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Articles Posted in Forced Arbitration

An arbitration agreement is a contract, in which two or more parties agree to settle a dispute outside of court.  Usually, an arbitration agreement is a clause in a larger contract. The arbitration clauses are often subjects to hotly disputed litigation, stemming from the vague verbiage and possible inconsistencies with other parts of the contract.  One of such issues – the admissibility of the “Wholly Groundless Exception” – was decided by the Supreme Court in January in the case of Henry Schein, Inc. v. Archer & White Sales, Inc , 586 U.S. __ (Jan. 8, 2019).  This is a tricky issue for those in the trucking industry who include arbitration clauses in their contracts with drivers.

What Is A Wholly Groundless Exception?

A “wholly groundless exception” was born out of the “delegation clauses” ordinarily found in arbitration agreements.  A delegation clause represents an agreement between parties that an arbitrator, not the court, will determine the threshold issues of enforceability of the arbitration clause and the scope of the arbitration agreement.  In other words, it is up to an arbitrator to decide whether, according to the contract or the rule of law, an issue may be decided by arbitration or needs to be determined by a judge.  These clauses were held to be valid by the Supreme Court in 2010 in Rent-A-Center, West, Inc. v. Jackson, 561 US 63 (2010). Since then, several circuits decided that this provision must be limited; thus creating a so-called “wholly groundless exception” to the delegation clause. This exception lets parties avoid compelling arbitration in cases where the claims are so obviously not within the scope of the agreement, that it would be a waste of time to go through arbitration before filing a lawsuit.

forced-arbitrationGeneral Mills gave itself something of a Public Relations black eye when it got caught slipping some tricky new language into its “terms of service” agreement. Unnoticed by most consumers, the company had imposed restrictive new legal conditions on anyone who unsuspectingly redeemed an online coupon for a cereal or baking product, or clicked “Like” on a General Foods Facebook page, or entered a sweepstakes or otherwise received a “benefit” from the company (other than, for example, the thrill of watching one’s children savor their Count Chocula).

The updated language took away the consumer’s right to sue General Mills in court and required them to submit to submit any grievances against the company to an arbitrator. It also banned them from participating in class action suits. Because they were engaged in routine online activities, few General Mills customers understood that they were entering into a contract at all, much less renouncing their right to sue the company.

This misdeed generated a few days of media outrage, and due to a furious – if short-lived – backlash the company was persuaded to rescind the new terms. But in reality, General Mills’ only “crime” was getting caught. Although the media chose this particular incident to spend fifteen minutes on, there was nothing illegal or even unusual about inserting restrictive clauses into an online usage agreement. In fact, compelling consumers to surrender their right to legal redress in the courts – generally known as forced arbitration – is quickly becoming standard corporate practice.