Francisco González de Cossío
González de Cossío Abogados, Mexico City
​​​fgcossio@gdca.com.mx

The arbitration agreement provokes dilemmas when related to legal acts with implications in consumer protection law (including class claims).  The solutions have oscillated between favoring either arbitration or consumer protection.  I propose that there is a better view: their coexistence.  This alternative has the merit that the protected interest of each of them is respected and achieved. This leads to more rights, which is always desirable, particularly when dealing with protected parties (as consumers).  

Current state of affairs

The existence of arbitration agreements in acts subject to consumer protection legislation and in situations that allow class claims has been raising concerns. Different jurisdictions have tackled the dilemma by analyzing which prevails: consumer protection and class claims or arbitration.  This entails unfortunate implications (§C).

Prevalence of consumer protection

Consumer protection law seeks to avoid abuses of the industrial class over the consumer class.  In the absence of a regime that allows mustering the cost suffered by the consumer class the producer of bad products can rely on the fact that the consumer will find more practical not to exercise his rights. An example may illustrate why.  

Imagine the reader that buys a blender for US$20.  When he installs it, he realizes that it does not work.  He goes to the distribution channel. They respond that they are not the producer.  That the producer can be found in a distant address; which involves a one-hour drive away.  The analysis that the consumer will do is whether it is worth incurring the costs to assert his rights.  One option is to file a claim with the consumer protection authorities.  But that also involves a cost.  And both costs will be multiplied by the probability of a positive result.^[1] If the response of the consumer protection authorities is effective, the desire to go to them will be higher - and vice versa. Although there are consequences that indicate that this way of doing business is not in the best interest of the producer,^[2] both, experience and behavioural analysis show that this happens. And the fact that the consumer is not eager to incur the costs of asserting his rights turns this into a clever strategy.   That’s why legal engineering has created class claims. This tool, if well designed, allow to muster the costs in one front. This allows allocating the cost to whom has created it - a powerful dissuasive of wrongdoing. 

Prevalence of arbitration

When disputes entail consumer protection issues, the question is whether they will be considered by the arbitrator - or if the arbitrator should even consider them. After all, the arbitrator is the contract judge, not the protector consumer body.

This last assessment invites us to consider that if the relationship triggers consumer protection issues, the resources envisaged by said lex specialis shall be activated. This, however, may be obstructed by the negative effect of the arbitration agreement.

The negative effect of the arbitration agreement and compétence-compétence are the keys to the effectiveness of arbitration.  These guarantees that the arbitration agreement will not be circumvented by any party. However, the negative effect of the arbitration agreement raises a consumer protection concern: denial of justice: the cost of arbitration will de facto prevent claims.  The concern is valid: consumer protection law and class claims have a role to play.  Their circumvention can be extremely profitable.  

As can be seen, we face a dilemma: which should prevail? Consumer protection or arbitration?

Using as a premise the negative effect of compétence-compétence and the principle of favor arbitrandum^[3] it has been sustained in several caselaw that arbitration shall prevail.  For instance, in ATT v Concepcion^[4] the Supreme Court of the United States ruled in favor of the arbitration forum over a class claim.^[5] The background was as follows.  In a class-claim involving overcharges in mobile phones, an arbitration agreement existing in the mobilephone contract put at issue whether the matter could be dealt with before US courts.  The District Court and the Court of Appeals for the Ninth Circuit held that the arbitration agreement was “unconscionable” since it involved a class claims waiver.  The Supreme Court overturned holding that §2 of the FAA preempted said solution.^[6] Failure to do so would be contrary to the favor arbitrandum principle.^[7]

Something similar happened in France.  The cases Jaguar^[8] and Rado^[9] decided in favour of arbitration.  The first involved the sale of a limited series luxury car and the second the opening and management of an account. In the first, it was reasoned that the arbitration clause shall apply due to its independence. In the second, that in the absence of a manifest nullity, the arbitration clause shall apply by virtue of its independence. In both it was stated that arbitrators shall observe public order and are under the control of the annulment judge regarding their jurisdiction and the arbitrability of the matter.^[10] 

This view recently changed. In PWC v Lefebre^[11] the French Court of Cassation held that, although the concerning contract entailed an arbitration agreement,^[12] since the recipient of the services in France was a consumer, he could bring his action before the judge.^[13]

• The consequence is that:^[14]
  
  'The procedural priority rule enacted by this text cannot have the effect of making impossible, or excessively difficult, to exercise the rights conferred on consumers by Community law which national courts are required to safeguard.'
  
  (Author’s translation)

The 'procedural priority rule' is the arbitral referral principle, which seeks to enforce the principle of compétence-compétence.

The Court of Cassation confirmed the decision by setting aside the arbitration clause as it was considered “unfair”^[15] seeking to ensuring the full effectiveness of the Community law of consumer protection.^[16]

Implications

Prevailing one lex specialis over another has implications.

1.    Consumer protection

Choosing consumer protection law (including class claims) frustrates the will of the parties to seek the solution of their problems through arbitration.  It “neutralized the negative effect of compétence-compétence in the name of consumer protection”.^[17]   The decision to choose arbitration is usually a way of managing the legal risk.  By leaving it without effect - the result of prevailing consumer protection legislation - the risk management falls apart, provoking legal uncertainty.  

2.    Arbitration

Choosing arbitration has the effect of leaving the consumer without the protection established in the consumer protection law.  Since the arbitration cost becomes a dissuasive from an action that seeks to vindicate a consumer right.  

This generates a second negative effect (which as a believer in arbitration worries me): that arbitration is perceived by the consumer class as the way in which big companies deprive of effectiveness a regime that protects the consumer.

The coexistence thesis is more desirable

The prevalence analysis not only is suboptimal, but it is not necessary.  There is a third view.  The current analysis recalls the Aristotelian principle of the excluded middle: either it is, or it is not: tertium non datur.  Sometimes there is a third view to tackle the problem, in which case the dilemma is false.  This is our scenario I will develop the proposal, and then, I will explain why is more desirable.

Proposal

De lege ferenda I propose to accept that: 

(1)    Consumer protection law is not waived due to the existence of an arbitration agreement;
(2)     Class claims are not waived due to an arbitration agreement, with or without the participation of the party who is bound by said arbitration agreement; and
(3)     The arbitration agreement shall not be considered null and void (of the kind that is within its jurisdiction) due to consumer protection or class claims issues.

None of the disciplines at stake (arbitration, consumer and class claims) prevails over another; coexist.  The three of them can (shall) have effects when they concur.  The arbitration agreement does not cease to have effects due to a class claim: both can coexist.
A concern that may arise from the coexistence proposal is the risk of double compensation. However, the risk can be solved by adopting the following solution: the subsequent judgments offset what has already been indemnified.  
This solution is the adequate remedy for situations where different entitlements coexist and stem from a specific set of circumstances.  The multiplicity of laws providing tutelage and rights of action may very well mean that a single set of circumstances may give place to claims under different regimes - but the monetary damage is the same.  Hence, what needs to be ensured is that double (or multiple) compensation be avoided.  A proper remedy to achieve this is the advanced proposal: the judgment later in time offsets amounts thus far received.

Desirable

Conceiving the disciplines as unconnected, concluding that they do not subordinate each other, is desirable. As a result, the consumer has more options: he can address his problem in three different ways: 

(1)    Arbitration: He can activate the arbitration agreement, which will allow him to have a specialized court, following a process tailored to the needs of his problem, issuing a ruling that is res judicata.
(2)    Consumer protection: He can report the problem to the consumer protection authorities.  
(3)    Class claims: he can agree to be part of the class in a collective action. Depending on the regime, it would be an acceptance (opt in) or not exercising their right to separate (opt out).

Result: the consumer is vested with more options; more rights.

The opposite thesis (that of prevalence) subtracts rights. It implies that one of the aspects described will prevail, which ex hypothesi means the other one doesn’t.  Ergo, the consumer will have fewer rights.  This, I submit, is unfortunate. Depending on the characteristics of the problem, it may well be in the interest of the parties (including the consumer) to address the problem in different ways - particularly given that consumer protection and class claims are often sensitive domestic matters.
 

 

^[1]The decision to incur a cost to achieve an objective involves an analysis (conscious or unconscious) of the probability of success.  Always.

^[2]Reputation and information play a role. Regarding the first, the economic analysis of reputation shows that the more decent a company is, the more business it can do and the less onerous it is. And vice versa. Regarding information, the consumer plays a role: he obtains information regarding the products he wants to purchase. And the more durable they are, the more informed he is since the implications of his decision would be greater.

^[3] Several United States caselaw mention the “policy in favor of arbitration” as analytical premise of solutions to various dilemmas..

^[4]AT&T Mobility LLC v. Vincent Concepción et ux (131 S.Ct. 1740), decision 27 April 2011.

^[5]The case was about a class claim against AT&T for false advertising: having offered free phones, sales tax was collected, which the plaintiffs and other class members believed to be contrary to what was promised.

^[6]The relevant part of §2 of the FAA was the last sentence which allows to declare arbitration agreements as unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.”.

^[7]The question was as follows: “whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures.” (p. 1744). It held that no: “the Federal Arbitration Act preempts California’s judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts” (Id. p. 1740).

^[8]Philippe Renault v Sociétés V2000 (Jaguar France), Cass. Civ. 1re, decision of 21 May 1997.

^[9]Rado v Painewebber, Cass. civ. 1re, decision of 30 March 2004.

^[10]REVUE DE L’ARBITRAGE, 2021, No. 3, p. 662.

^[11]Société PWC Landwell – PricewaterhouseCoopers Tax & Legal Services v Lefebvre et autres, Cass. Civ. 1re, decision of 30 September 2020 (“PWC”).

^[12]CIMA, a Spanish arbitral institution.

^[13]PWC ¶24.

^[14]Id. ¶13.

^[15]The adjective is used in the context of article 3.1 of the Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, which establishes that a contractual term will be unfair if causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. Section 1(q) of the Annex to Article 3.3. describes as “unfair” the terms which have the object or effect of: “excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with another party to the contract.” (emphasis added).

^[16]PWC ¶24.

^[17]Christophe Seraglini, ECLAIRCIE POUR LA PROTECTION DU CONSOMMATEUR DANS L’ARBITRAGE INTERNATIONAL (à propos l’arret Cass. Civ. 1re, 30 septembre 2020), Revue de l’Arbitrage 2021, No. 3, p. 658.