Pay to Play in Consumer Arbitration

Some companies that include predispute arbitration clauses in their contracts have refused to pay these arbitration costs as a defendant in consumer cases.  In the case of the AAA,  nonpayment of fees will result in the AAA refusing to administer the arbitration.  Additionally, consumer claimants in such cases can then raise the same dispute in court, arguing that the arbitration requirement no longer applies because of the defendant’s material breach.

Roach v. BM Motoring, LLC, 2017 WL 931430 (N.J. Mar. 9, 2017), provides an example of what happens when a defendant refuses to pay arbitration costs.  In that case, the New Jersey Supreme Court joined other courts that find the defendant’s refusal to pay arbitration costs waives the arbitration requirement by materially breaching the agreement. See e.g. Pre-Paid Legal Services, Inc. v. Cahill, 786 F.3d 1287 (10th Cir. 2015).  The defendant car dealership included an arbitration provision in its consumer contracts that required arbitration in accordance with AAA rules, but did not explicitly require arbitration before the AAA. Nonetheless, the defendant failed to pay the AAA’s filing fees and arbitrator compensation deposit when a consumer filed a complaint against the dealership with the AAA.   Indeed, the defendant ignored the AAA’s notices — leading the AAA to send  the parties a letter stating that because of this failure it would not administer the arbitration or any other consumer disputes involving the dealership.  The consumers then filed their claims in state court and the dealership moved to compel arbitration. The New Jersey Supreme Court concluded on appeal that the dealership was precluded from enforcing the arbitration agreement.

Confirmation of Pay to Play

The Roach court confirmed basic contract law:  when a party breaches a material term of an agreement, the non-breaching party is relieved of its obligations under the agreement. The court then concluded that the arbitration terms (by requiring use of AAA rules) permitted arbitration before the AAA, even if the AAA was not stated as the exclusive forum for the arbitration.  Accordingly,  the court would not disturb the consumers’ choice to arbitrate with the AAA. The dealership materially breached the agreement where the consumer paid the consumer’s filing fee and the dealer did not pay its fees.  Therefore, the consumers were then free to litigate their claims in court.

Missouri Takes a Strong Stance on Arbitration

In 2005 and 2007 respectively, Lee Hobbs and the Jonesburg Methodist Church bought Heritage Series Shingles, which are manufactured by Tamko. On the outside of each bundle of shingles was a limited warranty that provided a remedy for damages caused by manufacturing defects and included a binding arbitration provision. Neither Hobbs nor Jonesburg saw the limited warranty or was made aware of the warranty.

Then, in 2013, the shingles they purchased started warping, curling, and beginning to fail.  In 2014, Hobbs and Jonesburg filed a class action complaint against Tamko alleging violations of the Missouri Merchandising Practices Act (MMPA), negligence, and entitlement to declaratory relief. Tamko responded with a motion to compel arbitration because of the binding arbitration provision slapped on to Tamko’s shingles packaging. The trial court denied Tamko’s motion, and Tamko appealed, arguing that the trial court erred because the parties had entered into a valid arbitration agreement. The court of appeals affirmed the judgment of the trial court, finding that the mere purchasing of the shingles did not create acceptance of the arbitration agreement; the plaintiffs had never signed any document agreeing to an arbitration clause. An appeal to the Missouri Supreme Court was denied, and a petition for certiorari is still pending before the Supreme Court of the United States.

First, Tamko argued that the plaintiffs accepted and agreed to the terms of the limited warranty because the plaintiffs kept and used the shingles. The court found this unpersuasive because there was no evidence that the consumers actually received the documentation; typically, shingles are a product that are not kept by the consumer after they are unbundled and used. Second, Tamko alleged that plaintiffs accepted the terms of the arbitration agreement by invoking their claims under the limited warranty. The court also rejected this argument; Hobbs and Jonesburg only became aware of the warranty after they had filed their claims with Tamko. The court took a firm stance: big business cannot bully consumers into arbitration.

As the law currently stands (and with the help of this case), the MMPA makes Missouri one of the most consumer friendly states in the nation. But, this is not the end of the story. A new bill, Senate Bill 5, was introduced in the Missouri legislature in the beginning of 2017. It amends the MMPA, stating that the MMPA does not apply to any business “regulated by the Federal Trade Commission or any other regulatory agency.” Passage of this bill would eliminate consumer protection in Missouri; almost every business is subject to regulation by the Federal Trade Commission or another regulatory agency. Consumers, unfortunately, would be left unprotected.

But as of now, Tamko provides some thread of hope for consumers who have been forced into arbitration clauses against their will. Simply attaching an arbitration agreement to a product’s packaging does not create a valid arbitration clause in Missouri. But Tamko still does not protect consumers who unknowingly enter into arbitration agreements in other contexts. The legislature, therefore, should be working to help all consumers fight back against abusive business practices rather than taking away the little protection they have now.