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ARBITRATION AND FAIRNESS IN THE UNITED STATES

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.

One Response to “ARBITRATION AND FAIRNESS IN THE UNITED STATES”

  1. Matt Powell says:

    The American Jury system is under attack by large corporations seeking to limit their exposure to their violations of individuals rights. The push for arbitration has lead to abuse and loss of individuals rights. I too doubt that legislation will have much effect on individual rights. It will take some large public awareness of this problem before change can occur. With recent Supreme Court decisions it seems that the jury system in America is becoming weaker every day.

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