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How automakers are using arbitration clauses to avoid lemon laws

A “lemon law” is something that most people have heard of. Lemon laws are designed to protect consumers against defective products. They often require automakers (or dealers) to return a defective vehicle. A lemon can be defined as a vehicle that is under warranty and has a problem that cannot be fixed after several attempts (often 3-4), or spends more time waiting for repairs (typically 30 days). The lemon must be offered by the vehicle manufacturer to be bought back. You can read more about lemon laws here.

These lemon laws exist in every US state and have been used by thousands to “undue” the purchase or a poor-quality vehicle. Automakers have found a way to get around these lemon laws. They are using mandatory arbitration clauses in dealership vehicle purchase agreements to piggyback on to them. This practice is not only common, almost all dealers have mandatory arbitration clauses within their contracts, but it’s also used to limit consumers’ rights to participate in class actions lawsuits.

Automakers offer consumers a false choice. If you want to buy a new vehicle, you must agree to not sue us. You can’t purchase a new vehicle if you don’t agree to waive your legal rights to sue.

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Arbitration isn’t bad, but mandatory arbitration might not be fair

Consumers generally find arbitration to be a good idea. Arbitration is much more cost-effective than court action, which can take many years and cost hundreds of thousands of dollars. Instead of investing hundreds of dollars in litigation (or more), a token amount of money is required. This amount will be refunded if the consumer wins. Arbitration doesn’t require the hiring of an attorney. Consumers can consult or hire an attorney to represent themselves in arbitration proceedings. The consumer needs to present their case and wait for the arbitrator to decide.

Arbitration is a popular choice for automakers, too, for many reasons. Arbitration is cheaper and more efficient than traditional legal proceedings. Automakers can dispute lemon law claims at lower costs, which ultimately helps to keep vehicle prices down.

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But not all arbitration proceedings will be the same. Dealers and automakers often choose which arbitration firms will be used in any given proceeding. It’s not difficult to see how some arbitration firms might favor their corporate clients to get more work in the future. Additionally, many arbitration proceedings emphasize record keeping and documentation…two areas that consumers often fail to meet.

What is the point? Arbitration can be used against consumers, particularly if the arbitrator is named by the automaker/autodealer.

Arbitration is sometimes mandatory. A mandatory arbitration clause is often included in a contract when you purchase a car. You can’t purchase the car if you don’t agree to the clause.

In many agreements, class action rights are also removed

Mandatory clauses not only force consumers to choose an arbitrator firm chosen by the dealership or automaker, but also remove a consumer’s rights to join a class action lawsuit. Many mandatory arbitration agreements are legally binding. Consumers cannot seek financial relief from the automaker by going outside the arbitration process.

For example, if an automaker lies about a vehicle’s fuel economy rating (as Ford recently did), or has a major safety defect that lowers resale value, then consumers would need to initiate arbitration proceedings to obtain restitution. This is a step most consumers will not take.

This effectively means that automakers can avoid lawsuits from class actions. However, it is a good thing for automakers but it is a bad thing for consumers. Automakers don’t have to worry about the possibility of a class action because they aren’t under any obligation to make disingenuous product claims or fail to account for safety risks.

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