility LLC v. Concepcion held that the FAA generally preempts state laws invalidating arbitration agreements because they prohibit class actions.
American Express Co. v. Italian Colors Restaurant upheld class-action waivers even when individual arbitration might be economically impractical.
Epic Systems Corp. v. Lewis held that employers may require employees to resolve workplace disputes through individual arbitration rather than class or collective actions.
Lamps Plus, Inc. v. Varela ruled that class arbitration generally cannot be compelled unless the contract clearly authorizes it.
Limits on mandatory arbitration
Not every dispute can be forced into arbitration. Congress has created exceptions in some areas. For example, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 allows individuals alleging sexual assault or sexual harassment to choose whether to pursue their claims in court rather than being compelled to arbitrate under a pre-dispute arbitration agreement.
Courts may also refuse to enforce an arbitration clause if it is invalid under generally applicable contract principles, such as fraud, duress, or unconscionability.
Example
Suppose you sign a credit card agreement containing this provision: "Any claim arising from this agreement shall be resolved by binding arbitration. Neither party may participate in a class action."
If a dispute later arises over fees or billing practices, the issuer may ask the court to compel arbitration. If the clause is enforceable, the court will usually require the dispute to proceed before an arbitrator instead of a judge or jury, and you generally would have to pursue your claim individually rather than as part of a class action.
In short, a mandatory arbitration clause is an advance agreement to resolve specified disputes through a private arbitration process rather than through litigation in court. Under current U.S. law, such clauses are generally enforceable, though they remain the subject of ongoing legal and policy debate regarding consumer protection, employment rights, and access to the judicial system.
