Is Arbitration on the Ropes? Not Yet.
As I’ve mentioned in earlier articles, until 1925, the status of arbitration was iffy. Many judges found contracts to arbitrate unenforceable, apparently feeling arbitration impinged on the role of the judiciary in resolving disputes. That changed with the passage of the Federal Arbitration Act (FAA). The FAA makes contracts to arbitrate – with some limited exceptions – “ valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
Commercial arbitration came first
Arbitration’s origins were primarily in the commercial sector. To quickly resolve commercial disputes — presumably before merchants had to sail on to the next port — the parties would allow a knowledgeable professional of good repute to decide the dispute quickly. Courts were slow. Arbitration was faster and usually cheaper. Commerce moved forward.
Arbitration expands to labor and consumer disputes
Arbitration also expanded into the labor area, with labor arbitration generally being well-established and well-regarded. But it kept expanding and now has expanded into general employment, and consumer disputes. Have a look at your credit card agreement, product warranties, and just about anything you do online. Chances are pretty good you are governed by an arbitration agreement. Arbitration became especially popular with financial institutions, retailers, and employers seeking to avoid class actions.
Resistance to expansion of arbitration resisted
This expansion, unsurprisingly, has not always been well received. For example, the California Supreme Court found that consumer contracts waiving the consumer’s ability to bring class action were unconscionable contracts of adhesion. It explained:
[W]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then … the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ Under these circumstances, such waivers are unconscionable under California law and should not be enforced.
Discover Bank v. Superior Court, 113 P. 3d 1100, 1110 (2005).
But a majority of the United States Supreme Court disagreed. In AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Court rejected what had become known as the Discover Bank Rule, and reversed the Ninth Circuit’s finding that class action waivers in consumer contracts are unconscionable and therefore unenforceable.
Arbitration also expanded in the employment area. For example, in Epic Systems v. Lewis, 584 U. S. 138 S. Ct. 1612 (2018), a divided Supreme Court concluded that “Congress has instructed in the Arbitration Act that arbitration agreements providing for individualized proceedings must be enforced, and neither the Arbitration Act’s saving clause nor the NLRA suggests otherwise.” In other words, employees could not get out of their individualized arbitration agreements and pursue collective actions against their employers despite the provisions of the National Labor Relations Act favoring collective actions.
Congress weighs in after nearly 100 years
While the FAA preempts state laws and provisions that conflict with the FAA, it is not the Constitution. It is a federal statute like any other. If the federal courts won’t limit the reach of the FAA to protect employers and consumers, Congress can. And recently it has.
As noted in an earlier article, Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 in the wake of the Me-Too movement. The President has now signed it into law. The Act provides that no pre-dispute arbitration agreement or joint-action waiver is enforceable for cases filed under Federal, tribal, or state law claiming sexual assault or sexual harassment. A joint-action waiver includes class and collective action waivers. A party claiming sexual assault or harassment has the option of challenging the arbitration agreement or not.
More restrictions on the way?
While that Act took care of one of them most controversial applications of mandatory arbitration of employment claims, consumer and other employment claims remain on the same footing they always have. For now.
But the House has now also passed the “Forced Arbitration Injustice Repeal Act of 2022” or the “FAIR Act of 2022.” That Act would do two things: (1) prohibit pre-dispute arbitration agreements that force arbitration of future employment, consumer, antitrust, or civil rights disputes; and(2) prohibit agreements and practices that interfere with the right of individuals, workers, and small businesses to participate in a joint, class, or collective action related to an employment, consumer, antitrust, or civil rights dispute. That would be quite a change. Corporations would no longer be able require employees and consumers to arbitrate their claims or use arbitration clauses to foreclose class actions.
But the Senate hasn’t passed this act, and isn’t expected to any time soon. This next iteration of reigning in arbitration doesn’t have the wide support as ending mandatory arbitration of sexual harassment and assault case did. Opponents argue that often it is in everyone’s interest to have a faster, less expensive, and less formal way to deal with employment and consumer disputes. Proponents see the matter as corporations using arbitration to get an upper hand by enjoying a more favorable forum and dodging class actions. The debate will continue.
So, you wanted to arbitrate . . .
Another development that also may restrict arbitration in the consumer and employment area. Recall that arbitration agreements are often used to foreclose class actions. Often, arbitration clauses require claimants to bring their claims individually. This requirement has been upheld, as noted above.
Apparently, having been given lemons, creative counsel have been making lemonade. For example, Amazon customers typically had agreements requiring them to arbitrate their disputes with Amazon. Amazon was to pay the filing fees. So, lawyers brought over 75,000 individual claims against Amazon, leaving Amazon with a bill for millions in arbitration filing fees. Amazon has now informed its customers they could pursue claims in court.
Similarly, counsel filed thousands of arbitration claims against DoorDash, potentially requiring it to pay millions in arbitration filing fees. When DoorDash then sought a class-wide lawsuit to foreclose the need to pay, it received no sympathy. The Judge said:
The employer here, DoorDash, faced with having to actually honor its side of the bargain, now blanches at the cost of the filing fees it agreed to pay in the arbitration clause. No doubt, DoorDash never expected that so many would actually seek arbitration. Instead, in irony upon irony, DoorDash now wishes to resort to a class-wide lawsuit, the very device it denied to the workers, to avoid its duty to arbitrate. This hypocrisy will not be blessed, at least by this order.
Abernathy v. DoorDash, No. C 19-07545 WHA (N.D. Cal. Feb. 20, 2020).
Whether this strategy will significantly cut back on arbitration of consumer and employment claims remains to be seen. But it has certainly had an effect on some large companies.
Effect on commercial and labor arbitration
Many of us who believe arbitration is a useful and fair way to resolve commercial disputes have been nervous that the controversy that has arisen over the expansion of arbitration into the consumer and employment has given arbitration in general a bad name. That may decrease the use of arbitration even in commercial disputes.
But so far, Congress’s reigning in of arbitration’s expansion beyond commercial and labor matters has been fairly modest, limited to sexual harassment and assault claims. While opponents of arbitration in the employment and consumer context have set their sights on eliminating mandatory arbitration in those areas, that hasn’t happened yet. The strategy of filing thousands of arbitration claims has the potential to set back arbitration’s expansion into the employee and consumer area, but that situation is still shaking out.
Still, consumer and employment arbitration may one day be significantly limited if California Supreme Court’s view of the matter is accepted. As noted, it concluded that corporations of vastly superior bargaining power had coerced folks into giving up important rights and procedures by requiring agreements to arbitrate disputes. If that view prevails, we can expect to see significant cutting back of employment and consumer arbitration.
But those considerations don’t come into play in contracts entered into by sophisticated companies negotiating commercial agreements. In fact, reigning in what some consider unfair expansion of arbitration may strengthen commercial arbitration.
In short, arbitration in general is not “on the ropes” so far. And it appears commercial arbitration may never be.