December 8, 2011

Occupy Arbitration? Judicial Nonviolent Resistance

By Paul Kirgis

Over the past 18 months, the Supreme Court has become increasingly brazen in using the Federal Arbitration Act to cut off procedural rights–and in the process substantive rights–established by Congress and state legislatures. Through its decisions in Rent-a-CenterStolt-Nielsen, and Concepcion, the Court has handed the Chamber of Commerce a simple recipe for relieving itself of many of the burdens of consumer and employment law. Here it is:

With every contract, include an arbitration clause that

  1. expressly delegates all questions about the enforceability of the arbitration agreement to the arbitrator;
  2. either says nothing about the possibility of class arbitration or, just to be safe, expressly forbids class or representative action;
  3. expressly forbids the award of punitive damages; and
  4. includes just enough financial and other protections for the weaker party to make the process look palatable (but not so many that an attorney would have a genuine incentive to take on the claim).

If those steps are taken, no court will ever have an opportunity to examine the contractual relationship.  And as long as any injuries are small and diffuse, it is likely that no arbitrator will either. And if a claim does get to arbitration, any award will be modest and the proceedings will be confidential, limiting the market effects of the claim. The costs of violating consumer and employment law are thus dramatically reduced, all in the name of freedom of contract and a “national policy favoring arbitration” created out of whole cloth.

The one entity that could check the Court’s excesses is Congress. In recent years, various versions of FAA reform bills have been introduced, but all have languished and ultimately died, defeated by Chamber of Commerce pressure. A number of more specific bills have also been advanced, including bills to restrict arbitration in nursing home agreements and payday loan contracts. This fall, Senators Franken and Blumenthal have focused on Concepcion, introducing a bill called the Consumer Mobile Fairness Act that would ban mandatory arbitration clauses specifically in mobile phone contracts. Like the others before it, this attempt will almost certainly fail.

With Congress effectively paralyzed, the lower courts are the last line of defense against high Court overreaching. State courts in particular have good reason to resent the Court’s assault on civil procedural rights. Almost 75 years after Erie, the Supreme Court has allowed corporate actors to unilaterally revoke the power of state courts to interpret contracts, assess damages for breaches of contract, review contracts for fraud or illegality–exactly the sorts of determinations the Erie Court had in mind when it reserved questions of state substantive law for state courts.

In this year of nonviolent resistance, at least some lower courts seem to be engaging in a protest of sorts, seeking ways to avoid the inevitable logic of the recent decisions, especially Concepcion. Not surprisingly, California leads the resistance. For example, in its recent decision in Sanchez v. Valencia Holding Co., the California Court of Appeal invalidated an arbitration agreement containing a class waiver in a used car contract on unconscionability grounds, finding that the agreement was a contract of adhesion and unfairly one-sided (the court focused on a variety of terms besides the class-action waiver). And in Brown v. Ralphs Grocery Co., the California Court of Appeal invalidated a class-action waiver in an arbitration agreement as applied to a representative action under California’s Private Attorney General Act, which allows a plaintiff to bring an action on behalf of other employees to enforce the Labor Code, in the process distinguishing representative actions from class actions.

To be sure, the vast majority of courts have toed the line after Concepcion, upholding a variety of class waivers. (A good recap of post-Concepcion cases through August is available here.) But this is an area in which lower courts have very good reasons to test the boundaries of Supreme Court precedent. They should continue to do that, and force the Court to make clear how far it intends to push the reach of one of the shortest Titles in the United States Code.

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Comments

  • RJN says:

    Like Franken, your rhetoric about arbitration is very one-sided. You are assuming the arbitration process is unfair, which may or may not be true. Please try to be objective in your analysis.

  • Paul Kirgis says:

    @RJN-

    I don’t assume (or contend) the process is inherently unfair. NAF credit card arbitration was unfair; the evidence suggests that AAA consumer arbitration and FINRA arbitration are not. Whether arbitration is fair to consumers and employees is beside the point. The problems with it are 1) it denies individuals their constitutional rights to due process and a jury; 2) it denies courts their legitimate role in interpreting and making law; and 3) it removes much of the threat of legal liability that we rely on to deter corporate misconduct (not because individual arbitrations are unfair, but because the removal of class actions, punitive damages, and publicity reduces the cost of wrongdoing overall).

  • [...] ADR Prof Blog: Occupy Arbitration? Judicial Nonviolent Resistance http://www.indisputably.org/?p=3104            ADR Prof Blog: The Future of Summary [...]

  • Alan Rau says:

    The suggested “state court nullification of Supreme Court precedent” seems quite reminiscent of what happened in the South following Brown v. Board of Education. But no, perhaps the suggestion is that the civil-rights shoe is in fact on the other foot—-that is, that trial lawyers and the plaintiff’s bar are now standing in for Rosa Parks.

  • Paul Kirgis says:

    I think that analogy actually puts credit card companies in the Rosa Parks role, not plaintiffs or the lawyers who represent them. Notwithstanding Steven Colbert’s “corporations are people too” initiative, I’m less concerned about protecting corporations’ rights than the rights of either black school children or consumers.

    Having said that, I am not advocating “nullification.” I’m advocating testing boundaries. I believe it is entirely appropriate to suggest that when the Supreme Court intrudes into areas traditionally reserved to the states, its precedents should be read narrowly. In this case, in my view, very narrowly.

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