Client Alert

The American Arbitration Association ("AAA") adopted the Consumer Due Process Protocols ("Protocols") in 1998. There are also Employment Dispute Protocols, Healthcare Protocols and E-Commerce Protocols. The Consumer Due Process Protocols consist of 15 broad principles of "fair" arbitration of consumer disputes. Although the Protocols have been published for nine years, they have come under increasing scrutiny as consumers around the country have mounted challenges to consumer arbitration clauses. Several jurisdictions have refused to enforce certain consumer arbitration clauses on the grounds that they are "unconscionable." To emphasize that they represent a "conscionable" choice, the AAA has highlighted the Protocols. The AAA issued a policy statement that they "reserve the right" to refuse to administer clauses which did not comply with the Protocols. In 2003, the AAA's code of ethics prohibited handling consumer cases which did not comply with the Protocols. Recently, the AAA has flatly refused to administer arbitration clauses that do not comply with the Protocols. However, one court recently noted that non-compliance with the Protocols was not a sufficient reason to deny a motion to compel arbitration. Sprague v. Household International, 473 F.Supp. 499 (W.D.Mo. 2005).

Any company which specifies the AAA for resolution of consumer disputes should carefully review their arbitration agreements for compliance with the Protocols. Compliance points include:

1) No Right to file Small Claims: Consumers must have the right to proceed in small claims court (Protocols Principle # 5).

2) Inconvenient Hearing Location: Any hearing location must be "reasonably convenient" to both parties. The arbitrator should decide any dispute about location. (Principle # 7).

3) Inadequate Notice: The consumer must be given clear notice about arbitration and must be told how to get more information. The Protocols include a sample Notice of Arbitration "box". (Principle # 11).

4) Damages Limitations: The arbitrator must be given the authority to award any damages available in court. The AAA has refused to administer arbitration clauses which prohibit consequential, special and punitive damages. (Principle # 14).

Practice Tips

Although the AAA may refuse to administer clauses which fail to meet one or more of the Protocols' Principles, companies may be able to address this issue by giving the AAA written assurance that they will abide by the Protocols. Agreement drafters considering using the AAA as administrator may be able to submit their arbitration agreements to the AAA for "pre-approval" in order to assure later acceptance for administration. Typically, the AAA only looks at the arbitration clause of the contract, so clauses that appear elsewhere (for examples damages limitations in a section discussing breach of contract) will not likely trigger a refusal to administer by the AAA. Such damages limitations will, nevertheless, be subject to challenge under the law of some jurisdictions. See, e.g., Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006) (clause prohibiting treble damages was invalid and would be severed).

If you have questions or if we can be of assistance, please contact any of the following Womble Business Litigation attorneys or the Womble Carlyle attorney with whom you regularly work.

Mark Henriques
(704) 331-4912
email

Jim Cooley
(704) 331-4908
email