An arbitration clause is intended to keep a customer’s suit against a dealership from becoming the basis of a class action.
Regardless of the merits of a claim, lawyers who sue dealers want the case before a jury and in a class action whenever possible simply to leverage a better settlement for their clients.
Let’s be honest. Dealers are not going to get a jury of their peers. Instead they will get a jury of individuals who despite what they may tell you, have some animosity or trust issues with dealers. Plaintiffs’ lawyers know this and count on it.
A best defense against this bias is the arbitration clause in customer agreements. A binding arbitration clause keeps the case from a jury and short-circuits the class-action lawyer.
An arbitration clause drafted in accordance with the Federal Arbitration Act requires disputes to be resolved before an arbitrator, and may preclude class actions by prohibiting class arbitration.
Consumer groups object to the use of mandatory arbitration and are heavily lobbying the Consumer Financial Protection Bureau to pass rules and regulations to limit the use of arbitration in consumer-loan transactions.
Some courts have also begun to review arbitration clauses as unconscionable, and look for ambiguity to find them non-binding. The California Supreme Court currently has such a case before it. It has stayed action on state appellate court cases striking down arbitration clauses.
A New Jersey case provides an example of how unclear terms and terminology in an arbitration clause can torpedo a dealership’s legal maneuvering to avoid defending a class action.
In July, a state appellate court affirmed a trial court’s decision denying Auto Group’s motion to dismiss a plaintiff's class-action complaint and to compel arbitration of her 5-count legal complaint.
Demanding a jury, plaintiff Fiorella Rotondi alleged violations of the New Jersey Consumer Fraud Act and Truth-in-Lending Act as well as theft by deception, civil conspiracy and fraud.
The case stems from a new-vehicle purchase and purported refinancing of the original installment loan one year later by the dealer.
The allegations provide an example of how not to refinance a consumer vehicle, but are not germane to why the arbitration clause in the contract was not enforced.
Both the 2011 and 2012 retail orders had identical mandatory arbitration agreements Rotondi had signed. The use of an arbitration clause in both transactions was not an issue. The court recognized such provisions are valid where a waiver of rights to pursue judicial remedies is stated in clear and unambiguous language.
Auto Group’s arbitration clause read as follows with reference to a potential class-action waiver:
“The parties to this agreement agree to arbitrate any claim, dispute, or controversy, including all statutory claims and any state or federal claims, that may arise out of or relating to the sale or lease identified in this agreement…
“The parties also agree to (i)waive any right to pursue any claims arising under this agreement, including statutory, state or federal claims, as a class action arbitration, or (ii) to have an arbitration under this agreement consolidated with any other arbitration or proceeding…
“If any part of this arbitration clause, other than waivers of class-action rights, is found to be unenforceable for any reason, the remaining provisions shall remain enforceable.
“If a waiver of class action and consolidation rights is found unenforceable in any action in which class action remedies have been sought, this entire arbitration clause shall be deemed unenforceable, it being the intention and agreement of the parties not to arbitrate class actions or in consolidated proceedings.”
The Court found the language “waive any . . . claims . . . as a class action arbitration” was unclear and ambiguous as to whether the plaintiff’s recourse was to pursue a class action in the courts.
Denying Auto Group’s request to move the matter to arbitration, the appellate court said of the clause references:
“On the one hand, the arbitration clauses state that the parties to the contract agree to arbitrate all claims. On the other hand, ‘class action arbitration’ is waived.
“Since the agreement seems to preserve other types of claims, only subject to arbitration, and since it does not state explicitly that the consumer may not pursue any class action whatsoever, one might infer that a class action must be brought in the courts.”
The court concluded the prohibition against class actions was unenforceable because it lacked clarity.
Mandatory-arbitration clauses should be based on the Federal Arbitration Act, which preempts state law. Moreover:
- They should be clear and concise on any waivers including waiving the right to participate as a class representative or class member.
- Make the arbitration provision of the contract conspicuous. Consider highlighting with bold or different-size type any waivers of legal rights, like class action waivers.
- The agreement should be balanced and not pro seller.
- Avoid provisions and arbitration organizations that would make it financially burdensome for consumers to arbitrate.
- Clearly define any legal remedies not subject to arbitration, such as self-help remedies or proceeding in small claims courts.
The CFPB is busy looking at arbitration clauses. Federal and state courts are reviewing such clauses with more scrutiny. Review the arbitration clause. Make sure it will keep you out of the court system and out of a class action.
David R. Missimer is general counsel for Automotive Compliance Consultants. A lawyer for 28 years, he is a member of American Financial Services Assn. and National Automotive Finance Assn. Contact him at [email protected]