Court Denies Enforcement of Consumer Arbitration Clause In Merchandising Practices Act Case

by Dan Conlisk

Arbitration clauses have become increasingly prevalent in consumer contracts. The typical consumer – likely unwittingly – has agreed to resolve disputes in private arbitration simply by, for example, applying for a credit card, obtaining cell phone, cable or internet services, shopping on line, purchasing software, or hiring a financial advisor. In doing so, such consumers have surrendered their right to have disputes resolved by courts. Instead, they are forced into an arbitration system in which their cases are decided in confidential proceedings governed by rules that arguably favor corporate respondents. The arbitrators who preside over these proceedings (often paid hundreds of dollars per hour) have the incentive to please the companies that come before them so that they will be selected for additional arbitrations in the future.

Worse yet, many arbitration clauses require consumers to waive their rights to pursue class action lawsuits. Such waivers virtually insure that cases involving small damage amounts, regardless of the type of misconduct causing those damages, will not be pursued. Individual consumers and their attorneys often cannot afford to challenge well-funded corporate defendants; class action proceedings are designed exactly for such circumstances.

Despite all this, courts routinely enforce arbitration clauses and order consumer disputes to arbitration. They do so even where evidence of the consumer’s agreement to arbitrate seems tenuous. But in Hobbs v. Tamko Building Products, Inc., 2015 WL 6457837 (Mo. Ct. App. October 26, 2015), the Court found the evidence that two consumers had agreed to arbitrate was simply too weak to force them to arbitration. In Hobbs, Hobbs and the Jonesburg United Methodist Church (the “Church”) purchased roofing shingles from Tamko. Id. at *1. The shingles had a thirty-year warranty, but began to warp and leak after six to eight years. Id. at *2. At the time of purchase, Hobbs and the Church had been shown only Tamko’s representations and marketing materials stating that the shingles were durable, reliable and free from defects for thirty years. Id. at *1. The shingles came with a limited warranty that was printed on the outside of each package and contained an arbitration clause. Id.

When the shingles began to warp and fail, Hobbs located a warranty claim form on the internet, completed it, and sent it to Tamko. Id. at *2. Similarly, the Church contacted Tamko by telephone, secured a warranty claim form and submitted it. Id. Tamko denied Hobbs’ claim and offered the Church only replacement shingles for a portion of the damaged area. Hobbs and the Church filed a class action lawsuit against Tamko asserting claims, among others, under the Missouri Merchandising Practices Act. Id.

To escape this class action, Tamko moved to compel arbitration. It argued that Hobbs and the Church had agreed to arbitrate by keeping and using the shingles and/or making warranty claims. Id. at 3. Tamko principally relied on case law holding, for example, that an arbitration clause contained inside of computer packaging was accepted when the consumer kept the computer beyond thirty days. See Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1149-50 (7th Cir. 1997). But in Hill, there was no dispute that the consumer had received computer documentation which included the arbitration clause. Id. at 1148.

In contrast to Hill, the Tamko court held that the printing of a warranty containing an arbitration clause on the shingle packaging did not create an agreement to arbitrate. 2015 WL 6457837 at *3. It reasoned that shingle packaging is not an item that consumers typically retain after the shingles are unwrapped and installed. Id. In turn, Hobbs and the Church emphasized that they never received the written warranty, were unaware of the arbitration clause, and would not have purchased the shingles had they known of it. Id. Against this background, the court concluded that Hobbs and the Church’s retention and use of the shingles did not constitute an agreement to arbitrate. Id.

Tamko also argued that, by making warranty claims, Hobbs and the Church agreed to arbitrate. Id. The argument primarily focused upon Hobbs, who undertook internet research and thus had the opportunity to review the arbitration provision on Tamko’s website while securing the warranty claim form. Id. The court flatly rejected this, noting that neither the warranty nor the arbitration clause appeared on the warranty claim form. Id. at *3 & n. 5. Hobbs and the Church did not learn of the clause until after making their warranty claims. Id. Accordingly, they did not accept the terms of the arbitration clause by submitting warranty claims.

Hobbs stands for what should be an unremarkable proposition: consumers cannot be forced to surrender their right to have disputes resolved in courts where the evidence that they received proper notice of arbitration clauses is weak. Unfortunately, however, courts tend to favor the opposite approach and find enforceable arbitration clauses in countless consumer transactions based upon boilerplate contracts and fine print. Even against this background, Hobbs at least suggests a limit beyond which courts ought not to go in forcing consumers to arbitrate.

As Hobbs indicates, technical hurdles and pitfalls may lurk in seemingly straightforward disputes – like claims based on faulty shingles. Whether litigating under the Missouri Merchandising Practices Act or other consumer protection statutes, such hurdles and pitfalls may trip the unwary. Competent counsel can help to avoid them.