December 8, 2011
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-Center, Stolt-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
- expressly delegates all questions about the enforceability of the arbitration agreement to the arbitrator;
- either says nothing about the possibility of class arbitration or, just to be safe, expressly forbids class or representative action;
- expressly forbids the award of punitive damages; and
- 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.
Last 5 posts by Paul Kirgis
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- Multi-Stage Negotiation Materials on DRLE Website - August 8th, 2014