Testing Assumptions about Consumer Understanding of Arbitration

Arbitration critics often make assertions about the impact of arbitration clauses hidden in the fine print of employment and consumer contracts. In the short film Lost in the Fine Print, for example, Robert Reich bases much of his critique of what the movie calls “forced arbitration” on the lack of meaningful consumer understanding of—and therefore consent to—arbitration. The movie relies on anecdotal evidence of arbitration harms while assuming that arbitration agreements are neither wanted nor understood by most consumers.

Jeff Sovern, Elayne Greenberg, Yuxiang Liu, and I recently completed a study of consumer understanding of arbitration agreements to test the widespread assumption that consumers are the unwitting and unwilling beneficiaries of arbitration agreements. We have posted a draft of the resulting article, titled “Whimsy Little Contracts” with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, on SSRN. Here’s the abstract:

Arbitration clauses have become ubiquitous in consumer contracts. These arbitration clauses require consumers to waive the constitutional right to a civil jury, access to court, and, increasingly, the procedural remedy of class representation. Because those rights cannot be divested without consent, the validity of arbitration agreements rests on the premise of consent. Consumers who do not want to arbitrate or waive their class rights can simply decline to purchase the products or services covered by an arbitration agreement. But the premise of consent is undermined if consumers do not understand the effect on their procedural rights of clicking a box or accepting a product.


This article reports on an empirical study exploring the extent to which consumers are aware of and understand the effect of arbitration clauses in consumer contracts.  We conducted an online survey of 668 consumers, approximately reflecting the population of adult Americans with respect to race/ethnicity, level of education, amount of family income, and age.  Respondents were shown a typical credit card contract with an arbitration clause containing a class action waiver and printed in bold and with portions in italics and ALLCAPS. Respondents were then asked questions about the sample contract as well as about a hypothetical contract containing what was described as a “properly-worded” arbitration clause. Finally, respondents were asked about their own experiences with actual consumer contracts.


The survey results suggest a profound lack of understanding about the existence and effect of arbitration agreements among consumers. While 43% of the respondents recognized that the sample contract included an arbitration clause, 61% of those believed that consumers would, nevertheless, have a right to have a court decide a dispute too large for a small claims court. Less than 9% realized both that the contract had an arbitration clause and that it would prevent consumers from proceeding in court. With respect to the class waiver, four times as many respondents thought the contract did not block them from participating in a class action as realized that it did, even though the class action waiver was printed twice in bold in the sample contract, including one time in italics and ALLCAPS. Overall, of the more than 5,000 answers we recorded to questions offering right and wrong answers, only a quarter were correct.


Turning to respondents’ own lives, the survey asked if they had ever entered into contracts with arbitration clauses.  Of the 303 respondents who claimed never to have done so and who also answered a question asking whether they had accounts with certain companies that include arbitration clauses in their contracts, 264, or 87%, did indeed have at least one account subject to an arbitration clause.


These and other findings reported in this Article should cause concern among judges and policy-makers considering mandatory pre-dispute consumer arbitration agreements. Our results suggest that many citizens assume that they have a right to judicial process that they cannot lose as a result of their acquiescence in a form consumer contract. They believe that this right to judicial process will outweigh what one respondent referred to as a “whimsy little contract.” Our results suggest further that citizens are giving up these rights unknowingly, either because they do not realize they have entered into an arbitration agreement or because they do not understand the legal consequences of doing so. Given the degree of misunderstanding the results demonstrate, we question whether meaningful consent is possible in the consumer arbitration context.

6 thoughts on “Testing Assumptions about Consumer Understanding of Arbitration”

  1. I’ve developed very mixed feelings about arbitration over the past few weeks as we’ve been covering it simultaneously in two different classes, in two very different contexts. In one class, we’re learning about how arbitration is used in amateur (Olympic) sports. While one party is usually not happy with the outcome, arbitration in these cases accomplishes what it sets out to—resolve disputes quickly and in a more cost-efficient way than litigation. It’s used effectively and I leave that class thinking what a great tool arbitration is.

    Then 15 minutes later I go to my ADR class and we talk about arbitration in the consumer context and I’m horrified. We recently watched “Lost In the Fine Print” as well and it did not make me feel better. One theme that courts continue to go back to is that the consumer always has a choice. But do they? True, they don’t have to buy a cell phone plan through AT & T if they don’t like their arbitration clause. But it’s not like they can go over to Verizon or another carrier and not be bound by a similar agreement. And if they are any kind of professional or a parent, is it practical to expect the consumer to not have to use a cell phone? And I’m guessing even a contract for a land line has an arbitration agreement. Same with credit cards.

    I don’t see a court buying my argument about consumers not having a true choice. So if these mandatory arbitration agreements are going to continue to be used, I’m hoping there is a better way to help educate consumers about them. The lack of knowledge about these agreements by the average consumer that is referred to in this post is extremely troubling and upsetting. Arbitration can be a great tool, but not when it’s consistently forced on people without their knowledge. I want to like you, arbitration…stop being so sneaky.

  2. I found the documentary “Lost in the Fine Print” to be quite shocking. The video provides a wonderful glimpse of some of the downfalls of arbitration. As Becky mentioned previously, arbitration can be a great tool when both sides are of relatively equal power, such as two similarly sized businesses. However, problems lie in the business-consumer context. Admittedly, allowing a consumer plaintiff to bring every claim into court would be uneconomic. However, most people can likely agree that the arbitration examples outlined in the documentary are unacceptable as well. One obvious solution would be to allow the plaintiff more input in choosing the arbitrator. However, information asymmetric between the parties would inevitably exist as to the selection of the arbitrator. Thus, the business would have a better opportunity to select an arbitrator that is more advantageous to its side than the consumer. Another possibility may be for a court to appoint an arbitrator in a business to consumer dispute. This solution has its flaws, of course. For example, issues would likely arise as to what constitutes a “consumer” and a “business.” Businesses would likely be vehemently opposed to this solution. However, this solution would reduce the costs of litigation and also reduce the unfairness that the current arbitration system presents in the business to consumer context. Therefore, this may be one of the few viable solutions in regard to this matter.

  3. I didn’t learn about arbitration clauses until a took a class in undergrad. Many of my classmates had not heard of these clauses either and we soon realized how many we were subject too. In the example presented by the author, people actually read through the terms, which is not always the case. Additionally, if you want the service bad enough, you will still enter into a contract, even though there is an arbitration clause. Since many industries are turning to arbitration clauses, there is really no option to bring your business to a different provider because they will likely have an arbitration clause as well (take cell phones for example). I think there is a place for arbitration clauses, but I am unsure if it is in consumer agreements.

  4. Stephen, it isn’t quite that bad. That arbitration agreement covers Apple customers who live in Egypt. It wouldn’t apply to you. To the best of my knowledge, Apple does not require its US customers to agree to arbitrate (making it one of the few tech companies that doesn’t). But I guarantee your cell phone contract requires you to arbitrate, and probably at least a handful of other contracts do, too (yes, including Microsoft).

  5. This topic was covered last night in my ADR class. The professor asked the students to find an arbitration agreement that they were subject to. I used my Apple User Agreement. The arbitration agreement includes a class waiver. Perhaps most troubling was the language regarding location of arbitration proceedings, which were to take place in Cairo, Egypt. Additionally, the arbitrators could not be from Egypt. In my opinion, this is unconscionable. Not only would I have to travel all the way to Cairo, but I wouldn’t be able to use a local arbitrator. Even worse was the fact that I never noticed the arbitration agreement.

    Unfortunately, my example reaffirms the author’s conclusion that consumers are unaware of the arbitration agreements that they are signing. Had I known about the language I still would have signed the contract because, like other consumers, my choices regarding arbitration agreements are limited. These agreements are ubiquitous and even if I had chosen to buy an Android instead of an iPhone, I am fairly certain that I would be subjected to an arbitration agreement with Microsoft.

  6. This post presents issues addressed in Contracts 101. But I agree, that unsophisticated consumers are essentially waiving their constitutional rights without their consent. The complex world we live in blurs the underlying assumptions of consumer transactions. Arguably, unsophisticated consumers are less likely to even initiate complaints, so to support an arbitration principle which removes these consumers’ already diminished power is, dare I say it, unconscionable.

    Arbitration agreements give arbitration a bad reputation, and they remove the essence from ADR processes–self-determination and the ability to control the process. These agreements are so far-removed from their origination within the “folklore arbitration” model.

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