Where the mountain meets the road. Photography by Tony Figueroa

Tyranny of the Arbitrators

And the Waterfall of Doom — a Follow Up

This is Part 2. Click here for Part 1, here for Part 3, and here for an overview in the form of a FAQ. If you have not already read Part 1 or the FAQ, you should probably skim one or the other for proper context.

Once again, I am not a lawyer and that’s the point. This is my — and only my — personal opinion.

I have gotten so much great feedback. Thanks to everyone — especially you experts who have helped me understand the finer points of law. Your patience is appreciated.

This follow up is largely based on that feedback. If you just read the first article, this one will be fairly repetitive to start but leads to some additional points.

Executive summary: The issue comes down to implied waiver vs. express waiver. If the consumer in certain states is presumed to know that they cannot access small claims court despite what their contract implies, then the American Arbitration Association (“AAA”) must be subject to the same presumption. If the AAA examiners believe an agreement contains an implied waiver but in practice there is no waiver then it must require express waiver. There’s no way around it. The AAA must reject these sorts of arbitration agreements and require their modification. Anything less calls the AAA’s integrity into question.

Small claims court claims are not excluded from arbitration — no matter what your consumer agreement or the AAA’s rules might say.

My original article was intended to be cynical and provocative. While I am open to being convinced that this entire episode is a waterfall of errors (consumer doom, really), I can also see how it is not.

The AAA’s Intake Review

From the AAA’s document, “AAA Review of Consumer Clauses” (and now in the amended “Consumer Arbitration Rules”):

“In order to determine if the arbitration agreement substantially and materially complies with the due process standards of the Consumer Due Process Protocol [“CDPP”], the AAA reviews the parties’ arbitration clause only, and not the entire contract. The AAA’s review of the arbitration clause is only an administrative review to determine whether the clause complies with the AAA’s minimum due process standards in consumer arbitrations.” [Emphasis Added][1][2]

The AAA does not provide agreement language. Its rules provide an end — consumers shall not be prohibited from accessing small claims court — and it is up to the drafters of arbitration agreements to achieve that end[3].

Waterfall of doom — man-made or nature-made? Photography by Tony Figueroa

When there is a dispute, the AAA performs an “intake review” of the arbitration agreement to determine whether it complies with those ends. The AAA states that it will deny jurisdiction to those arbitration agreements that do not comply[1][2].

The qualifications of the staff performing these reviews are unknown. The reviews are not shared and are not challengeable to the AAA directly. In our arbitration filing, we outlined our concerns but no additional information or follow up questions were asked by the AAA’s examiners.

If the AAA conducts its intake review by superficially examining the arbitration agreement, without taking into account the effect that extraneous qualifiers will and have had under varying laws, is the AAA really doing anything more than rubber stamping its own legal ignorance?

Would the AAA accept the following arbitration clause as rule-compliant: “Disputes filed in a small claims court are not subject to arbitration, so long as the sky is blue…”?

Conceivably, the AAA could claim it has no duty to know what color the skies are in every state and allow the clause. Skies are mostly blue anyways, right?

Citibank’s small claims exclusion clause is as follows: “Disputes filed in a small claims court are not subject to arbitration, so long as the disputes remain in such court…”[4]

In Arizona and elsewhere, under longstanding state law, Citibank can unilaterally and mechanically cause a claim to no longer remain in small claims court[5]. It then combines that unilateral removal action with its removal language — “…so long as the disputes remain in such court…” — to justify a referral to arbitration. The court will not deny this request. Therefore, for large populations, Citibank’s arbitration agreement excludes no disputes from arbitration.

To legal professionals responsible for a nation-wide organization like the AAA, is not Citibank’s clause equivalent to the blue sky clause? It should be obvious to anyone knowledgeable in certain states’ laws how Citibank’s small claims court exclusion clause contains its own destruction.

Actually, Citibank’s clause is arguably worse. It would be as though Citibank could control the color of the sky but fails to inform consumers that it will use that capability when it can to bar access to small claims court. Even if aware of Citibank’s ability to do so, the consumer is unlikely to expect Citibank to do so — especially given any knowledge of the AAA’s and JAMS’ rules.

Why would the consumer expect Citibank to substitute rapid, inexpensive resolution for lengthy, expensive resolution?

Frankly, if the consumer is expected to know that Citibank will use its clause to prevent access to small claims court, why is the AAA not held to the same standard? Surely the AAA is more sophisticated than a consumer.

If the AAA does know this, why is it not compelling Citibank and others to alter their agreements to prevent this outcome?

Find me an attorney that does not think they can draft an agreement that will prevent this outcome.

At a minimum, by allowing the removal language, is the AAA not obligating itself to check for misuse during intake?

The AAA has an obligation to deny jurisdiction in my and similar cases.

Begin cynicism.

The AAA or the Arbitrator

Many have argued that it is not the AAA’s responsibility to dig so deeply into a claim during its intake review — that this decision should always be left to the arbitrator.

While I disagree that catching this contractual trap requires any digging (or that the AAA has not already obligated itself to do so), there are significant fundamental fairness problems with that argument.

The AAA needs to answer the following questions:

  1. Is a consumer small claimant (picture your grandma) expected to argue arbitrability in addition to the underlying issue every time this happens?
  2. Are they expected to successfully do this against a large law firm without representation?
  3. Do we expect arbitrators to decide consistently?
  4. If the AAA’s intake review has already determined compliance, why would an arbitrator believe he/she has an obligation to revisit the question? How would a plaintiff successfully argue otherwise?
  5. Is the arbitrator expected to overturn the decisions of his/her employer, the AAA? How is that not a conflict of interest?
  6. Is there no way that Citibank could have drafted its agreement to avoid this result?
  7. Why does Citibank not feel compelled to grant all consumers a right to small claims court?

Leaving the decision to the arbitrator unnecessarily increases complexity, time and cost. It also risks bad decisions and serves to aid deep pocketed wrongdoers seeking to keep their wrongdoings confidential.

I find it hard to believe that this is the first time a small claims court claim was removed to AAA arbitration against the objections of the filer. Citibank’s agreement has contained the removal clause for at least eight years.

My guess is that in prior cases the consumer was ignorant of their rights under the agreement, the arbitrator avoided the question by claiming the AAA had already decided compliance, or the claim was settled.

With its agreement, Citibank can unilaterally prohibit large portions of the population from accessing small claims court for resolution. I’ve done very basic research (a few Google searches), but Arizona and Nebraska seem to have the same law.

Many other states, like Connecticut and Ohio, have a similar removal law but exercise requires an affidavit of defense. I am not sure how much of a hurdle that affidavit is but if it’s as simple as it could be, it may effectively be used in the same way. (If anyone knows the answer to this, please let me know.)

Regardless, Arizona has a population of nearly 7 million. Through inaction, the AAA intends to allow the drafters of one-sided agreements to substitute arbitration for small claims court resolution for 7 million people? Why?

At what point do we question the AAA’s motivations and objectivity?

Others have tried to blame the Arizona legislature. The Arizona removal law has been in force for more than 30 years. So I find the argument disingenuous. It is the drafter’s responsibility to develop language that is harmonious with states’ laws and the AAA’s rules. It is the AAA’s responsibility to coerce harmony. The AAA cannot shy away from its enforcement duties in the face of a large, repeat customer — or create that perception.

Citibank opted for regular Justice Court over Small Claims Court, which it has a right to under Arizona law. It cannot then opt for arbitration and thereby usurp a well defined AAA fundamental fairness rule of due process. The AAA should have denied jurisdiction, leaving the claim in regular Justice Court. Such an action would have sent a message to Citibank that abusing procedure will not be tolerated. So why didn’t the AAA do that?

Is our agreement unenforceable because it contains an illusory promise?

If there is not implied waiver of a statutory right of removal, then there must be express waiver — anything less fails to accomplish a right to small claims court.

The AAA is a business. It represents to the world that consumer arbitration agreements will be judged by the standard of the CDPP. This representation induces parties to accept its agreements, use its service and outsiders to view the AAA as fair (See Justice Scalia’s comments in AT&T Mobility v. Concepcion). If this is a false representation, we have a civic duty to sound the alarm.

The AAA has created a waterfall of doom for consumer small claimants.

I consider my cynicism well-founded.

The Calculation

It becomes a simple calculation for Citibank: how many consumers will catch on to its wrongdoing, of those how many will take it all the way to judgment, and of those that take it all the way, what will its liability be? If outcomes are confidential and Citibank can increase the time and cost of getting a small claim to judgment to multiple years and tens of thousands of dollars, how many small claimants are going to get to judgment? Few, if any. How many small claimants can Citibank steamroll into submission?

Citibank’s steamroller ran into my mountain of perseverance. Come stand with me on the mountain.

If you are a victim of similar circumstances, want to help or have any useful information to share, please send an email to removedsmallclaim at gmail.com.

If you think I am wrong and have a legal argument as to why, please share. I am not hostile towards thoughtful disagreement — I welcome it. My goal is to protect our rights as consumers and citizens. If the wrongdoers among us can keep their numerous but small wrongdoings confidential, with the demise of consumer class action, we are going to see a lot more small wrongdoings — think: small un-agreed to charges.


[1] AAA Review of Consumer Clauses: [Click Here]. No longer available on AAA website.

[2] Consumer Arbitration Rules, September 1, 2014: [Click Here]; See Rule R-1 (d).

[3] The AAA’s Consumer Due Process Protocol: [Click Here]; See Principle 5, among others.

[4] Citibank Checking Plus Agreement, September 2010: [Click Here]. Subsequent and previous agreements are substantially the same.

[5] Arizona Revised Statutes (“A.R.S”) 22–504 (A), Transfer to Justice Court: “If any party whose rights are or may be adjudicated by an action in the small claims division, at least ten days before the time set for hearing objects to the proceedings being held in the small claims division, the action shall be transferred from the small claims division to the justice court and the provisions relating to civil actions in justice court shall apply.”