by: Abby Hug, Senior Staffer

The Federal Arbitration Act (FAA) reflects a federal policy that strongly favors arbitration for resolving disputes, especially regarding written agreements between a buyer and seller. Arbitration appeals to organizations because arbitrators tend to issue results that favor the company that hired them, it is cheaper than litigation, and keeps product defects and other reputational risks private. With companies increasingly including arbitration provisions in sales and service contracts, consumers have sought ways to avoid some undesirable results of individual arbitration.

The Supreme Court has supported the FAA’s preference for enforcing arbitration clauses and has extended it to forced arbitration provisions. In DirecTV v. Imburgia, the Supreme Court upheld a mandatory arbitration clause in a consumer service agreement, which additionally prohibited class arbitration. The Court reasoned that the FAA clearly states that written provisions in contracts that mandate arbitration are enforceable as all other contracts are enforceable. Companies throughout the United States use forced arbitration for employment and consumer contracts, commonly used for car leases. Forced arbitration clauses in consumer contracts ensure that customers settle their disputes with a company through arbitration rather than through court proceedings. Many consumers are unaware that sellers have subjected them to these mandatory arbitration proceedings. In the automobile industry, sales contracts and leases in almost all transactions include forced arbitration clauses. All 50 states give automobile dealers the exclusive ability to decide what they include in their sales or lease contracts, including mandatory arbitration clauses.

Tesla is one of the most recognizable car brands in the world as a high-profile American manufacturer of electric automobiles. It further distinguishes itself from other car manufacturers by selling directly to its buyers rather than through dealers. Tesla’s Model Y is now the world’s bestselling car, and the company continues to develop new models and new technology for its vehicles, like self-driving capabilities.

In May 2023, seven senators issued a letter to Tesla, expressing their concern over the company’s use of forced arbitration clauses in both consumer and employee contracts. The senators stressed Tesla’s forced arbitration clauses’ detrimental impact on the public. They requested that Tesla respond with relevant information and data about the number of consumers that filed a safety complaint, opted out of the clause, and generally, how these arbitration proceedings usually result. Forced arbitration clauses ensure that the public is not informed about any legal disputes that arise from defects in Tesla’s automobiles because arbitration proceedings are private. Private arbitration keeps valid safety and business practice concerns concealed from other potential Tesla customers. There have been reports of hardware and software issues, steering wheels falling off, vehicles combusting, and, most recently, issues regarding the self-driving capability of the vehicles. The February 2023 recall of almost 363,000 Tesla vehicles with “Full Self-Driving Software,” initiated by the National Highway Traffic Safety Administration (NHTSA), highlighted the issue of Tesla’s concealment of these safety issues through forced arbitration. If this information is publicly available, consumers can discover potential major defects before considering purchases.

In addition to forced arbitration provisions affecting consumers’ ability to make informed business decisions, these clauses make it nearly impossible for consumers to bring class action lawsuits or obtain information about previous related cases. In September 2022, a group of Tesla owners tried bringing a class action suit against the company, alleging that Tesla misled the public about its vehicles’ self-driving capabilities. In October 2023, a district judge for the Northern District of California ruled that the plaintiffs agreed to arbitrate any legal claims when they accepted the terms and conditions in the vehicle purchasing agreement, so they must abide by the arbitration arrangement. Tesla gives consumers the option to opt out of arbitration within 30 days of signing the purchasing agreement by sending a letter including one’s name, vehicle identification number, and intent to opt out of arbitration. However, it is unlikely that most consumers know of this option or decide to do so, especially when private arbitration conceals previous safety concerns about the products. Further, many consumers sign the purchasing agreement online, before delivery of the vehicle and its “vehicle identification number,” which the letter requires to opt out of arbitration effectively.

In addition to forced arbitration provisions affecting consumers’ ability to make informed business decisions, these clauses make it nearly impossible for consumers to bring class action lawsuits or obtain information about previous related cases.

Abby Hug

The recent increased scrutiny of Tesla’s forced arbitration practices resulted in efforts to ensure consumers can adequately plead their claims through mass arbitration. A large number of individual consumers may resolve their disputes through mass arbitration, which imposes particularly high costs on the company facing these claims. Mass arbitration is growing in popularity as a way to combat forced arbitration, because although the proceedings are still private, claimants are able to make a greater financial impact on the company. Lawyers also use mass arbitration as an effective tool when circumventing mandatory arbitration clauses’ ban on class action suits. Claimants may also more easily recover damages, as many companies may settle instead of arbitrating each claim and paying the steep fees associated with mass arbitration. Companies usually use arbitration to lower costs: they can avoid litigation, and the fees associated with arbitration for a few individual claims are much lower than potential awards given in court. However, by utilizing mass arbitration with hundreds or thousands of claimants, companies face exponentially larger fees than with individual claimants, and complaints may force them to pay several thousands of dollars per claim before the arbitration process even begins. Employees effectively used mass arbitration against DoorDash regarding its employment contracts. DoorDash faced over 5,800 arbitration claims and failed to pay the $12 million in administrative fees to begin the arbitration process. The court eventually compelled DoorDash to arbitrate. Such costs can be devastating for a company, and the trend towards using mass arbitration, along with political pressures, may cause Tesla to reevaluate its use of forced arbitration in the coming years.

Mandatory consumer arbitration clauses are commonplace in the United States, and most people cannot avoid them, especially when buying certain goods like automobiles. Companies use them to decrease potential costs of lawsuits, as individual arbitration is comparatively cheap, and to maintain their reputation, as the proceedings are private. Tesla is just one example of a company whose forced arbitration clauses disadvantage potential customers looking to make informed purchase decisions. However, the development of mass arbitration gives claimants a better way to recover damages and bring product defects to the attention of organizations like Tesla. As mass arbitration continues increasing in popularity, companies may reconsider using forced arbitration clauses and instead opt for modified provisions that will encourage potential claimants to seek other, less expensive avenues of redress.