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When the Supreme Court decided in April 2011 that the 1925 Federal Arbitration Act (FAA) preempted California state contract law in AT&T Mobility in a five to four decision – thereby reversing the Ninth Circuit decision upholding the California ban on class action waivers – arbitration scholars and commentators expressed their disappointment with the Supreme Court, which missed an opportunity to improve the rights of consumers and employees. The majority opinion written by Justice Scalia confirmed the Court’s contentious position that corporations can force arbitration on consumers via pre-dispute arbitration clauses contained in adhesion contracts. The novelty here is that they can do so even though said clauses also contain class action waivers, which are unconscionable under California contract law. Indeed, Section 2 of the FAA – also known as the “saving clause” – provides that state contract law shall apply to arbitration agreements in a non discriminatory manner; the majority ultimately found that the California ban on class-action waiver has a disproportionate effect on arbitration agreements, and is therefore preempted by the FAA.

Consumer protection groups took fright and argued that the decision de facto gave corporations the legal right to prevent consumers and employees from ever reaching the courts in order to initiate or join class actions, thus preventing consumers from alerting others of the reprehensible practices of certain businesses. Another public benefit of class actions – i.e., punitive damages to deter future bad behaviors – also disappears. Allegedly, companies could now engage in deceitful practices, and employers would discriminate in the work place with complete impunity.

Well, on January 3, 2012, the National Labor Relations Board (NLRB) made it clear that it did not consider that AT&T Mobility applied to labor disputes. In D. R. Horton, the employer-defendant began to require each new and current employee to execute a mutual arbitration agreement as a condition of continued employment. The arbitration agreement contained, among other frankly abusive elements, a waiver of collective litigation, either in the arbitral or judicial forum. The NLRB found that the arbitration agreement in this case clearly restricted the exercise of rights protected by federal labor law. The NLRB then opposed the FAA to the 1935 National Labor Relations Act (NLRA), two federal statutes, and ultimately found that “employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral or judicial.” The proponents of the AT&T Mobility decision tried to argue that D. R. Horton was not, in and of itself, contradicting the Supreme Court’s reasoning, because it involved two federal statutes, and that the saving clause thus needed not be triggered. However, a closer look at the actual reasoning of the NLRB shows how it differs from that of the Supreme Court. Indeed, although both tribunals (the Supreme Court and the NLRB) argue – rightly – that the FAA saving clause is designed to prevent state courts and state law from disfavoring arbitration, the Supreme Court found that, somehow, in practice, the Discover Bank rule (which makes class action waivers unconscionable if certain criteria are met, but which does not apply to arbitration agreements specifically) did actually trigger the saving clause. In D. R. Horton, however, the NLRB reasoned that the purpose of the FAA saving clause is for arbitration clauses to be considered like any other contractual provisions, nothing less and nothing more. If arbitration agreements should not be disfavored, they should not be given a superior value either. As such, the NLRB decision differs from the position of the Supreme Court vis-à-vis the role of the FAA. Considering that the decision has been appealed to the 11th Circuit, we should soon be fixed as to the “correct” interpretation.

It seems, however, that both decisions – D. R. Horton and AT&T Mobility – fail to address the core element at issue: consent. In both cases, the arbitration agreement was inserted after the original contract was entered into, by the party with the strongest bargaining power, in adhesion contracts. In AT&T Mobility, the parties initially entered into a cell phone contract which did not contain an arbitration clause. Later, AT&T added one unilaterally. How could a consumer possibly and realistically consent to such a clause? Even if it were already contained in the general terms and conditions, who would even read them? Most of the people reading these lines are lawyers (or aspiring lawyers) and probably do not even know that their cell phone contract contain an arbitration clause (the four largest cell phone providers in the US have pre-dispute mandatory arbitration clauses), or that their credit card agreement also prevents them from going to court should a dispute arise. In fact, a study by the Pew Health Group even shows that agreements relating to about 19% of US bank accounts include fee-shifting provisions: if enforced, the successful customer who prevailed against a bank would theoretically end up paying back the bank for the results of that win… In D. R. Horton, the employer unilaterally decided to add arbitration, and if the employees did not like it, they would be discontinued. Again, where is the consent to arbitrate here? And this is the core issue in what is called “mandatory arbitration” in the United States. Arbitration in itself is not the problem; lack of consent is. Access to justice is a fundamental right granted to every American citizen, and derogation to this right should be taken very seriously. Consumers do not really agree to arbitration when they enter into an adhesion contract: once the dispute arises, they may very well be happy to use arbitration, especially because it is much more adequate for low-value claims than traditional litigation. Some arbitration practitioners have argued against mandatory arbitration, because they believe it damages the public’s perception of real arbitration, where parties actually agree to use an alternative to the traditional court system. So how can the trust crisis in American arbitration system be solved? Well, Europe can be a useful source of inspiration: the arbitration systems of its western countries (especially France, England and Switzerland) are generally considered the most advanced. Interestingly, however, they have decided that pre-dispute arbitration agreements in consumer contracts should be dealt with caution (in France, they are presumed abusive, but the presumption can be rebutted by the seller). Therefore, consumers cannot be forced into arbitration unless they expressly agree to it after the dispute has arisen, or when the contract was actually negotiated on an equal footing. In this situation, the consumer is given a real choice, and if he/she chooses the arbitral forum, the decision will be final and binding on both parties, the possibilities of appeal being virtually inexistent. Consent is the cornerstone of arbitration.

For the past 5 years, several members of Congress have been working on a bill which would amend the FAA: the Arbitration Fairness Act. As currently drafted, it would restore the original objectives of the FAA, and prevent pre-dispute binding arbitration agreements with consumers and employees. The Senate Judiciary Committee also held public hearings, in which renowned scholars and other individuals testified on the issue of fairness and arbitration. Unfortunately, mandatory arbitration has recently become a very political issue in the United States, and the push for the adoption of the Arbitration Fairness Act only comes from Democrats. With a Republican Senate and such a contentious issue, it is unlikely that the abuses stemming from forced arbitration will stop anytime soon.

Toward a harmonious European mediation system?

(This post is co-authored by Peter R. Slowinski, a Fellow in Stanford SPILS program)

The German Act for the Promotion of Mediation and Other Methods of Alternative Dispute Resolution has been recently adopted by the Bundestag, on November 30, 2011. Unfortunately, in February 2012, the second Chamber of the German Parliament stopped the process whereby the bill would come into effect, based on the fear that the law would end or at least complicate court-annexed mediation programs initiated by most of the German states. To date, the law is not in effect and the two Chambers of Parliament will need to find a compromise. Similarly, in Spain, the Ley de Mediacion en Asuntos Civiles y Mercantiles (the Law on Certain Aspects of Mediation in Civil and Commercial Matters) was approved in April 2011, but has yet to be signed by the Prime Minister into law. The main objective of both these legislations is to transpose the European Mediation Directive (No. 2008/52/EC), the deadline for which was set for May 2011.

This Directive is a major component of the European Union’s strategy vis-à-vis alternative dispute resolution, which dates back to the Vienna Action Plan adopted in the late 1990s. The development of ADR in the EU is considered a political priority, and possibly the only way to establish a uniform forum for individuals in Europe without infringing on the “traditional” justice systems of the member states. The ultimate goal is to eliminate the barriers to trade – within the EU market – which are caused specifically by the unknown and the differences between the legal systems of the 27. The objectives and tools of the Directive are quite laudable: better access to justice (especially for low-value claims), better coordination with domestic courts, the professionalization of mediators, direct enforceability of settlement agreements reached via mediation, stricter confidentiality, and the suspension of the applicable statutes of limitation during the mediation proceedings so as not to penalize those who elect to mediate their disputes rather than inundate the court rooms.

But the examples of Germany and Spain, which both failed to implement the Directive within the deadline and who might not implement it within a reasonable period of time, clearly illustrate the difficulties that the Union might encounter in the future with the realization of its objectives. Indeed, even when the member states do implement the Directive, they often do so partially, or in different manners. As a result, far from creating a harmonious cross-border system, early evidence suggests that the legal differences among states will remain. One reason for these difficulties might be seen in the limited powers of the EU to implement highly detailed uniform rules. Other reasons for this problem seem to lie in the very different efficiency and perceived trust in the legal structures of the various European countries. Countries with a well-functioning judicial system fear to establish an alternative to litigation with limited regulation while countries with a high backlog in their courts see mediation as a chance to get rid of pressing problems.

For instance, the level of required training for mediators vary greatly from one country to another. In Austria, mediators are required to complete a theoretical training composed of an introduction to the history of problems and the development of mediation including their basic assumption and models; procedural development, methods and phases of mediation with special regard to dispute-oriented and solution-oriented approaches; basis of communication techniques, the conduct of meetings and moderation with special regard to conflict situations; conflict analysis; theories of personality and psycho-social forms of intervention; ethical problems in mediation, in particular the position of the mediator. Thereafter, Austria requires completion of a practical training which covers inter alia individual self-awareness and practical experience seminars, role play, simulation and reflection. This is quite a comprehensive training regimen, and by contrast, many other countries either remain much more vague about the required training, or simply ignore such requirements. It seems that Austria with a fairly efficient court system weights the quality of future mediation higher than the need for fast and low-cost alternative dispute resolution procedures on a wide scale.

Additionally, although many countries simply implemented the Directive – albeit partially – a few states took the opportunity to salvage what they could of their judiciary by going further than strictly necessary to comply with the Directive. Italy is the most striking example of this phenomenon: the average duration of civil cases was the longest in Europe and reflected the congestion in the courts. The Italian legislator, quite ably, decided to make mediation mandatory. Lawyers now have an obligation to inform their clients about mediation, failing which the court may forfeit their legal fees altogether, and mediation is a condition of admissibility for certain types of disputes. If the parties fail to agree on a settlement, the mediator will make a “conciliation proposal” and communicate it to the judge if the parties reject it. If the dispute brought in court is the same than the one mediated, the judge can sanction the parties for not having reached an agreement. More specifically, the prevailing party in the trial, if it rejected the mediator’s proposal, will have to pay all the legal fees of its counterpart (the idea being that the same outcome could have been reached without involving the courts).

These are all but isolated examples of the discrepancies that arise in the implementation of the exact same text by the European member states. So, how can Europe address the issues of discrepancies in the members’ legal systems when the very instrument designed to bring uniformity creates more differences? For one thing, the EU could try to make sure that the Directive is properly implemented in order to create a European-wide solid legal base for mediation, with countries remaining free to go beyond the Directive requirements. Another solution is the implementation of online dispute resolution (ODR) services. Indeed, by offering a unique and free decentralized electronic platform that can manage disputes all across Europe, the impact of national legislative differences in the field of ADR is rendered nonexistent. The latter seems to be the solution preferred by the EU institutions, who recently adopted the Regulation on Online Dispute Resolution for Consumer Disputes. However, cynics will – rightly – point out that if the EU leaves the design and implementation up to the member states, the same issues encountered with the implementation of the Mediation Directive will occur with this regulation. If the traditional European legislative process has clearly shown its limits here, it may be time to try something new, a different approach. For instance, in the case of ODR, rather than legislating from above, it might be more efficient to encourage the development of private ODR in Europe from the ground up, without governments mandating it. Once a European-wide platform has grown organically, through the demand of consumers, it will be easier to ask member states to adopt common rules vis-à-vis the use of ODR. One argument against ODR as a solution for the dilemma of creating a uniform ADR framework in Europe might be that ODR is an excellent solution for online disputes but that it might be difficult to use for what is still the majority of cases in court rooms: disputes arising outside the internet. However, the percentage of contracts formed on the internet is rising, especially between consumers and businesses. In addition the main problem for ADR seems to be the reluctance of parties to accept it as an equal or better alternative to traditional litigation. Existing ODR systems show a high degree of acceptance and the use of ODR on a wide scheme could work as a catalyst for ADR in general: If it works for disputes online why not try something similar outside the internet.

(This post is co-authored by Peter R. Slowinski, a Fellow in Stanford SPILS program)

Robert Pastor & the North American Idea

Robert A. Pastor

Robert A. Pastor

A fish asks another fish: “How is the water today?” And the other fish replies: “What is water?” Professor Robert A. Pastor told this story at the beginning of his presentation at the Stanford Faculty Club on Friday February 24, 2012 in an event co-sponsored by the Gould Center. His goal was to illustrate how very little attention is paid to the concept of “North America” in U.S. politics: “we are so submerged with the issue that we ignore it,” he said. In his new book, The North American Idea, A Vision of a Continental Future (Oxford University Press, 2011), Robert A. Pastor charts the rise and decline of North America, and ultimately argues that the United States, Canada and Mexico would all greatly benefit from a stronger regional integration. This blog post is meant to share Prof. Pastor’s presentation with the greater SLS community.

Today, most of U.S. citizens do not realize that the largest trade and energy partners with the United States are not China or Saudi Arabia, but Canada and Mexico. This integration took a new meaning in the early 1990s, when successive bilateral trade agreements among Canada, the United States and Mexico led to the creation of the North American Free Trade Agreement. From 1994 onwards, the rate of trade growth, social and economic integration, and legal migration kept increasing exponentially, evidencing clearly how these three countries are capable of achieving great productivity within a very short amount of time. Unfortunately, the North American integration really peaked in 2001. It all went downwards from then on, to the detriment of the economies of all three countries.

The reasons for this decline are multiple according to Pastor. First, the 9/11 attacks on the United States led to a contraction of the exchanges with the United States. The border with Canada was immediately closed for security reasons, and never really fully recovered its post-9/11 levels. Second, the entry of China into the WTO gradually led to the decline of Japan, Canada, and then Mexico as the largest source of imports in North America. About a third of the factories in Mexico on the border with the U.S. were shut down and moved to China. Third, the author argues that this integration suffered from one of the flaws that we now find in the European Union: we expanded before we deepened. Specifically, there was very little investment in terms of infrastructure, which, in turn, led back to asymmetry. If the North of Mexico has dramatically changed since the first days of NAFTA, the South remained virtually unaffected by it, simply because the output of new factories could not go anywhere.

So what can we do about this, and more importantly, why should we even care? Pastor argues that it is essential for North America that all three countries be world leading economies. Mexico thus needs to develop dramatically in order to get there. The author also argues that it is crucial for the U.S. to become leader in issues that were previously purely domestic matters, but now require the participation of Canada and/or Mexico if successful resolution is to be achieved. This is the case for labor mobility, infrastructure, environment, security, the fight against drugs, etc. The solution, Pastor says, is to achieve regulatory conversion without which any stronger unification would virtually be impossible. OK, so if the reasons in favor of this integration are so overwhelming, why not do it? Some would argue that the citizens of Canada, the United States and Mexico would be highly suspicious about one another, or that a widespread nationalistic sentiment would prevent such integration. In fact, a survey conducted by Pastor shows that North American citizens love each other more than they love any other country, and that all three countries would be in favor of better cooperation. The problem, says Pastor with a dash of exasperation, might reside in the fact that a small minority remains resistant to change while the other majority is still looking for a leader. The current GOP front runners simply ignore the issue of NAFTA; indeed, Pastor observed that the 2008 Democratic candidates engaged in a race to the bottom as to who would be the most against NAFTA. They even threatened to re-open NAFTA if their “demands” on environment and labor matters were not met. The criticisms seem to have stopped when Canada said it would then seek to change the oil provision.

Prof. Pastor took many questions after his presentation, and it is worth mentioning here the most important one (the elephant in the room one would argue): the narco-trafficking in Mexico. Prof. Pastor acknowledged that to date, this phenomenon was probably the most important deterrent in the public opinion against a stronger union. However, with the opening of the border with Mexico came profound political change. From the late 1980s to 2000, Mexico made the most significant progress in terms of political regime, and transitioned from a deeply corrupt to a democratic regime. Violence on the border has increased since 2006, and it will take about a decade until the Mexican judicial system is profoundly reformed and the police are appropriately trained and reorganized. One has to admit however, that the violence in Mexico might be somewhat inflated: it is a much less pronounced phenomenon than in other Latin American countries. It remains concentrated in 3 cities and is mostly gang related. Interestingly enough, Pastor made the point that most of the guns recovered in Mexico with respect to violence come from the United States, and wondered what would be the U.S.’ reaction should the roles be reversed: if Americans were killed because of assault rifles purchased in Mexico, would the U.S. administration accept Mexico’s justification based on its constitutional right? Probably not. The United States has a shared responsibility in this, explained Pastor.

Professor Robert A. Pastor concluded his presentation by quoting the great American architect Daniel Burnham: “Make big plans; aim high in hope and work, remembering that a noble, logical diagram once recorded will not die.