To Arbitrate or Not To Arbitrate: How Courts Deal with Arbitration Clauses

By: Julia Tuck, Class of 2025

Background

Most people have unknowingly agreed to an arbitration clause at some point in their lives. Perhaps you clicked “Agree” without reading the Terms and Conditions of your brand-new iPhone, or you signed all the paperwork at the car dealership to take your new car for a drive. In both cases, you probably agreed to arbitrate any disputes that arise between you and the seller based on the terms that were in that contract.

An arbitration clause is “a clause in a broader contract in which you agree to settle out of court . . . any dispute that arises with your counterpart.”[1] Arbitration is often praised as a “relatively inexpensive, brief, and confidential” alternative to litigation.[2] The process involves a neutral arbitrator, often a retired judge, and flexible rules that can be set by agreement of the parties.[3] Despite the positive aspects of arbitration, there are downsides not often emphasized, particularly to consumers.[4]

Courts tend to enforce arbitration clauses and will typically only intervene to uphold the validity of such a provision. Recent cases highlight that arbitration clauses are often enforced in a way to limit a consumer’s options for dispute resolution.[5]

A Recent Application

On January 27, 2023, the District Court for the Southern District of New York granted a motion to compel arbitration filed by Defendant Home Box Office Inc. (“HBO”).[6] Plaintiffs in that case sued HBO under the Video Privacy Protection Act (“VPAA”)[7] for allegedly sharing personal information with Facebook without their consent.[8]

While recognizing that the Federal Arbitration Act (“FAA”) applies to the agreement with HBO, Plaintiffs centered their argument on the idea that they never entered into an enforceable contract with HBO because they were not able to review the Terms of Use (“TOU”) until after payment was made.[9] In other words, because Plaintiffs were not able to review the TOU, they were not able to form the requisite intent to enter into the TOU. Defendant argued simply that Plaintiffs were able to review the TOU prior to using its platform and that “bolded text . . . notifies subscribers that the terms contain an arbitration agreement.”[10] Further, the FAA generally views arbitration clauses as valid and enforceable.[11] Considering this, courts tend to enforce arbitration clauses that are in accordance with the FAA and promote a stream-lined process for alternative dispute resolution.

The District Court found that Plaintiffs had agreed to the TOU, arbitration agreement and all.[12] The TOU were available for review, contained a conspicuous notice that they contained an arbitration clause, and Plaintiffs “continued to renew their HBO Max subscription, even after they were well aware of the arbitration agreement in the TOU.”[13] Thus, the parties were required to arbitrate any claims related to Plaintiffs’ allegations and could not try to litigate the matter in court.

Conclusion

Courts tend to favor the enforcement of arbitration clauses, and consumers bear costs because of that.[14] Consumers are often “one-shot players” and are not able to navigate the nuances of arbitration, resulting in 94% of consumer-company arbitrations result in the company prevailing.[15] Even with this striking result, consumers are often required to agree to arbitration clauses simply to use the products that have become part of modern life.

For all the potential benefits of arbitration clauses, there is also a potential for lurking costs. In many cases, consumers do not have much control when trying to dispute the validity of an arbitration clause and often cannot win in an arbitration setting due to the immense disadvantages already discussed. Thus, arbitration clauses will have to be considered more closely based on their effectiveness and whether these are reasonable long-term for society overall.

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[1] Katie Shonk, What is an Arbitration Agreement? The Ins and Outs of Contractual Agreements to Engage in Arbitration, Harvard Law School (Jan. 16, 2023) https://www.pon.harvard.edu/daily/conflict-resolution/what-is-an-arbitration-agreement/.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] McDaniel v. Home Box Office, Inc., No. 22-CV-1942 (S.D.N.Y. Jan. 27, 2023).

[7] Id. at *1.

[8] Christopher Brown, HBO Succeeds in Bid to Force Video Privacy Suit to Arbitration, Bloomberg Law (Jan. 30, 2023) https://www.bloomberglaw.com (follow hyperlink).

[9] McDaniel, No. 22-CV-1942 VEC at *4.

[10] Id. at *2.

[11] Id.

[12] Id. at *6.

[13] Id.

[14] Shonk supra note 1.

[15] Id.