Arbitration Clauses

How can cell phone companies and car rental places force someone to arbitrate? Don’t we have a right to a jury trial in America?

Michael W. Flynn
5-minute read

First, turning to our caller’s question about the right to a jury trial. The Seventh Amendment to the United States Constitution provides: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury shall be otherwise re–examined in any Court of the United States, than according to the rules of the common law.” On its face, this text seems to say that you get a jury if you want it. That is true. However, the right to a jury trial is waiveable. When you sign an arbitration agreement, you are effectively waiving your constitutional right to a jury. So, if the arbitration clause is valid, then you no longer have right to a jury trial in that case.

But, as Mark’s question suggests, these arbitration clauses do not seem fair because you do not always have a choice. Mark has basically asked, “When does an arbitration agreement become so unfair that it is not enforceable?”    

There are several reasons that a contract is not enforceable. The one that Mark has hit upon is called unconscionability, which basically means grossly unfair. While the law varies from state to state, a contract is unconscionable, and thus unenforceable, where there are both unfair procedural and unfair substantive elements. Procedural unconscionability exists when either inequality of bargaining power or surprise prevents real negotiation or assent. Substantive unconscionability exists when one-sided or oppressive terms have been imposed.

Applying this rubric to Mark’s situation, it is clear that there is an element of procedural unconscionability because the doctor has a superior bargaining position than the patient. When a patient comes into a doctor’s office, he is typically sick, and needs the services of that doctor. Also, the patient does not usually have the luxury of shopping around because most insurance carriers limit which doctors you may see. Last, the doctor simply hands you the contract with the arbitration clause in it, and you take it or leave it. If you do not agree to the arbitration clause, the doctor will not treat you. Take it or leave it contracts like this are sometimes referred to as “contracts of adhesion.”  

Turning to the question of substantive unconscionability, courts that are reviewing your arbitration agreement will generally inquire into the bilateral nature of the agreement. That is, the question is whether the arbitration clause contains the same benefits and burdens for both parties. So, arbitration clauses that give the doctor the right to choose the arbitrator at his discretion, or allow the doctor to choose which law will apply, are substantively unconscionable. Most companies are smart enough to write their arbitration clauses such that they grant the same rights under the clause to both parties. So, if the doctor’s arbitration clause provided that Florida law would apply, and that the arbitrator will be selected at random from the American Arbitration Association, then that arbitration clause is fair to both of you. It might turn out that Florida law is less kind to patients, but the clause is considered fair because the same law applies to both parties.