The Cost of Doing Business: The AAA's New Consumer Clause Registry and Due Process Compliance
By: Michael J. Dommermuth and Sarah M. Wright
Colorado Automobile Dealers Association Newsletter
Every legal practitioner today has likely interacted with the American Arbitration Association (AAA) in some way, or at the very least has heard of the various alternative dispute resolution services the AAA provides. Traditionally, the AAA’s role in the alternative dispute resolution process is to administer a case from its initial filing until the matter’s conclusion. In the realm of consumer arbitrations, however, the AAA has implemented a rule change that provides the organization with a proactive role in ensuring due process compliance in the arbitration process before a case is ever filed. Dealer attorneys should be aware of this rule change as large finance and lease companies that do business with dealers are likely to participate in this program.
As of September 1, 2014, the AAA implemented Rule 12, entitled Business Notification and Publicly-Accessible Consumer Clause Registry. The new rule requires all businesses that use AAA Rules in a consumer contract to jump through a number of procedural, and financial, hoops before the business can invoke the power of the AAA to arbitrate a dispute.
Also on September 1, 2014, the AAA created the Consumer Clause Registry (Registry). The Registry contains a list of businesses that submitted their consumer arbitration clauses to the AAA, which the AAA has determined substantially and materially comply with the due process standards of the AAA Consumer Due Process Protocol (“Protocol”). The Registry is publicly available and searchable, and contains the name of the business, its address, and its consumer arbitration clause, along with any related documents deemed necessary and appropriate for inclusion by the AAA. The intent behind the Registry is to create a searchable database for a consumer to determine if the AAA has reviewed a consumer arbitration clause and will administer an arbitration.
The AAA’s new rule change is a costly proposition. When a business submits a consumer contract to the AAA for review of the contract’s arbitration clause, each submission requires a nonrefundable fee. The fee is currently $650 for review for due process compliance and to maintain the clause on the Registry through 2015. For those businesses submitting an arbitration clause at any time within the 2015 calendar year, the cost of reviewing the clause and maintaining the clause on the Registry is $500. In subsequent years, an annual fee of $500 will be charged to maintain a previously approved and included clause in the Registry.
The rules are silent with regard to the cost to register a new clause after 2015, and there is the language of Rule 12 provides not protection against future increases to these costs for new clauses. The AAA has indicated that, if after review, however, it determines there is a Protocol violation, it will notify the business and provide an opportunity to revise the clause. Waiver or revision does not require any additional fee.
Failure to Register Arbitration Clause
Rule 12 requires businesses around the country to register all consumer contracts that use AAA arbitration rules. If a business uses a consumer contract that invokes the AAA Rules, but the business failed to register, the clause with, the AAA will still administer, but the business must pay an additional cost. If the AAA receives a demand for consumer arbitration under an arbitration clause that was not previously submitted to the AAA for review and inclusion on the Registry, it will assess a $250 expedited review fee in addition to the standard fee.
For any arbitration clause previously included in the Registry, the AAA requires the clause to be resubmitted for review when there is any subsequent change, addition, deletion, or amendment that is not considered de minimis. The Rule omits any definition of a de minimis change. Resubmission of clause will incur another $500 review fee. A prudent business will ensure that any arbitration clause is fully inclusive of all issues and in final form prior to submission such that only one clause need be submitted.
The AAA will refuse to administer consumer arbitrations arising out of an arbitration clause invoking AAA Rules where the business fails to pay the review fee.
Registering a Clause in a Form Arbitration Agreement
Many commercial and consumer businesses use arbitration agreements included in forms. For example, many finance companies use the same Retail Installment Sale Contract. To the extent the form will apply to any consumer transaction, it must be registered with the AAA, even if the form provider previously had the arbitration provision approved by the AAA.
Ensuring your arbitration clause meets AAA due process standards
One of the motivations behind the new Registry is to ensure all consumer arbitrations invoking AAA rules follow the Protocol. The AAA sets forth fifteen guiding principles in its Protocol. These principles should be considered when drafting an arbitration clause and will be discussed in turn below.
In many public and private communications, many NADC members have expressed dissatisfaction with AAA arbitrations. The primary objection, as expressed to the author, has been the perceived excessive cost. Even if the drafter of the consumer arbitration clause elects to select a different arbitration provider, some attention should be paid to the Protocol’s principles to avoid due process challenges.
Principle 1. Fundamentally-Fair Process. This principle acknowledges that the arbitration, and any dispute resolution process, should be fundamentally fair to all participants. “As embodiments of fundamental fairness, [the following] Principles should be observed in structuring ADR Programs.”
Principle 2. Access to Information Regarding ADR Program. At the time of contracting, the business should make reasonable efforts to ensure that the consumer is fully aware of all information regarding the business’s consumer ADR programs. The business should consider including (1) clear and adequate notice regarding the ADR provisions, including whether participation in the ADR Program is mandatory or voluntary, and (2) a vehicle to obtain additional information regarding the ADR Program. The goal is to provide the consumer with access to all information necessary for effective participation in the ADR process.
Principle 3. Independent and Impartial Neutral; Independent Administration. Due process requires a fair, independent, and impartial neutral process; however, the requirement is broader in scope than simply selecting a neutral decision-maker. The AAA suggests that an independent ADR institution, like AAA, should administer mandatory ADR programs. Administrative services provided by the independent ADR institution should include: 1) maintenance of a panel of prospective neutrals, 2) facilitation of neutral selection, 3) collection and distribution of the neutral’s fees and expenses, 4) oversight and implementation of ADR rules and procedures, and 5) general oversight and monitoring of neutrals, including the neutrals’ qualifications, performance, and adherence to pertinent rules, procedures, and ethical standards. Both the consumer and business should have an equal voice in the selection of the neutral. The neutral also has an ongoing disclosure obligation to inform the ADR administrator of any bias or circumstance that could affect his or her impartiality. The ADR administrator determines whether or not the neutral should be disqualified, and it must inform the parties of its decision.
Principle 4. Quality and Competence of Neutrals. The ADR institution should maintain a pool of highly-qualified ADR professionals, and should implement a review process to ensure neutrals are adhering to all performance standards.
Principle 5. Small Claims. If a claim falls within the jurisdictional limits of a small claims court, Consumer ADR agreements should be clear that all parties retain the right to seek relief in such courts.
Principle 6. Reasonable Cost. The costs of administering a dispute should be reasonable in relation to the size and nature of the claim, the nature of goods or services provided, and the ability of the consumer to pay. Additionally, the ADR administrator should fashion fee arrangements with all of its neutrals and all payment should be handled through the ADR administrator.
Principle 7. Reasonably Convenient Location. The ADR proceedings should be hosted at a location convenient for both parties. If the parties are unable to agree on a convenient location, the neutral should have the power to assign the location.
Principle 8. Reasonable Time Limits. ADR proceedings should occur without undue delay. The rules selected to govern the ADR process should establish specific time periods for each step of the process. It is also important to include a default procedure, should a party fail to participate in the ADR process after reasonable and sufficient notice.
Principle 9. Right to Representation. The ADR rules and procedures should inform all parties of their right to representation at their own expense.
Principle 10. Mediation. Just like the traditional court system, mediation is encouraged in the realm of ADR as a means of assisting parties to resolve their own disputes.
Principle 11. Agreements to Arbitrate. This principle reiterates the standards set forth in Principles 2 and 5. Businesses must provide consumers with: 1) clear and adequate notice of the arbitration provision and its consequences, i.e., whether arbitration is mandatory or optional; 2) reasonable access to information regarding the arbitration process, i.e., is the difference between arbitration different and court, related costs, and direction to full arbitration procedures; 3) notice of the option to use small claims courts, where applicable; and 4) notice, clearly stated, of the means by which the consumer may choose between arbitration or a traditional court proceeding.
Principle 12. Arbitration Hearings. Each party must have adequate notice of hearings as well as an opportunity to present all relevant evidence to the neutral decision-maker. Depending upon the case, telephonic hearings may be appropriate. However, the neutral should have discretion to require a face-to-face hearing upon request of either party. Hearings will be kept private and confidential to the extent permitted by law.
Principle 13. Access to Information. Similar to the discovery process utilized in traditional courts, consumer ADR agreements should establish procedures for arbitrator-supervised exchange of information prior to arbitration, bearing in mind the expedited nature of arbitration.
Principle 14. Arbitral Remedies. The arbitrator must be vested with the power to grant any relief that would be available in court, under either the provisions of law or equity.
Principle 15. Arbitration Awards. If desired, agreements to arbitrate should note that the arbitrator’s award is final and binding, subject to review in accordance with applicable statutes governing arbitration awards. In issuing the arbitration award, the decision-maker should apply any identified, pertinent contract terms, statutes, and legal precedents. Finally, at the request of either party, the arbitrator should provide a written explanation of the basis for the award. The request for a written opinion should be discussed prior to the arbitration hearing.
Implicit in the AAA’s use of the term principle, there are no absolute rules that consistently apply to every case to ensure due process compliance. A consumer arbitration clause must reflect the aforementioned principles, while also allowing flexibility to adapt to the demands of a particular case.
Registration of a Consumer Arbitration Clause
First, identify which of the business’s consumer agreements or contracts contains a dispute resolution provision designating AAA Consumer Rules or refer to AAA Rules. If alternative arbitration language exists in various agreements, consider choosing just one version in order to streamline the registration process and reduce costs. In this circumstance, the business should submit the single arbitration clause and also note (either in the cover sheet to the clause or on the clause itself) to which contracts the clause applies. If registered in this manner, only one fee and registration would be required. In the alternative, each individual clause could be submitted and registered separately, with a registration fee applied to each clause.
Next, notify the AAA of the existence of such a consumer contract or of the business’s intention to include a dispute resolution provision designating AAA Rules in a consumer contract. The AAA recommends such notice at least thirty (30) days before the planned effective date of the contract. There are two methods for submitting the consumer agreement containing the arbitration clause for review: 1) via email at firstname.lastname@example.org or 2) via website www.adr.org/consumerclauseregistry.
The “Register Now or Wait” Debate
Businesses must individually determine whether to register an AAA arbitration clause proactively, or take the gamble that no demand is made under the arbitration clause. Regardless of the decision, however, it is imperative that businesses incorporate or at least consider the fifteen principles set forth above in any consumer arbitration agreement to ensure due process compliance, protect themselves, and their customers.
This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.
Copyright © 2014 Fairfield and Woods, P.C., ALL RIGHTS RESERVED.
Comments or inquiries may be directed to: Michael J. Dommermuth and Sarah C. Millard