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I was recently asked to make a presentation regarding arbitration clauses before a national dealer group.  I went through past issues of You Auto Know and since 2001, I have drafted five You Auto Knows on arbitration clauses.  I went from being a great proponent of arbitrations to recommending that each matter be reviewed independently to determine whether or not arbitration would be applicable.  Let me provide you with snippets of my position over the years.

June 2001 You Auto Know:   “First it must be established that arbitration is viewed as a good procedure to follow in order to resolve legal disputes.  The reasoning is that arbitration is generally much quicker, less costly, the matter is heard either in front of one or three impartial arbitrators, and the court system is not being tied up with litigation … This author highly recommends an arbitration provision in each and every Buyer’s Order.”

March 2014 You Auto Know:  “First, it must be noted that this author is absolutely in favor of having an arbitration clause in your Buyer’s Order ….  Even a poorly written arbitration clause provides you with a window of opportunity to stay any litigation in court in the attempt to have the matter arbitrated.”

January 2008 You Auto Know:  “At first, the arbitration clauses worked very well, not only on behalf of the dealer, but also on behalf of the consumer.  The reason behind this was the fact that the parties were able to have an impartial hearing within a short period of time after the arbitration was filed.”  “However, there was one downfall to the arbitration.  The Plaintiff’s attorney fees were significantly reduced.  Obviously, this lead to litigation which has substantially redefined the arbitration system.”  “… if a plaintiff pleads that the arbitration clause was one of adhesion and he or she was coerced into executing an unconscionable agreement, then the Court has the ability to hold a full blown hearing (trial) specifically on the topic of the arbitration clause itself.”  “… parties must incur time and litigation expenses in determining whether or not the arbitration is valid …”  “The downside for the dealer in any arbitration is still a ‘runaway’ arbitrator(s) who chooses to ignore the law and award damages to an undeserving plaintiff.”

The upside to a well written arbitration clause is the inclusion of a “class action waiver.”  Although this is under attack throughout the United States by plaintiffs’ attorneys and activist judges, the inclusion of the class action waiver clause has been upheld and therefore precludes the individual consumer plaintiff from participating or instituting a class action lawsuit.  Obviously, this is important if one knows that plaintiff’s counsel is seeking to pursue a class action against a dealership.  However, in ordinary consumer cases, there are downsides.  As I indicated before, plaintiffs are entitled to what I call a “trial within a trial,” specifically, Ohio Revised Code §2711.023 permits a plaintiff to challenge the arbitration clause based upon its terms or conditions and the manner in which the clause was executed.  In the legal practice, it is known as substantive unconscionability and procedural unconscionability.  In essence, this permits a plaintiff to pursue discovery, interrogatories, requests for production of documents, admissions and depositions against the business/dealership regarding the formulation and utilization of the arbitration clause itself.  Since this is a final appealable order by the court, either the plaintiff or the dealership has the right to appeal and, obviously, the appellate process can take an additional year.  This means additional time and cost before the actual consumer case is even heard.  Quoting my October 2011 You Auto Know, “Further, I have found that most plaintiffs’ attorneys who are willing to run to arbitration generally do so because they have a weak case.  They believe that since discovery process is limited, they have a better opportunity to present a weak case to an arbitrator.”  It is not necessary for an arbitrator to specifically follow the Rules of Civil Procedure or the Rules of Evidence in a hearing, therefore, there is the danger to present evidence and testimony that would not be permissible in a courtroom situation.  Further, in order to overcome one of the main objections to arbitration by a consumer, businesses will generally agree to pay the full arbitration fee schedule and the arbitrator’s time and costs.  Regardless of the independent arbitration sources that you utilize, this can be very expensive.  For example, one arbitration source will only use retired judges and you will pay their time, travel, and hotel accommodations to be present for the arbitration.  Next, there is always the issue of obtaining a rogue arbitrator who does not or will not follow the law.  Does this happen?  Absolutely!  In this situation, the arbitrator will find for the plaintiff simply out of sympathy and will craft a decision to support his or her bias.  The decision can be hard to understand.  There really is no appeal process to the arbitrations unless it can be shown that there is evident partiality or bias on behalf of the arbitrator and this is very difficult to prove.

Further, some arbitration sources state that if you use their name in an arbitration clause, then the business is obligated to submit the business’ arbitration clause to the entity for review to determine if it follows the guidelines for that arbitration source.  This is particularly true of the American Arbitration Association.  Quoting the American Arbitration rules, “Upon receiving the arbitration agreement, the AAA will review the agreement for material compliance with due process standards contained into consumer due process protocol … There is a non-refundable fee to conduct this initial review …  Any subsequent changes, additions or deletions or amendments … to an arbitration agreement must be resubmitted for review and a fee will be assessed at that time …  Further, “after the AAA reviews a submitted consumer clause, receives the annual consumer registration fee and determines it will administer consumer related disputes filed pursuant to the arbitration clause, the business will be included in the publicly accessible consumer clause registry …  Therefore, in order for you to utilize AAA, your arbitration clause must be approved by AAA, for a fee, and you will pay a yearly fee to AAA besides the actual arbitration fees and costs.

I realize the choice to go to arbitration should be determined on a case by case basis.  I do not believe that each and every matter should automatically go to arbitration.  This is a situation where you and your legal counsel will have to determine the facts of the matter and the strengths and weaknesses of not only your case, but the plaintiff’s case.  Therefore an informed decision should be made as to the best venue to try the case.  In many cases, a court will throw out a number of the plaintiff’s claims based upon the filing of a Motion for Summary Judgment which will streamline the issues at hand.  Although permitted, many arbitrators refuse to rule on motions for summary judgment believing that any and all issues should be presented whether warranted or not.

Again, make sure you have an arbitration clause with a class action waiver, but choose the location of your battle wisely.  You may find out that going to court is better.

Robert A. Poklar, Esq.
Weston Hurd LLP
The Tower at Erieview
 1301 East 9th Street, Suite 1900
Cleveland, Ohio 44114-1862
p: 216.687.3243; f: 216.621.8369