Sternlight – Asking Tough Questions About Mandatory Arbitration and Article III

Our good friend Jean Sternlight (UNLV) sends along her opinions on Sharif, one of last week’s Supreme Court cases and how it impacts the Federal Arbitration Act.

The Supreme Court’s most recent Article III decision, Wellness Int’l v. Sharif (2015), raises substantial questions as to the constitutional legitimacy of the Federal Arbitration Act, 9 U.S.C. § 1 et seq., at least as applied to private mandatory arbitration. When companies require consumers and employees to submit their claims to arbitration, and when federal law requires judges to enforce arbitration awards entered pursuant to those arbitration clauses, we must ask whether claimants are being unconstitutionally denied access to federal court and whether judges are being unconstitutionally forced to act as rubber stamps.

Sharif, decided just a couple of days ago, is the latest in a series of decisions involving whether or when referring disputes to bankruptcy judges or federal magistrates may be problematic under Article III. A five justice majority (Sotomayor, Kennedy, Ginsburg, Breyer & Kagan), also joined by Justice Alito, in substantial part, held that litigants may “knowingly and voluntarily” allow a bankruptcy judge to hear claims that, absent such consent, Article III would bar the bankruptcy judge from deciding. Writing for the Court, Justice Sotomayor explained that the entitlement to an Article III adjudicator is a personal right, ordinarily subject to waiver, except in circumstances in which such consent would threaten the separation of powers guaranteed by the Constitution. Id. at 11-12. The majority found that allowing bankruptcy judges to hear the disputed claims would not as a practical matter threaten the institutional integrity of the federal courts, because bankruptcy judges are subject to control by Article III courts. Id. at 12-15.   The majority further explained that the consent, in order to be effective, must be knowing and voluntarily, though not necessarily explicit, (Id. at 18-20) and remanded the case so that the lower courts could determine whether this test had been met. Id. at 20.

While Sharif was not an arbitration case, arbitration was definitely on Justices’ minds. In oral argument, Justices Kagan, Sotomayor, and Scalia all asked how arbitration is permissible given Article III. Musing about the distinction between a contract referring a matter to arbitration and an agreement to have a matter heard by a bankruptcy judge Justice Kagan stated:

The fact that the arbitrator himself doesn’t issue the judgment, and instead you have to take it across the street and the Federal court has to issue the judgment, basically on the arbitrator’s say-so, . . . seems to me much more threatening to the integrity of the Federal judicial system than a system of bankruptcy courts which are, from the very beginning all the way through, supervised by . . . district courts.

Indeed, the majority, concurring and dissenting opinions in Sharif all explicitly reference arbitration. The majority observes that from the “early years of the Republic” federal courts have appointed arbitrators, with the consent of the parties. Id. at 8. Justice Alito, concurring, states “[n]o one believes that an arbitrator exercises ‘the judicial power of the United States,’” id. at 1, suggesting that for similar reasons the referral to bankruptcy judges is acceptable, so long as consented to.  And, Justices Roberts and Scalia, dissenting, assert that referrals to arbitration pose no Article III issue because “arbitration is a matter of contract” and because only Article III judges, and not arbitrators, may enter final judgments. Id. at 17. Justice Thomas, also dissenting, similarly emphasizes that arbitrators can only issue decisions and not judgments. Id. at 15-16.

Yet, while the Justices who have spoken on the topic seem inclined to find arbitration permissible, the principles espoused by the Court cast doubt as to the constitutional legitimacy under Article III of mandatory private arbitration. Lower court decisions have blithely held that arbitration is permitted because parties waive their right to go to court when they agree to arbitrate, but the issue is not so simple. First, mandatory private arbitration involves claims brought under private rather than public law. Although cases such as Thomas v. Union Carbide Agricultural Prods. Co. (1985)  have held Congress may mandate arbitration of public law claims, such as purported violation of a federal insecticide statute, that justification does not apply to companies’ mandated arbitration of private fraud or breach of contract or similar claims.

Second, when courts have sought to justify arbitration on the ground that parties “consented” to bring claims in arbitration rather than in court, they have not applied the “knowing and voluntary” definition of consent recently applied in Sharif. If courts did look for knowing and voluntary consent they would find that while many business-to-business arbitration agreements meet the test, few if any consumer and employment clauses do so. The recent Consumer Financial Protection Board analysis shows that when companies impose arbitration on consumers, such as through small print contracts, envelope stuffers or on-line click-throughs, consumers have no idea they have been subjected to arbitration, much less what that process entails. This is far from knowing voluntary consent.

Third, although some Justices seem inclined to find arbitration poses no Article III problem because arbitrators only issue “decisions,” and not “judgments,” upon reflection this distinction also fails. As Justice Kagan noted in the oral argument in Sharif, the Federal Arbitration Act, 9 U.S.C. § 10, requires judges to convert arbitration decisions into judgments, except in very narrow circumstances in which the decision may instead be vacated. It is far harder and rarer to vacate an arbitral award than to overturn a lower court judgment on appeal. From an Article III standpoint, therefore, the arbitral decision is virtually equivalent to a final judgment. Under the FAA the federal judge has no discretion to perform the normal judicial function but instead is compelled to effectively rubber stamp the arbitrator’s award. This situation raises Article III red flags.

This Article III arbitration issue has not been extensively discussed in the literature or case law, particularly as applied to mandatory arbitration, although one of my articles flagged the issue almost twenty years ago.  Peter Rutledge’s article, “Arbitration and Article III,” 61 Vand. L. Rev. 1189 (2008), argues that appellate review can be used to cure otherwise serious Article III problems and that the extent of review necessary varies according to the type of arbitration. Judith Resnik, in “Diffusing Disputes: The Public in the Private of Arbitration, the Private in Courts, and the Erasure of Rights,” 124 Yale L.J. 2808 (2015) urges more broadly that arbitration must be more closely regulated in order to ensure that constitutionally mandated access is provided to both disputants and the public.

As to mandatory private arbitration, my focus here, Rutledge recognizes: “At one extreme lie involuntary private arbitrations. In those circumstances the need for Article III review is at its zenith.” Id. at 1218.   Yet, under current interpretations of the FAA law, decisions issued in mandatory private arbitrations are not subject to meaningful appellate review. I do not share Rutledge’s view, at least as of 2008, that courts’ use of the “manifest disregard” analysis is sufficient to save involuntary private arbitration from Article III challenge. I also share Professor Resnik’s view  that the impact of mandatory arbitration in the consumer and employment settings is often to deprive consumers and employees  of a forum altogether, thus rendering appeal not meaningful in any event.

In short, the Supreme Court’s most recent Article III decision, Wellness Int’l v. Sharif, should bring new attention to the fact that mandatory private arbitration is highly problematic from a constitutional standpoint. I hope that the new decision and several Supreme Court Justices’ increased attention to this issue will help strengthen challenges to mandatory private arbitration on Article III grounds.

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