General Mills drops arbitration clause, but such contracts are 'pervasive'

Consumer advocates warn that clicking 'I agree' to online contracts can crimp buyers' legal rights, if a contract requires arbitration and nixes class-action lawsuits. The practice is spreading, though General Mills encountered a backlash.

When consumers click “I agree” to online contracts, two things can happen: They may give up their right to pursue a class action lawsuit if something goes wrong, and they can seek damages only through arbitration, an out-of-court legal process that many experts say weighs against the harmed consumer.

Although food manufacturer General Mills back-pedaled over the weekend on its policy change to make binding arbitration the new normal, so-called "forced arbitration clauses" are "incredibly pervasive" these days, says David Seligman, an attorney with the National Consumer Law Center in Boston. [Editor's note: A previous version of this article incorrectly identified David Seligman's professional affiliation.]

Fueling the arbitration push is the fact that more consumers today engage directly with the companies that sell products and services, via online avenues. They may, for example, buy gift cards online, download coupons, or click "likes" on Facebook, and companies take those opportunities to set terms that they say can actually benefit a consumer.

But others, such as Mr. Seligman, warn that consumers should beware. “Each of the ways we interact with companies, each of those are opportunities for companies to form a contract," he says. "Now, almost everything we do in our consumer relationship is governed by contracts, and there’s a good chance arbitration clauses are built into those contracts.”

General Mills on Saturday opted to step back from a retooling of its legal agreements with consumers. Earlier, it had changed its contract language to say that when consumers do a myriad of things with the company – download coupons, subscribe to e-mails, enter sweepstakes, and so forth – they give up their right to participate in a class action lawsuit against the company and, if something does go wrong, can pursue claims only through arbitration.

After a flurry of negative press, the company reversed its position, saying on its website, “there’s no mention of arbitration, and the arbitration provisions we had posted were never enforced. Nor will they be.” It added that the proposed policy change regarding arbitration “would have simply streamlined how complaints are handled.”

Arbitration is often seen as desirable both by plaintiffs and defendants because it can help both sides “resolve their problems informally, privately, and more quickly than you could in the courts, which tend to be slow and fairly expensive,” says David Gibbs, a law professor at Chapman University in Orange, Calif., who is an arbitration specialist.

However, arbitration “can be used to deny people their day in court,” he adds. “It’s how you use arbitration that counts,” says Professor Gibbs.

Consumer advocates argue that history shows that arbitration often favors the corporate defendant, and that attorneys are often reluctant to take individual cases because it is unlikely a plaintiff will receive a big judgment. Companies know that “when people arbitrate individually, they will never arbitrate at all,” says Seligman. “What they’re worried about are consumers banding together and bringing claims collectively, and that’s how private people hold companies accountable for wrongdoing. Without it, corporations can really gain the upper hand.” 

Moreover, arbitration findings can be kept confidential, appeals are limited, and rewards for damages are often much less than those in a jury trial, say consumer advocates.

Companies, for their part, emphasize the cost-effectiveness of arbitration – and they may offer to pick up the tab for such services. General Mills, for one, says “arbitration clauses don’t cause anyone to waive a valid legal claim” and cited the practice as “a cost-effective means of resolving” disputes. 

The US Supreme Court, too, has recently endorsed arbitration through a series of rulings, notably in the 2011 case AT&T Mobility v. Concepcion. That ruling blocked states from passing laws that prohibit contracts that allow class-wide arbitration.

“The Supreme Court has been pushing the envelope harder to limit the ability of state courts to strike down these contracts,” says Gibbs. “The federal courts want to encourage arbitration because it reduces their docket and allow parties to resolve their cases outside court. The conservative majority in the court has pushed for this much harder than the states.”

Because online technology is so pervasive, consumers are increasingly being asked to agree to contracts they may not agree with – if they read them at all. The time may come when companies publish the fine print of such contracts on the products themselves, making the act of purchasing them an agreed-upon acknowledgement of the terms. To date, no law exists to prevent that.

“Theoretically, there’s nothing to stop General Mills from putting arbitration clauses on its Cheerios boxes, or Starbucks on its cups. The question is whether that would be enforceable and certainly there is some fear that it would be,” Seligman says. “We’re not seeing it on consumer products yet, but there is nothing in the law that would stop the company from doing it.”