Are secretive arbitration waivers fair to consumers?

For the uninitiated, under Rule R-1(d) of the American Arbitration Association's (the "AAA") Consumer Arbitration Rules (the “Rules”), forced consumer arbitration agreements — which is most all consumer arbitration agreements — are required to materially and substantially comply with both the Rules and the AAA's Consumer Due Process Protocol (the “Protocol”).

R-1. Applicability (When the AAA Applies These Rules) (d) The AAA administers consumer disputes that meet the due process standards contained in the Consumer Due Process Protocol and the Consumer Arbitration Rules. The AAA will accept cases after the AAA reviews the parties’ arbitration agreement and if the AAA determines the agreement substantially and materially complies with the due process standards of these Rules and the Consumer Due Process Protocol. Should the AAA decline to administer an arbitration, either party may choose to submit its dispute to the appropriate court for resolution.

Under Rule R-12, a company can submit its arbitration agreement to the AAA for a compliance review and approval prior to any dispute arising. These agreements are then published in a clause registry.

R-12. Business Notification and Publicly-Accessible Consumer Clause Registry ...Upon receiving the arbitration agreement, the AAA will review the agreement for material compliance with due process standards contained in the Consumer Due Process Protocol and the Consumer Arbitration Rules (see Rule 1(d))...

Notably, nowhere in the Rules are consumers notified that the AAA can — and regularly does — require the waiver of specific non-compliant provisions in an arbitration agreement without rejecting the entire arbitration agreement.

To waive a provision, the AAA generates a letter to the company that the company then executes and returns. The executed waiver letter is then published in the aforementioned clause registry.

Choice Home Warranty and Ashley Madison are two companies that executed waiver letters. Years later, neither company has materially amended its consumer arbitration agreement to reflect its waiver letter.

Choice Home Warranty

On or about September 1, 2014, Choice Home Warranty submitted its arbitration agreement to the AAA for pre-approval. See copy as submitted here.

On or about September 8, 2014, Neil B. Currie, a Vice President at the AAA, emailed a waiver letter to Christine Gadalla of Choice Home Warranty. See the Choice Home Warranty waiver letter here.

The AAA required the following two provisions be waived:

3. Any and all claims, judgments and awards shall be limited to actual out-of-pocket costs incurred to a maximum of $1,500 per claim, but in no event attorney's fees.

4. Under no circumstances will you be permitted to obtain awards for, and you hereby waives all rights to claim, indirect, punitive, incidental and consequential damages and any other damages, other than for actual out-of-pocket expenses, and any and all rights to have damages multiplied or otherwise increased.

The provisions were determined non-compliant with Protocol Principle 14:

Principle 14. Arbitral Remedies

The arbitrator should be empowered to grant whatever relief would be available in court under law or in equity.

Christine Gadalla of Choice Home Warranty executed the waiver letter on January 13, 2015.

As of March 1, 2018, the waived provisions remain in the Choice Home Warranty User Agreement substantially unchanged.

Section G of the current agreement reads:

3. Any and all claims, judgments and awards shall be limited to actual out-of-pocket costs incurred to a maximum of $1500 per claim, but in no event attorneys’ fees.

4. Under no circumstances will You be permitted to obtain awards for, and You hereby waive all rights to claim, indirect, punitive, incidental and consequential damages and any other damages, other than for actual out-of- pocket expenses, and any and all rights to have damages multiplied or otherwise increased.

Ashley Madison

On or about February 23, 2016, Ashley Madison submitted its arbitration agreement to the AAA for approval. See Section 19 (page 6) here for a copy.

On or about May 16, 2016, Neil B. Currie, a Vice President at the AAA, emailed a waiver letter to Avi Weisman of Ashley Madison. See the waiver letter here.

The AAA required the following two provisions be waived:

Venue: The exclusive venue for the arbitration shall be in Toronto, Canada if claimant is a Canandian resident and New York, New York if claimant is a United States resident.

E. Limit of Liability

Liability for both parties is limited $5,000 in damages. Parties waive and the Arbitrator shall not be empowered to grant indirect, consequential, special, punitive or exemplary damages and/or damages or relief in excess of those permitted by this Agreement unless the statute under which they are suiing provides otherwise.

The provisions were determined non-compliant with Protocol Principles 7 and 14.

Principle 7. Reasonably Convenient Location

In the case of face-to-face proceedings, the proceedings should be conducted at a location which is reasonably convenient to both parties with due consideration of their ability to travel and other pertinent circumstances. If the parties are unable to agree on a location, the determination should be made by the Independent ADR Institution or by the Neutral.

Principle 14 is quoted in prior section.

Someone at Ashley Madison — presumably Avi Weisman though it is unclear without a signature block — executed the waiver letter on June 1, 2016.

As of March 1, 2018, the waived provisions remain in Ashley Madison's Terms and Conditions substantially unchanged.

Section 19 of the current terms read:

B. Venue

The exclusive venue for the arbitration shall be New York, New York if claimant is a resident of the United States of America.

E. Limit of Liability

Liability for both parties is limited $5,000 in damages. Parties waive and the Arbitrator shall not be empowered to grant indirect, consequential, special, punitive or exemplary damages and/or damages or relief in excess of those permitted by these Terms unless the statute under which they are suing provides otherwise.

Are secretive arbitration waivers fair?

According to attorney Cliff Palefsky of the Law Offices of McGuinn, Hillsman & Palefsky, "[i]t is completely unacceptable to leave in the agreement unconscionable clauses that [companies] are willing to waive if called on. It has what is called the ‘in terrorem’ effect of scaring people out of bringing their claims in the first place."

"[The] AAA has to do more than require a waiver. Once presented with a non-conforming agreement they have to tell the company they won’t enforce it and demand that their name be taken out of any agreement they refuse to enforce."

"It could also constitute a type of fraud if [a company] continue[s] to write in AAA knowing AAA won’t enforce the agreement."

We single out Choice Home Warranty and Ashley Madison here but there are many waiver letters in the AAA's clause registry.

Choice Home Warranty appears in the Level Playing Field arbitration database six times. All but one case has a disposition of "Administrative."

Ashley Madison does not appear in the arbitration database.

What do you think?

Is this pre-approval and waiver process fundamentally flawed?

Is it acceptable to continue to include already-waived provisions in a customer agreement?

Have potential claimants been deterred by material omission?

What questions are we missing?

Please share your thoughts and opinions below.

For this inaurgural blog post, we're giving our Patrons (quickly become one here) early access to a list of and copy of every waiver letter in the AAA online database, a copy of the original agreement, a copy of the most recent agreement (if available), and our research into whether a company has amended its agreement after executing the waiver letter.

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