The Hidden Risk in Online Holiday Shopping
Life + Money

The Hidden Risk in Online Holiday Shopping


Most shoppers who forked over their share of the $3.07 billion spent with online retailers on Cyber Monday probably don’t know that there could be a downside to buying their holiday gifts over the Internet instead of in physical stores.

A large number of popular online retailers have inserted forced arbitration clauses and language banning class-action suits in their terms-of-service rules, forbidding consumers from taking the corporations to court if they feel they’ve been defrauded or given a defective or dangerous product.

An arbitration clause requires that the parties settle their disputes through a third party. Consumer watchdogs have been fighting against such mandatory arbitration clauses, arguing that they erode consumer protections and limit the rights of workers, investors, credit-card holders and mortgage borrowers, among others. The Consumer Financial Protection Bureau announced in October that it was considering proposing a ban on arbitration clauses used by financial companies. 

Related: 5 Ways to Avoid Identity Theft Online During the Holidays

While the fight against forced arbitration has centered more on financial services products and labor laws, it touches on retail, too. The big-name online shopping sites that have forced arbitration clauses include Amazon, Ticketmaster, Starbucks (for its gift cards), Patagonia, H&M,, J.Crew, Sears, Under Armour, Walgreens, Lowes, L’Oreal, Sephora, Lego and Dell, according to watchdog group Public Citizen.

(Several companies did not respond to requests for comment about their use of arbitration clauses, or declined to comment.)

Most legitimate e-tailers have policies that allow customers to return merchandise regardless of the reason, without any cost or fuss. If a product is faulty or doesn’t function as promised, you can always sue the manufacturer directly. Unless you bought the product from the manufacturer, you probably didn’t sign their arbitration agreement.

One major concern relates to credit and debit card use. If an online retailer was negligent in protecting consumers’ confidential information, what recourse would one have through arbitration to recover any losses? After 70 million Target customers were hacked, the company paid victims $10 million in a widely publicized settlement.

Trial lawyers, unsurprisingly, are riled up about the arbitration clauses. “They’re in places where a typical consumer wouldn’t even dream they exist. Most don’t even know what a forced arbitration clause is, much less that they’re agreeing to one,” says the president of the New York State Trial Lawyers Association, Evan Goldberg.

By not reading the fine print and simply agreeing to these clauses, consumers are forced to take any claims to private arbitrators, who often rule on the side of the company, Goldberg says. He adds that class action suits, which he describes as “the great equalizers that hold big companies accountable,” are no longer an option if consumers agree to those terms.

Related: 5 Ways Online Shopping Can Drag Down Retail Profits

While forced arbitration clauses and the warnings about them aren’t new, they may merit renewed attention given the rise in online holiday shopping, which has eclipsed sales at brick and mortar stores. Black Friday sales in physical stores fell to $10.4 billion this year, down from $11.6 billion in 2014, according to early data from ShopperTrak. Meanwhile, online sales on the same day jumped 14.3 percent to $2.72 billion compared with $2.4 billion last year, Adobe found.  

Goldberg says that right now there aren’t that many options for shoppers to protect themselves from these provisions — except for restricting online shopping and only buying from web retailers that don’t have arbitration clauses. He advises that consumers do their shopping in stores, where nobody has to sign any contracts and “no clicking goes on.”

Worth noting is that reputation is paramount for most of these big online retailers, and they work hard to protect their brands. Any stain on their name can lead to a loss in revenue, so they’re not likely to be actively working against consumers. While it’s true that some consumers have been hurt by forced arbitration clauses, for the most part these online retailers are working hard to please consumers.