In Section 18 of the TOU: Microsoft states:
18.1.4. BINDING ARBITRATION. IF YOU LIVE IN THE UNITED STATES, YOU AND MICROSOFT AGREE THAT IF YOU AND MICROSOFT DO NOT RESOLVE ANY DISPUTE BY INFORMAL NEGOTIATION UNDER SECTION 18.1.2 ABOVE, ANY EFFORT TO RESOLVE THE DISPUTE WILL BE CONDUCTED EXCLUSIVELY BY BINDING ARBITRATION IN ACCORDANCE WITH THE ARBITRATION PROCEDURES IN SECTION 18.1.7 BELOW. YOU UNDERSTAND AND ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION, YOU ARE GIVING UP THE RIGHT TO LITIGATE (OR PARTICIPATE IN AS A PARTY OR CLASS MEMBER) ALL DISPUTES IN COURT BEFORE A JUDGE OR JURY. INSTEAD, YOU UNDERSTAND AND AGREE THAT ALL DISPUTES WILL BE RESOLVED BEFORE A NEUTRAL ARBITRATOR, WHOSE AWARD (DECISION) WILL BE BINDING AND FINAL, EXCEPT FOR A LIMITED RIGHT OF APPEAL UNDER THE FEDERAL ARBITRATION ACT. ANY COURT WITH JURISDICTION OVER THE PARTIES MAY ENFORCE THE ARBITRATOR'S AWARD.
There is an exception to this rule. Under the new TOU, you can take Microsoft to small claims court for any Xbox 360 related dispute.
In another part of Section 18, the TOU states:
18.1.6. CLASS ACTION WAIVER. YOU AND MICROSOFT AGREE THAT ANY PROCEEDINGS TO RESOLVE OR LITIGATE ANY DISPUTE, WHETHER IN ARBITRATION, IN COURT, OR OTHERWISE, WILL BE CONDUCTED SOLELY ON AN INDIVIDUAL BASIS, AND THAT NEITHER YOU NOR MICROSOFT WILL SEEK TO HAVE ANY DISPUTE HEARD AS A CLASS ACTION, A REPRESENTATIVE ACTION, A COLLECTIVE ACTION, A PRIVATE ATTORNEY-GENERAL ACTION, OR IN ANY PROCEEDING IN WHICH YOU OR MICROSOFT ACTS OR PROPOSES TO ACT IN A REPRESENTATIVE CAPACITY. YOU AND MICROSOFT FURTHER AGREE THAT NO ARBITRATION OR PROCEEDING WILL BE JOINED, CONSOLIDATED, OR COMBINED WITH ANOTHER ARBITRATION OR PROCEEDING WITHOUT THE PRIOR WRITTEN CONSENT OF YOU, MICROSOFT, AND ALL PARTIES TO ANY SUCH ARBITRATION OR PROCEEDING.
As Kotaku points out, Microsoft only admitted to hardware issues with the first batch of Xbox 360 consoles (The Red Ring of Death) after many lawsuits against the company were filed. This new TOU would make it much harder for the company to admit such an issue if something similar were to happen today.
The good news? There is a clause at the very beginning of the new Xbox 360 TOU that gives users a way out:
Your continued use of the Service is your acceptance of the changed contract, except that Section 18.1.11 permits you to reject changes to Section 18.1 (arbitration agreement) within 30 days of the change.
You can mail that request to Microsoft at Microsoft Corporation, ATTN: LCA ARBITRATION, One Microsoft Way, Redmond, WA 98052-6399. We suggest doing that ASAP.