ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, October 12, 2007

There Ought To Be a Law...

Arbitration is a creature of contract, and the Contracts course necessarily includes at least a few cases involving arbitration terms. But, pre-dispute arbitration could face its demise in many contexts. Senator Russ Feingold has proposed a bill called the Arbitration Fairness Act, which would invalidate pre-dispute arbitration agreements in employment, consumer and fanchise contracts and "dispute[s] arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power."

The proposed legislation contains the following findings:

(1) The Federal Arbitration Act (now enacted as chapter 1 of title 9 of the United States Code) was intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power.

(2) A series of United States Supreme Court decisions have changed the meaning of the Act so that it now extends to disputes between parties of greatly disparate economic power, such as consumer disputes and employment disputes. As a result, a large and rapidly growing number of corporations are requiring millions of consumers and employees to give up their right to have disputes resolved by a judge or jury, and instead submit their claims to binding arbitration.

(3) Most consumers and employees have little or no meaningful option whether to submit their claims to arbitration. Few people realize, or understand the importance of the deliberately fine print that strips them of rights; and because entire industries are adopting these clauses, people increasingly have no choice but to accept them. They must often give up their rights as a condition of having a job, getting necessary medical care, buying a car, opening a bank account, getting a credit card, and the like. Often times, they are not even aware that they have given up their rights.

(4) Private arbitration companies are sometimes under great pressure to devise systems that favor the corporate repeat players who decide whether those companies will receive their lucrative business.

(5) Mandatory arbitration undermines the development of public law for civil rights and consumer rights, because there is no meaningful judicial review of arbitrators’ decisions. With the knowledge that their rulings will not be seriously examined by a court applying current law, arbitrators enjoy near complete freedom to ignore the law and even their own rules.

(6) Mandatory arbitration is a poor system for protecting civil rights and consumer rights because it is not transparent. While the American civil justice system features publicly accountable decision makers who generally issue written decisions that are widely available to the public, arbitration offers none of these features.

(7) Many corporations add to their arbitration clauses unfair provisions that deliberately tilt the systems against individuals, including provisions that strip individuals of substantive statutory rights, ban class actions, and force people to arbitrate their claims hundreds of miles from their homes. While some courts have been protective of individuals, too many courts have upheld even egregiously unfair mandatory arbitration clauses in deference to a supposed Federal policy favoring arbitration over the constitutional rights of individuals.

And, on the heals of this proposal, comes a 74-page report, titled "The Arbitration Trap," by a group called Public Citizen. The report exposes the troubling relationship between certain arbitration providers and the credit card industry, and concludes that pre-dispute arbitration is "a rigged game in which justice is dealt from a deck stacked against consumers."

Nevertheless, the near consensus of predictors is that the bill has no chance of passing (or even getting to the floors of the House or Senate). And, despite numerous academic writings that support these findings and the elimination of pre-dispute arbitration agreements in these contexts, there has been very little popular press coverage of the subject. The most mainstream press I have seen yet is this op-ed piece from Forbes, which, in light of credit card industry practices, encourages the passage of the Arbitration Fairness Act.

[Meredith R. Miller]

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