Hannah on Arbitration and Class-Action-Waivers in Terms of Service

On our mailing list about terms of service, where we discuss specific parts of terms, we sometimes end up discussing legal things more generally. Indeed a lot of services, especially in the US, require users to waive their right to a class action or even sometimes require that any matter resolve through private arbitration rather than in the public court system. We often felt that these clauses were unfair for users. So I wanted to share Hannah’s analysis with you. Hannah is an attorney practicising in the US and has been contributing a lot of her insight to the mailing list. Thanks a lot Hannah! -- Hugo

My practice involves writing a lot of terms of use, so obviously, I like things that provide my clients the most protection possible.

However (and please forgive me, I'm about to get very preachy...) speaking strictly for myself, I strongly dislike them in the context of standard terms of service and end user license agreements. On the one hand, I understand why the Supreme Court [of the United States] made the decision it did: in a well-negotiated contract, where two parties have, for reasonable consideration, agreed that they will waive the right to class action and agreed that they will settle disputes through alternative dispute resolution rather than going to court, the parties should be held to that agreement. However, terms of use and EULAs are not well-negotiated contracts. They are not negotiated contracts at all, and this fact changes everything.

Terms of use and EULAs are contracts of adhesion: non-negotiable contracts in which one party has all the bargaining power and the other party can only take or leave the the terms. Given the doctrine of unconscionability (unconscionability has two factors: procedural and substantive unconscionability, and both have to be satisfied before a contract can be found unconscionable), I believe that terms of service are, at the outset, barely fair. They start out being procedurally unconscionable. It is the job of the person writing the terms of use to make sure they aren't also substantively unconscionable, because if they are, the entire agreement could fail.

This is why I really get upset at class action waivers and poorly drafted, consumer-unfriendly arbitration clauses (as well as other majorly faulty terms of use elements). It's my job to write terms of use that protect my clients, of course. But it doesn't protect my client if I write an agreement that is so horribly weighted in their favor that it actually harms their customers to do business with them. It benefits no one if the terms of a contract are so unfairly advantageous to one side that a court must invalidate the agreement.

To sum up, because I did get wordy: I absolutely think there is a justifiable reason for class action waivers and arbitration requirements in negotiated contracts. But in contracts of adhesion, like terms of use agreements, I think they run the risk of making the entire agreement unconscionable.

(P.S., this is not meant to be legal advice, etc. It's meant to be common sense. If you write an unfair agreement, it's probably unfair, even if you're technically allowed to do it. The end.)

Context: we were discussing Sony’s terms of service where they impose arbitration and waive rights to a class action.