Mandatory Arbitration Limits?

As I am finishing up the semester teaching dispute resolution and focusing on arbitration, we’ve been having lots of fun in class finding mandatory arbitration clauses in our life — credit cards, cell phones, apartment leases, etc. My favorite clause to teach is from Gateway Computers, which used to have a clause requiring arbitration under the International Chamber of Commerce rules. My guess is that some junior associate drafting the clause thought it would be great to go to Paris on a regular basis!

I point out in class that there have been proposals to limit mandatory arbitration, but that there is generally little expectation these would be passed by the Senate or House. This year, however, the news might be different with the Democrats taking over. As Vicky Pynchon has helpfully posted, there is now new contemplation that the bill could be passed. The bill, proposed by Wisconsin Senator Russ Feingold last summer, provides:

Arbitration Fairness Act of 2007 – Declares that no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of: (1) an employment, consumer, or franchise dispute, or (2) a dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power.

Declares, further, that the validity or enforceability of an agreement to arbitrate shall be determined by a court, under federal law, rather than an arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement.

Exempts arbitration provisions in collective bargaining agreements from this Act.

So . . . it will be interesting to watch how the new party in charge deals with issue of mandatory arbitration (and if we have to rewrite the arbitration chapters in our textbooks once again!).

Cross posted at Indisputably.

This Post Has 5 Comments

  1. Bruce Boyden

    Interesting. Given cases like Hill v. Gateway (you should suspect, and therefore assent to, additional, unmentioned terms when you order a computer by phone) this can only be a good thing.

    But I’m puzzled by the inclusion of “franchise disputes.” Franchisees are small businesses, certainly, but they are still businesses. What’s wrong with mandatory arbitration of franchise agreements?

  2. Joe Kennedy

    This would definitely be a departure from the FAA and Court decisions on arbitration since Gilmer. Is this a two-way street, though? I understand this Act would be meant as a protection to consumers, employees, and individuals of unequal position, but couldn’t the business or employer challenge the arbitration agreement as well? With the time and expense of litigation, it seems like forcing the dispute into the court by challenging agreement could be a power play of a party that knows it has more resources.

  3. Sean Samis

    Southland Corp. v. Keating was a franchise case from California in which the FAA was held to preempt the California Franchise Investment Law; it apparently remains controversial.

    Perhaps inclusion of franchises was something Sen. Feingold did “to make the sausage”.

  4. Nathalia Wagner

    While this act may be meant to protect consumers and employees, this act may have the opposite effect. If arbitration agreements are not enforceable, then employers and companies that produce products will have to factor into their price the possiblity of litigation. This could result in increased prices for produts and decreased wages for employees because more funds will need to be “set aside” for possible litigation.

    Furthermore, a strong principle of “freedom to contract” is present within the U.S. Limiting the enforceability of arbitration would be narrowing the parties’ freedom to contract. Collective bargaining Agreements generally include an arbitration clause, thus ‘freedom to contract’ within the scope of collective bargaining agreements would be severely limited.

    So, before this act is passed general principles within the U.S. and the long-term effect of this act on the economy should be considered.

  5. Danica Zawieja

    I agree with Nathalia. I think most arbitration, especially consumer arbitration is beneficial for companies, individuals, and society as whole. I think it is a Mistake to prohibit practice altogether even though it may be appropriate to proscribe egregiously unfair mandatory arbitration. Companies will be spending less time and money in their disputes that gets passed along to their consumer rather than money to their general counsel. The progression of cases, some mentioned above, shows the Supreme Courts changing attitude towards arbitration. What is the impetus for this act? Is it really that unfair to individuals or such bad public policy?

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