Mandatory Arbitration Limits?

As I am finishing up the semester teaching dispute resolution and focusing on arbitration, we’ve been having lots of fun in class finding mandatory arbitration clauses in our life–credit cards, cell phones, apartment leases, etc.  My favorite clause to teach is from Gateway computers which used to have a clause requiring arbitration under the International Chamber of Commerce rules.  My guess is that some junior associate drafting the clause thought it would be great to go to Paris on a regular basis!

I point out in class that there have been proposals to limit mandatory arbitration but that there is generally little expectation these would be passed by the Senate or House.  This year, however, the news might be different with the Democrats taking over.  As Vicky Pynchon has helpfully posted, there is now new contemplation that the bill could be passed.  The bill, proposed by Wisconsin Senator Russ Feingold last summer, provides:

Arbitration Fairness Act of 2007 – Declares that no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of: (1) an employment, consumer, or franchise dispute, or (2) a dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power.

Declares, further, that the validity or enforceability of an agreement to arbitrate shall be determined by a court, under federal law, rather than an arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement.

Exempts arbitration provisions in collective bargaining agreements from this Act.

So…it will be interesting to watch how the new party in charge deals with issue of mandatory arbitration (and if we have to rewrite the arbitration chapters in our textbooks once again!)

18 thoughts on “Mandatory Arbitration Limits?”

  1. I went to the doctor yesterday, and behold… I was required to sign away my right be heard in court by jury to be replaced with arbitration; else the medical treatments would be withheld. Mind you this was not emergency care, it was for treatment of my HDL/LDL count. What hit me was the audacity to require that I sign away my constitutional rights in lieu of medical treatment. Im no lawyer, just an engineer; but can a citizen sign away their rights under the deress of not getting access to medical treatment? Im not for goverment health care either, but should not the government protect its citizenery from the perspective of constitutional rights and redress? Is this not a basic tenant for the purpose of government and laws?

  2. Hopefully the recent changes in government will forward the first element of Senator Feingold’s initiative. I believe it is high time for government to become involved in arbitration agreements when such significant disparities in power exist. The application of the act to employment, consumer, and franchise disputes appears to be limited enough in scope as to to avoid spill-over that would invalidate other (valid) arbitration agreements. It is interesting to me that the government hadn’t previously taken a stronger stand against unfair arbitration agreements aimed at consumers and employees.

    The second portion of the proposed Act that would put the question of arbitrability before a judge rather than an arbitrator seems to cast doubt on the arbitrator’s neutrality. Furthermore, putting such issues before a judge would undoubtedly increase the workload of the federal courts. I would be curious to see statistics that evidence the need to take such issues from the arbitrators, as it seems like a significant step to do so.

  3. I find it quite interesting that there is a distinct tone of distrust of arbitration on this thread, especially against pre-dispute arbitration in employment and consumer claims.

    The sense I get is suspicion based on lack of adequate discovery, on the way arbitration clauses are imposed on employees and consumers, and a general distrust of a system with limited appeals.

    All of these (and probably other) concerns are legitimate, but none are strong arguments against arbitration per se; they are arguments against a perceived lack of fairness and equity in the way arbitration is conducted.

    The courts do seem inclined to support arbitration, and for good reasons. Perhaps the best approach to these concerns is to alter the our approach to arbitration, which is what the AFA aims at; however imperfectly.

    Certainly, it would help to lower the bar regarding “disregard of law”; allowing the vacating of an award where actual errors in the application of the law occurred. If a Judge errs, his decision can be appealed, why arbitrators should get a pass is unclear. Maybe throw in a little arbitrator malpractice for such disregard so the arbitrator will “have some skin in the game” . . . ?

    Perhaps employment contracts should offer employees incentives to sign on to arbitration, like health insurance: Arbitration services operating to provide competent, neutral, fair arbitration services as required in exchange for a periodic retainer fee (I’m brainstorming here, don’t ask for too many details).

    On the other hand, how about substantial penalties being placed on the losing party if an arbitration award is appealed? There should be a huge disincentive for unfair arbitration and for unfair challenges to fair arbitration. (Again, I’m brainstorming.)

    Without making further efforts to brainstorm procedural safeguards in arbitration, I would suggest we don’t throw the baby out with the bathwater. There are advantages to everyone in fairly conducted arbitration. If there are problems with how arbitration is contracted for, or conducted, then those problems should be fixed.

    As long as the process is fair, then arbitration’s efficiencies over litigation will always incline employers and commercial interests toward it. As long as the process is fair, there’s no reason for employees or consumers to resist it. But arbitration itself? It ain’t going away; neither in employment nor consumer claims.

  4. The proposal makes me wonder how beneficial it will actually be. If passed, it will provide a greater number of consumers, whom would likely chose to forego their claim because they didn’t want to arbitrate, the route of litigation to resolve their dispute. My concern is that a greater number of consumers will now bring litigation claims, which in turn will increase costs businesses spend on litigation. This in turn will just be passed on to consumers by increasing the price they pay for products. It’s great that the consumers that have a problem will be able to sue, but unfortunately it will be other consumers that pay for the litigation, not the companies.

  5. Ohwilleke,
    I admit I haven’t been following the choice of venue cases as closely as I should: But has Carnival Cruise Lines recently and surreptitiously been overturned? Could you give me some support for the proposition that “federal law prohibits choice of venue clauses other than the consumer’s venue in most consumer cases”? Thanks for the help.

  6. I recently helped draft a Terms of Use policy for a local retailer’s website. Included in the policy was a mandatory arbitration agreement for disputes arising out of the use of their website. Although the retailer is only a small business and doesn’t expect any disputes (the website is for basic information purposes only – hours, contact information, etc), the clause was included regardless.

    Arbitration clauses are becoming boilerplate language in far too many contracts and legislation is needed to correct that trend. If nothing is done, consumers will soon have no choice but to submit to arbitration for disputes arising out of nearly every transaction they make. They will not have the choice to patronize a different store or buy a different product to avoid arbitration because every transaction will be subjected to such a clause.

  7. Tiffany Beaty says: “One of the benefits of arbitration, along with other alternative dispute methods, is to alleviate the court system. Allowing every single employment, consumer, or franchise arbitration agreement to be disputed would clog the system and make it much less efficient. It would not be quite as bad, except the courts are the ones being deemed the appropriate forum for deciding if the parties should arbitrate instead of the arbitrator. It is unclear how many cases this would add to the system, but it seems like this might be something the legislature needs to consider further.”

    This is a very weak objection to ending pre-dispute arbitration on the merits.

    The AAA, for example, handles about 1500 cases a case in California (about 60% of which are settled prior to hearing). California’s share of securities arbitration cases handled by FINRA is about 300-400 a year.

    The number of civil cases tried in Superior Court in California each year is about 989,000, and a great many of those are far more court resource intensive than consumer disputes, where the amount in controversy is generally within small claims court jurisdiction.

    Even if AAA had only a 10% market share of consumer arbitration in California the bump in caseloads would be less than 2% on a one time basis. I suspect that in reality, it has a much larger market share than that.

    Civil rights employment claims claiming discrimination are already subject to mandatory governmental pre-suit ADR in most cases anyway, with about 8,000 EEOC filings a year in California (pro-rating national statistics for 2007). Many EEOC filings, moreover, do not produce actual lawsuits.

    Franchise disputes are, of course, much smaller in number than either consumer cases or employment disputes. I would be surprised in California has 100 franchise arbitrations per year.

    Further, civil litigation is not a big budget burden on state governments. Typically, filing fees cover all or more of the public costs of civil litigation, and typically, any taxpayer funded contribution to the costs of civil litigation are a fraction of a percent of the state general fund budget.

    A minor new criminal statute would typically cost more to state governments than ending pre-dispute arbitration requirements for these kinds of cases.

    (BTW, in litigated cases, a choice of venue such as Chicago only would be invalid in consumer cases but for protections afforded to arbitration. Federal law prohibits choice of venue clauses other than the consumer’s venue in most consumer cases not arbitrated.)

  8. *TYPO*
    Please reread my post. FAA has never been expanded to transportation workers. The statute’s general prohibition against employment contracts has been narrowly applied to only seamen. This case shows the courts preference for arbitration quite clearly. See Circuit City v. Adams 532 U.S. 105 (2001).

  9. @Samis

    On the FAA text:

    “I admit I don’t recall when the courts extended § 1 of the FAA to transportation workers”

    Please reread my post. FAA has never been expanded to transportation workers. The statute’s general prohibition against employment contracts is limited to only seamen. However the Court narrowly applies the statue to only seamen. This case shows the courts preference for arbitration quite clearly. See Circuit City v. Adams 532 U.S. 105 (2001).

    Over all:

    Your argument minimizes the social policy behind most remedial legislation such as VII. Pre-dispute mandatory arbitration is a disadvantage for a variety of reasons. In the context of discrimination, where often there is no direct evidence of discrimination– e.g. the stated reason for termination is discriminatory–the rules of discovery are crucial. Limiting discovery to only depositions would likely preclude a finding of discrimination in the most insidious cases.

    My critique of the FAA stems from a desire not to further disadvantage someone who is already injured by discrimination. The FAA undermines the goal of adjudicating claims of discrimination.

    “Mandatory arbitration even in employment matters does not work an injustice so long as the process is fair. And not everyone experiences a work-place dispute so severe that Dispute Resolution is required.”

    I strongly disagree with this statement. First, if an employee has no say in the arbitration agreement, how are the terms going to be fair? Furthermore, if the employee is given the opportunity to amend the arbitration clause, how would she know what to alter. The complexity of anti-discrimination law makes it nearly impossible for a lay person to know what should be included.

    Second, while not everyone may experience an injustice in the workplace, anyone might. Because employment disputes have such a large potential to affect everyone, promoting compliance by creating a private cause of action is sensible.

    “To whatever extent arbitration is unfair to employees, there is no guarantee that litigation would do better.” and “Mandatory Arbitration of itself is not inherently unfair, or even suspiciously so. As always, the devil is in the details”

    Its true that an employee may not do better, but an employee stands a better chance if the rules are not stacked against her. The ability to bring a claim is not a guarantee that a claimant will succeed; rather, it provides a fair method to address the problem. Whereas, pre-disputetion arbitration prevents a fair settlement. A process that cuts out opportunities to present evidence, significantly reduces remedies, and is unappealable has little chance of being fair. This exemplifies why an inequitable distribution of power nearly guarantee injustice.

  10. I’m finding myself in agreement with Mr. Samis on this matter, particularly on franchise disputes and to a lesser degree on employmern and consumer disputes. I’m not a very large fan of some of the arbitration agreements that are getting pre-packaged in with employment and consumer purchases, but I can see the ease of such actions and why they are preferable to going to court, the caviet being that the process is, per the details, fair over all. The only time I’d really push for a greater enforcement of legal rights would come from Title VII actions and other government guarantees. Otherwise, the losses might be acceptable so to speak.

    That said, I think I’d rather see something less drastic at first and something that eases into the proposals the AFA is pushing for. I think if something just like the second paragraph, sans the first, were inacted, it might be a more effecient piece of legislation, encouraging fairer or at least fairer at face value contracts and arbitration practices, while still offering some of the speed that makes arbiration desireable.

  11. Joshua Pollack

    I think you draw too strong a parallel between the Court’s jurisprudence re. arbitration and West Coast Hotel Co. v. Parrish, a case in which the issue was whether a State could interfere in employment contracts to impose a minimum wage for women.

    Employers paying extremely small wages are leveraging their greater contract power to gain great advantage at the severe expense of their workers. Extremely low wages are far more than merely inconvenient.

    Mandatory arbitration certainly does have an economic effect on consumers and employees, but nowhere near the impact of slave-wages, and not necessarily to their disadvantage.

    Employment is a necessity (generally) so State regulation of minimum wages and other working conditions directly benefits nearly everyone in a matter not just of interest but compelling necessity. Everyone has to work (Richie Rich excluded).

    Mandatory arbitration even in employment matters does not work an injustice so long as the process is fair. And not everyone experiences a work-place dispute so severe that Dispute Resolution is required.

    To whatever extent arbitration is unfair to employees, there is no guarantee that litigation would do better. Adkins v. Children’s Hospital, 261 U.S. 525 (1923) was the result of litigation and not employee friendly at all. (Adkins is the case that Parrish overturned.)

    I think the Courts are not reinstating the freedom to contract as upheld in Adkins; the courts are protecting the right of people to make fair employment contract decisions which are not unconscionable; a right Parrish did not abandon. Mandatory Arbitration of itself is not inherently unfair, or even suspiciously so. As always, the devil is in the details.

    I admit I don’t recall when the courts extended § 1 of the FAA to transportation workers, so I cannot comment on the court’s reasoning, much less criticize or endorse it. Do you have the case number?

  12. @ Sean Samis
    Your point that Lochner Court would up hold the FAA is most likely right. My point was that the idea concept of liberty and contract are fairly removed from today’s jurisprudence. Who would argue that a child’s liberty is at stake when precluded employment working in a factory?

    Yet when it comes to VII or discrimination laws, the Court seems more willing to move back to a liberty based jurisprudence where a party can waive a judicial forum. While the Court doesnt allow a complete waiver of statutory rights, as such would are void for frustrating public policy, the Court goes out of its way to accommodate arbitration which can still undermine VII. What I find so disconcerting is the glaring lengths the court is willing to go to uphold contract principles.

    Look at the text of the FAA Sec. 1: “but nothing herein contained shall apply to contracts … [of] workers engaged in foreign or interstate commerce” Yet, the Court has narrowly construed this clause to transportation workers.

    Isn’t this reinstating the freedom to contract that was abandoned in West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937)?

  13. I hate to be a tiresome bore by relying on the facts, but the infamous Gateway arbitration clause provided that “the arbitration shall be conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The arbitration shall be conducted in Chicago, Illinois, U.S.A. before a sole arbitrator. ”
    The ICC may be based in Paris, but they can and do administer arbitrations all over the world.

  14. Given that arbitration is a creature of contracts and the Lochner Court’s reverence for the “right to contract” I would imagine a later-day Lochner Court would uphold arbitration clauses generally; they would not empathize with claims that arbitration was over-utilized. Nor do I think a “Lochnerian” Court would find any constitutional infirmities in the FAA.

    What I would like to see from the Arbitration Fairness Act is a more stringent protection against arbitration awards that misconstrue or misapply established law, even if the failure falls short of “manifest” disregard.

  15. The proposition of changing the current state of predispute mandatory arbitration agreements gives me mixed feelings.

    In one sense, it seems like a great idea. The parties that are weaker are the ones being forced into arbitration. If someone wants a job or wants to buy a computer, he or she has to accept that arbitration will be imposed upon him or her. Taking away this aspect makes it seem more like the parties would have the ability to negotiate the contract terms, including the option of arbitration, putting the weaker party in a slightly more powerful position.

    That being said, a bigger part of me finds that a change in the law would be problematic. One of the benefits of arbitration, along with other alternative dispute methods, is to alleviate the court system. Allowing every single employment, consumer, or franchise arbitration agreement to be disputed would clog the system and make it much less efficient. It would not be quite as bad, except the courts are the ones being deemed the appropriate forum for deciding if the parties should arbitrate instead of the arbitrator. It is unclear how many cases this would add to the system, but it seems like this might be something the legislature needs to consider further.

    If the purpose of this legislation is to protect the weaker party, I would argue that different arbitration rules already do this. The arbitrator is to be a non-biased party. Furthermore, as the Gateway case demonstrates, the terms of the mandatory arbitration agreement must be reasonable. While no system is perfect, it seems like the current method is the lesser of two evils. However, this is coming from the perspective of someone who has never been forced into arbitration.

  16. While I think the AFA is a good start on addressing the over expansion of arbitration, my interest is in the constitutionality of Fed Arbitration Act. Can anyone explain why the judiciary been so lax upholding, let alone re-establishing, Lochner Court concepts like right to contract?

  17. “or to regulate contracts or transactions between parties of unequal bargaining power.” Really? Really?

    So, as much as can deduce from the commercials, Apple Guy won’t be able to enforce the arbitration agreement in PC Guy’s employment contract (for a multitude of reasons), thus giving PC Guy the opportunity to finally bring his claim of nerd harassment before a court? Or do I have this wrong?

    Vista.

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