The use of mandatory arbitration clauses has been heavily litigated in the last couple of years in the state of California. In many cases, certain disclosures are required when mandatory arbitration clauses are used to guarantee that the less powerful party (the consumer) is aware of the terms of the contract and the options in the event of a breach. Some courts have held that these contracts are presumptively invalid as a matter of public policy because they preclude one party from initiating litigation arising from a contract of adhesion (in other words, a “take-it-or-leave-it” contract). Consumer contracts are typically considered adhesion contracts and courts are far more skeptical about the party’s ability to consent to all the terms of such an agreement.

California courts have traditionally favored consumers in these types of contracts. For example, class action waivers in mandatory arbitration clauses were found to be unenforceable, thereby allowing consumers with small claims to redress their claims in the context of a class action lawsuit. However, the U.S. Supreme Court effectively halted this trend by declaring that class action waivers are in fact enforceable under the Federal Arbitration Act. Although the case involved a consumer contract rather than an employment contract with a mandatory arbitration clause, the Court seemed to signal its desire to show deference to the contract that was entered into between the parties.

Recently the federal government announced a rule that questions the viability of mandatory arbitration in certain types of relationships and contracts. The rule, released by the Department of Health and Human Services, invalidates the enforceability of binding arbitration clauses in nursing home contracts. These clauses require families to resolve their disputes regarding matters related to the care in a nursing home facility in a non-courtroom setting. The law is applicable to any facility that receives Medicare or Medicaid funds, which includes most facilities in the country. The nullification of these mandatory agreements provides parties with the opportunity to maximize their awards by pursuing an action in court. A study in 2009 found that the average award in an arbitration setting was 35 percent lower than a courtroom ruling.  In addition, supporters of the new law are hopeful that eliminating mandatory arbitration from nursing home contracts will promote a higher standard of care overall.

Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.