Is Arbitration Getting Fair Scrutiny?

It seems that arbitration as an alternative to litigation has been the subject of much criticism of late, particularly in connection with the issue of class arbitrations.

Any discussion must begin with a brief discussion of three U.S. Supreme Court (“SCOTUS”) decisions which discussed the applicability of the Federal Arbitration Act (“FAA”) to state laws that prohibited commercial contract clauses containing class action waivers, (AT&T Mobility v. Concepcion), class action waivers in cases brought under US antitrust laws (American Express Company v. Italian Colors Restaurant) and arbitration clauses that invalidated a class action waiver if prohibited by the state law of the consumer’s state of residence, (DirecTv, Inc. v. Imburgia).

In 2011, in a 5-4 majority opinion authored by Justice Scalia, the Supreme Court in AT&T found that a California statue that prohibited class action waivers in commercial contracts was pre-empted by the FAA. This opinion was then followed in 2013 with American Express in a 5-3 majority opinion, (Justice Sotomayor took no part in the consideration of the case), also authored by Justice Scalia, which held that the FAA did not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeded the potential recovery. Then in 2015, in a 6-3 majority opinion authored by Justice Breyer, (Justice Scalia concurring) the Court held in DirectTV that  an arbitration clause deferring to state law regarding class action waivers was also pre-empted by the FAA. At issue in all these class action waiver cases was the argument that the consumer was being deprived of the right to level the playing field through class action litigation.

In recent years, the issue of class action waivers has been expanded to employment agreements and whether the inclusion of class action waivers in employment agreements is in violation of either the National Labor Relations Act (“NLRA”) or state law.  This issue was put to rest by SCOTUS in May of this year in Epic Systems Corp v. Lewis and its companion cases in a 5-4 decision authored by Justice Gorsuch.  The Supreme Court in Epic Systems held that arbitration agreements that called for individual proceedings were to be enforced as written and were not rendered invalid by contrary NLRA provisions that permitted collective resolution of employment disputes.

Several circuits have weighed in on the issue of whether a court or an arbitrator must initially decide whether the parties agreement authorized class or collective arbitration.  The Seventh Circuit of Appeals at the end of October, 2018 ruled in Herrington v. Waterstone Mortgage that the issue of class arbitrability was a gateway issue involving the foundational question of arbitrability.  The Seventh Circuit has now joined the Third, Fourth, Sixth, Eighth and Eleventh Circuits in holding that the courts must decide the gateway issue of arbitrability. Expect this issue to come before the Supreme Court some time in the future.

Since AT&T, much has been written attacking arbitration clauses containing class action waivers which culminated in a scathing series appearing in November, 2015 in the New York Times describing a host of horror stories from consumers compelled to adjudicate claims against lenders, credit card companies and other debt collection agencies. While no one disputes the fact that in the past numerous abuses occurred in consumer arbitration cases involving a particular arbitration service provider, as well as some truly bizarre arbitration clauses, conspicuously absent from the New York Times series was a discussion of the steps taken by traditional commercial arbitration service providers to ensure due process considerations in consumer arbitration. As an example, the American Arbitration Association (“AAA”), updated and enhanced its consumer arbitration rules and procedures with its adoption in 2014 of its amended Consumer Arbitration Rules that included among other provisions, the right of a consumer to proceed in small claims courts, required businesses seeking to use the AAA Consumer Arbitration Rules to first submit to the AAA their form arbitration agreements to assure compliance with the AAA due process protocols and capped filing fees due by a consumer in any consumer arbitration at $200 and obligated the business entity to the consumer arbitration proceeding to pay the arbitrator’s compensation and expenses.

In short, much of the current criticism of arbitration has failed to take into account the recent procedural changes adopted by widely used providers of arbitration services, all intended to insure that commercial arbitration and mediation continue to remain a viable, fair, time sensitive and cost effective alternative to traditional litigation.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

David L. Kabat | Employment, Complex Commercial Litigation, Real Estate Litigation and Bankruptcy Litigation

Dave concentrates his practice in commercial real estate law, construction law, financing and creditors’ rights.

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