November 19, 2014 -

New AAA Rules (and Annual Fees) May Require You to Change Your Terms of Service

The American Arbitration Association (AAA) now requires businesses to notify the AAA of their intent to use AAA arbitration in standard consumer contracts and to pay fees to review the arbitration agreement; otherwise, the AAA can refuse the arbitration. On September 1, 2014, the AAA released new arbitration rules and supplemental procedures governing standard, business-to-consumer contracts for personal or household products and services (such as terms of service for websites and mobile apps). As part of the new rules, companies that require (or intend to require) AAA arbitration in their standard, consumer agreements must:

  1. Notify the AAA at least 30 days before the planned effective date of the contract, and
  2. Pay AAA to review and register the arbitration clause to ensure the clause’s compliance with the Consumer Due Process Protocol and AAA Consumer Arbitration Rules.

The new fees involve nonrefundable upfront and yearly recurring costs. If a company registers its clause in 2014, the fee is $650, which covers 2014 and 2015. Renewal fees for subsequent years are currently $500 per year.

If a standard, consumer contract has an un-reviewed (and unpaid) provision providing for AAA arbitration, the company may seek expedited review of the clause upon a demand for arbitration, but the expedited review costs an additional $250. Furthermore, the AAA may refuse to take the arbitration if it determines that clause is not in material compliance with the Consumer Due Process Protocol or the Consumer Arbitration Rules. Given how recently the new rules have been released, there isn’t much historical experience to determine how frequently or under what circumstances the AAA will refuse to take arbitrations.

Arbitration provisions in terms of service and other consumer-facing contracts have exploded in popularity over the past few years. Their popularity, in part, is driven by the U.S. Supreme Court’s 2011 decision in AT&T Mobility v. Conception. In AT&T Mobility, the Court upheld the enforceability of an arbitration clause and related class-action waiver, despite the fact that the governing state law would have found the waiver unenforceable. The use of the clauses in online subscription services are so common it’s hard to find services that don’t contain arbitration provisions. Particularly for companies engaging in activities that attract class action lawsuits (such as text messaging, because of the Telephone Consumer Protection Act’s statutory damages), use of arbitration clauses in their online terms of services are almost universal.  A brief (and informal) search revealed that Dropbox, Paypal, Stubhub, Spotify, and Netflix all have class-busting arbitration provisions.

All companies with standard, consumer contracts providing for AAA arbitration should immediately review their provisions for compliance with the new protocol and rules. They should also seriously consider registering their clause with the AAA. Although the AAA is the most prevalent arbitration tribunal in the United States, other tribunals exist and handle consumer disputes (the next largest provider in the U.S. is likely JAMS).