Arbitration

Mandatory Binding Arbitration in Consumer Warranty Disputes: 

A Legal and Practical Concern

In recent years, there has been increasing litigation surrounding mandatory binding arbitration clauses in consumer warranty claims. Manufacturers, dealerships, and finance companies continue to insert these clauses into purchase and finance agreements. These provisions often go unexplained at the time of contract signing and shift arbitration costs onto the consumer, making them particularly burdensome and arguably unconscionable.

Notably, courts in several jurisdictions—including the Alabama Supreme Court in Southern Energyhave invalidated such clauses, finding them inconsistent with the Magnuson-Moss Warranty Act, which prohibits mandatory arbitration of written warranty disputes unless judicial remedies remain available.

Consumer advocates, including Consumer Reports and U.S. News & World Report ("No Suits for You!"), have highlighted the "pay-to-play" pitfalls of these arbitration agreements. The primary concern is cost: consumers are often required to pay substantial arbitration fees just to have their grievances heard—fees they would not face in small claims or public court systems.

Further complicating matters, some arbitration providers have faced scrutiny for bias in favor of businesses. One prominent national forum entered into a consent decree after allegations of consumer-unfriendly practices, agreeing to cease handling consumer cases. In response, others, such as the American Arbitration Association (AAA), have adopted Consumer Arbitration Protocols designed to ensure fairness and transparency. Significantly, under AAA rules, a consumer may still choose to pursue claims in small claims court, even if an arbitration clause is present in the original agreement.

Bottom line: Consumers should be wary of arbitration provisions in warranty and finance agreements. Where possible, they should seek to preserve access to courts and remain informed about their rights under federal law. The fee structure and procedural safeguards or lack thereof can make all the difference in achieving a fair resolution.