Thursday, April 29, 2010
Our recent guest-blogger, Mark Weidemaier, has emerged from under a cloud of volcanic ash and produced a new work of scholarship in the field of arbitration. You can download it from SSRN here. Here is the abstract:
The claim that arbitrators do not create precedent recurs throughout the arbitration literature. As an empirical matter, however, it is increasingly clear that, in some arbitration systems, arbitrators often cite to other arbitrators, claim to rely on past awards, and promote adjudicatory consistency as an important system norm. Much like courts, then, arbitrators can (but do not always) create precedent that guides future behavior and provides a language in which disputants, lawyers, and adjudicators can express and resolve grievances. This Article provides a theoretical foundation for understanding the conditions under which such precedent will (or will not) arise. It identifies three considerations that may account for the development of precedent across a range of arbitration systems: (1) whether the arbitration system is structurally conducive to the creation of precedent; (2) whether arbitral precedent functions to fill gaps in (or displace) state-supplied law; and (3) whether arbitrators are likely to be viewed as legitimate producers of law in the relevant context. After explaining the relevance of these considerations, the Article explores how they might apply in different arbitration contexts and sets forth a research agenda capable of shedding light on arbitration not only as a mechanism for resolving disputes, but also as a mechanism for generating robust systems of privately made law.
The article is also available on the William & Mary Law Review website
Wednesday, April 28, 2010
What is particularly striking to me about the Rent-A-Center oral argument is the Court’s preoccupation with drawing a line between the types of relatively extreme situations that would show the complete absence of a valid agreement to arbitrate (such as a forged agreement, or one that was obviously coerced) versus other situations, where the Justices appear to be less troubled with enforcing delegation language in the arbitration clause. It seems to me that many of the Justices share the view of the case that Mark has, as described in his previous post – that is, that at least some of the Justices may not be troubled with sending the issue of unconscionability to the arbitrator in this particular case, but there may be other cases where it would be troubling – such as the type of one-sided arbitration clause that was struck down by the Fourth Circuit in the notorious Hooters case.
Similarly, a number of the Justices seem to suggest that in a case like this one, where Jackson is challenging specific aspects of the arbitration clause, any allegedly unconscionable provision could be effectively “severed” from the basic agreement to arbitrate, leaving the basic obligation to arbitrate intact, allowing a court to leave to the arbitrator the question of whether the specific provisions are unconscionable. This rationale has been employed in numerous circuit court decisions, and I think also underlies the Court’s decision in PacifiCare.
As for the exchange between Justice Scalia and Justice Ginsburg regarding Hall Street (which Jeremy described in his post): the contract between Jackson and Rent-A-Center contains a provision allowing for expanded judicial review of the arbitration award (that is, it purports to allow a court to set aside an award not only on FAA grounds, but for errors of fact or law). Justice Ginsburg commented that this post-review provision made the arbitration agreement more “employee-friendly” than most. But as she also noted, in Hall Street, the Court held that parties cannot contract for judicial review beyond the statutory grounds provided for in the FAA. Justice Ginsburg expressed concern that since the post-review provision of the clause is now invalid, the arbitration agreement is less balanced. Justice Scalia responded that this issue was not previously raised by the parties and therefore the Court cannot consider it.
Finally, as Jeremy noted in his post, Justice Scalia made evident his views on the issues in the case, once commenting in response to Jackson’s counsel that if all allegations of unconscionability were for the court to decide, then, “[w]ell, kiss goodbye to arbitration.” As Dahlia Lithwick commented yesterday on Slate.com, “more likely, kiss it hello.” The grounds for challenging an arbitration agreement already are quite circumscribed, due to the Court’s previous arbitration decisions. If the Court rules in favor of Rent-A-Center in this case and enforces the delegation language in the arbitration clause, such a ruling will dramatically affect the ability of consumers and employees to challenge the enforceability of arbitration agreements, as most challenges will be found to be for the arbitrator to decide (see Chris’s and my previous posts on this issue).
Perhaps in the aftermath of Rent A Center, the future avenue for challenging mandatory arbitration will become post-award review. As I commented in a previous post, although the First Options dictum suggests that parties could contract in certain circumstances for an arbitrator to make a final (i.e., practically unreviewable) determination of arbitrability, the scope of review issue was not briefed by Rent-A-Center (except for a mention in the reply brief) or by Jackson, nor was it discussed at all at oral argument.
In fact, the oral argument seems to suggest that the decision of the Court will be premised on the assumption that any arbitrator’s ruling on unconscionability would be subject to post-award review under FAA §10. Justice Scalia was insistent that an arbitrator would not be able to disregard the law when determining whether an arbitration agreement is unconscionable, even commenting “I think there is no doubt” the award would be set aside if the arbitrator did totally disregard the law. (Although FAA §10 does not allow a court to set aside an award for an error of law per se, an argument might be made in such as case that the arbitrator exceeded his or her powers under FAA §10(a)(4)). It is also interesting that a footnote in the court’s Stolt-Nielsen decision seems to breathe new life into the “manifest disregard” ground for vacating an arbitral award, a doctrine that many commentators assumed was dead after the Court’s decision in Hall Street.
Historically, however, courts have interpreted the grounds for setting aside an award under FAA §10 extremely narrowly; it will be interesting to see if courts are any more likely to scrutinize an arbitrator’s findings when an allegedly unconscionable contract is at issue.
[Posted, on Karen Halverson Cross's behalf, by Jeremy Telman]
The outcome in Rent-a-Center may hinge on the answer. In a nutshell, if unconscionability is truly a post-formation defense that strikes unfair provisions because, well, they're unfair, then it does not relate to the "making" of the arbitration agreement under section 4 of the Federal Arbitration Act. And if the unconscionability defense doesn't fall within section 4, then the FAA doesn't prohibit arbitrators from deciding whether all or part of an arbitration clause is unconscionable.
On the other hand, if unconscionability actually operates from the premise that a party never truly assented to a one-sided clause, then it may attack the "making" of the arbitration clause. Arguably, then section 4 requires a court to adjudicate an unconscionability challenge.
The traditional view is probably the former: that unconscionability assumes that a valid contract exists, but then hacks away at some (or all) of it. Indeed, Rent-a-Center's brief does a great job of collecting sources for that proposition. Recently, though, it's become more common (at least in the academic literature) to conceptualize unconscionability as applying when informational defects cause a party not to realize that a term sharply deviates from her informed ex ante preferences. (I've made that argument, albeit in the context of trust law, here). In other words, unconscionability kicks in when (1) a clause is buried in a take-it-or-leave-it contract (procedural unconscionability) and (2) the harsh nature of the clause reveals that the non-drafting party would have objected to the clause if she'd been aware of it (substantive unconscionability). Viewed this way, unconscionability does flow from an absence of voluntary, knowing assent.
[Posted, on David Horton's behalf, by Jeremy Telman]
Deepak Gupta has a couple of posts on Rent-A-Center v. Jackson worth looking at.
The first is from April 1st.
The second is from yesterday. Yesterday's post links to a number of other discussions of the case.
Thanks to Christopher Drahozal for directing us there.
Tuesday, April 27, 2010
We have been preoccupied with Rant-A-Center v. Jackson, but the Supreme Court's interest in arbitration issues is not limited to that case. Today the court decided Stolt-Nielsen v. Animalfeeds Int'l Inc. in which the issue was whether an arbitrator can permit class-action arbitration when the arbitration agreement is silent as to the availability of that mechanism. The court said no in a 5-3 decision that split along predictable lines, with Justice Sotomayor not participating. If you want details you should look elsewhere. We recommend the following blawgs:
If anybody has other links to recommend, please let us know and we will add them.
Two quotations from the recent argument in Rent-A-Center West v. Jackson just call out for memorialization on this blog. Mind you, ripped from their contexts, these quotations might seem more significant than they really are, but still. . . .
Justice Breyer: I'm not interested in arbitration law. I am interested in contract law, and I want to know why as a general matter of contract law an allegation of unconscionability, defense of unconscionability is . . . not . . . like the coercion defense or the inducement defense or the "I was in Alaska" defense? Isn't it enough like that that they should be treated alike?
Justice Scalia: No, I don't care what we said in dictum. It doesn't seem to me that unconscionability is the same as duress or the same as fraud . . . that you can be a stupid person who voluntarily signs an unconscionable contact. Now, the courts may protect you because you are stupid, but you haven't been coerced. Is there no distinction between unconscionability and coercion?
The transcript from yesterday's oral argument in Rent-A-Center West v. Jackson is available now here. I hope that some of our arbitration experts will share their thoughts on how oral argument went. My inexpert attempt at a synopsis follows:
Rent-A-Center's counsel, friend of the blog Robert F. Friedman, under questioning from Justices Ginsburg, Kennedy, Stevens and Sotomayor, argued that the issue in the case, unconscionability, does not relate to the "making" of an agreement. It is a post-formation issue and thus one that can be determined by the arbitrator. This exchange with Justice Sotomayor (on p. 7 of the transcript) strikes me as getting to the heart of things:
Justice Sotomayor: Counsel, is your problem with unconscionability . . . being forced to or coerced into signing something? That's okay for the courts, but this type of argument that goes to the unfairness of the process, that's for the arbitrator; is that your position?
Mr. Friedman: That's right, Justice Sotomayor.
But Justice Scalia, who had been trying to help Mr. Friedman make his case was not buying Mr. Friedman's argument that there is a bright line separating allegations of physical coercion from allegations of substantive unfairness. Justice Scalia suggested that if argument is "that the one-sidedness [of an arbitration agreement] is evidence of that the agreement was not voluntary, I don't see how that's for the arbitrator." (p.10)
A bit later, Justice Breyer makes the distinction between clear and unmistakable language referring an issue to the arbitrator and clear and unmistakable evidence of intent to refer an issue to the arbitrator. (p. 15) Justice Breyer characterized Jackson's claim as one that there was no such intent on his part because of procedural and substantive unconscionability. Mr. Friedman agreed with Justice Breyer that a court could decide whether there was an agreement to arbitrate in cases in which the employee's signature was forged or if the employee was intoxicated at the time he signed. (pp. 18-19) Justice Breyer then pressed Mr. Friedman to explain why unconscionability should be treated differently from coercion, forgery or incapacity challenges to the enforcement of an agreement. (p. 20) Mr. Friedman responded that unconscionability claims simply did not rise to the same level as claims that a contract had never actually been made due to fraud or coercion.
There follows an interesting exchange between Justices Ginsburg and Scalia (pp. 22-23) about the effect of the court's decision in Hall Street Associates, LLC v. Mattel, Inc. on the validity of the arbitration agreement at issue in this case. Justice Ginsburg entertained the possibility that Hall Street might require a finding that the parties' agreement was invalid. Justice Scalia argued that the issue had not been raised below and thus was waived. Justice Ginsburg stuck to her guns: the parties had had no opportunity to raise the issue because the Hall Street opinion was issued after the District Court decided this case.
Plaintiff's counsel, Ian Silverberg, then had his chance. Much of the discussion here focuses on whether Mr. Jackson was seeking to invalidate the entire arbitration agreement or only specific provisions. Chief Justice Roberts suggested that one might say that a global challenge to the agreement goes to the making of the agreement and thus is for the court to decide, but if only specific provisions are challenged as unconscionable, that goes to enforcement and can be decided by the arbitrator. (p. 28) After a lengthy and very confusing exchange, Mr. Silverberg characterized his client's position as follows: "There are certain elements of the arbitration agreement that are unconscionable and under Nevada law, which would render the entire arbitration agreement unconscionable." (p. 42)
Justice Scalia pointedly rejected Mr. Silverberg's attempt to argue that unconscionability challenges should be treated like challenges to the making of an agreement based on coercion, fraud in the inducement or duress. "I would say all unconscionability challenges, if you have an agreement that is as clear as this one, would go to the arbitrator." (p. 47) A few pages later, Justice Ginsburg asked Mr. Silverberg whether all arbitration agreements could be subject to unconscionability challenges that would have to be decided by a court. (p. 52) When Mr. Silverberg suggested that all of them could be, Justice Scalia jumped in with "Kiss good-bye to arbitration." But Mr. Silverberg gamely replied that his client was simply seeking to retain the status quo. As the law now stands, parties can get before courts to argue that arbitration agreements that they have signed are unconscionable, and the heavens have not darkened. Courts quickly dispose of meritless unconscionability challenges and have the option of sanctioning the attorneys who bring them. (p. 53)
While the pols debate (or don’t debate) a bank reform bill, one judge is making headlines in New York by single-handedly taking on the banks. And he’s done it (at least in part) with basic contract doctrine.
In Suffolk County, New York, in the Residential Mortgage Foreclosure
Conference Part, Justice Jeffrey Arlen Spinner is waging his own
mortgage reform revolution. Back
in November, Justice Spinner canceled a $292,500 mortgage on unconscionability
grounds, describing IndyMac Bank’s behavior as “harsh, repugnant, shocking and
repulsive.” Then, just last week, he
ordered the Emigrant Mortgage Company to pay $100,000 to the homeowners as
compensation for the bank’s “deplorable” mortgage agreement and its bad-faith
foreclosure negotiations. The judge "forever barred" Emigrant from collecting interest on the $302,500 mortgage, as well as any legal fees, costs "or any sums other than the principal balance." He
In Suffolk County, New York, in the Residential Mortgage Foreclosure Conference Part, Justice Jeffrey Arlen Spinner is waging his own mortgage reform revolution. Back in November, Justice Spinner canceled a $292,500 mortgage on unconscionability grounds, describing IndyMac Bank’s behavior as “harsh, repugnant, shocking and repulsive.” Then, just last week, he ordered the Emigrant Mortgage Company to pay $100,000 to the homeowners as compensation for the bank’s “deplorable” mortgage agreement and its bad-faith foreclosure negotiations. The judge "forever barred" Emigrant from collecting interest on the $302,500 mortgage, as well as any legal fees, costs "or any sums other than the principal balance." He wrote:
The Court…determines that the imposition of exemplary damages upon [the plaintiff bank] is equitable, necessary and appropriate, both in light of Plaintiff's shockingly inequitable, bad-faith conduct, as well as to serve as an appropriate deterrent to any future outrageous, improper and wrongful activities . . .
When Emigrant initiated the foreclosure proceeding, the
homeowners contested the action, arguing that Emigrant refused to engage in
good faith settlement conferences, as required by a 2008 amendment to the
Banking Law. The decision,
however, focused on the provisions of the mortgage agreement, which Justice Spinner
described as “inequitable.” Among
other “deplorable” and “repugnant” provisions, the agreement had a clause
prohibiting the homeowners from ever seeking protection under the U.S. Bankruptcy
Code. The judge reasoned:
When Emigrant initiated the foreclosure proceeding, the homeowners contested the action, arguing that Emigrant refused to engage in good faith settlement conferences, as required by a 2008 amendment to the Banking Law. The decision, however, focused on the provisions of the mortgage agreement, which Justice Spinner described as “inequitable.” Among other “deplorable” and “repugnant” provisions, the agreement had a clause prohibiting the homeowners from ever seeking protection under the U.S. Bankruptcy Code. The judge reasoned:
This Court has never been presented with such a waiver. …It is axiomatic that a pre-bankruptcy waiver of such a valuable statutory right, even if freely bargained for (and in this Court's opinion, this is certainly not the case), should not, under any circumstances, be enforced against consumer debtors. …[S]uch a highly questionable waiver as this one is unconscionable, unreasonable, overreaching and is absolutely void as against public policy.
The judge's opinions read like a punishing thesaurus entry for "very bad bank" -- he has liberally thrown around language like "deplorable," "vexatious," "repugnant," "repulsive," "harsh," even describing the bank's actions as "premeditated." Definitely cases to watch on appeal.
[Meredith R. Miller]
On April 5, 2010, the Ninth Circuit ruled in favor of Hyundai in Hyundai Motor America v. National Union Fire Ins. Co. of Pittsburgh. The case followed a patent infringement judgment against Hyundai after it placed features on its website. In 2005, Orion IP, LLC sued Hyundai and 19 other car manufacturers for their "build your own vehicle" and parts catalogue features. Orion holds a patent for electronic methods that generate customized product proposals for potential automobile purchasers. Hyundai sought a defense from its insurers, claiming that Orion's suit was covered under the "advertising injury" clause in its contract with National Union. National Union refused to provide a defense, and Hyundai eventually was found liable to Orion for $34 million in damages.
Hyundai then filed suit against its insurer. The district court granted summary judgment to National Union, finding among other things, that patent infringement is not an "advertising injury" as defined in the policy. The Ninth Circuit reversed. Hyundai claimed that Orion's claims fell under the contractual provision obligating National Union to defend Hyundai against claims alleging the "misappropriation of advertising ideas." The Ninth Circuit first found that the challenged features constituted "advertising" for the purposes of California law. Next, the Ninth Circuit found that while California courts had in the past rejected claims that patent infringements constituted advertising injuries, they had done so through a fact specific inquiry, acknowledging that infringement of a patented advertising method could constitute misappropriation of advertising ideas. Finally, because the court found that the "build your own" feature was itself an infringement of Orion's patent, the use of the feature caused Orion's harm. The court thus found a direct causal connection between the advertisement and the advertisement injury.
Meanwhile, on the same day, the Seventh Circuit decided that Ace American Insurance Company had no duty to defend RC2, the manufacturer of the Thomas & Friends toys, against class action lawsuits alleging negligence in connection with use of lead paint on RC2 toys that had been recalled. The case is Ace American Insurance Co. v. RC2 Corp., Inc.
In this case, the policies in question excluded coverage for occurrences that took place within the United States. The district court nonetheless rules that Ace had a duty to defend RC2 based on the theory that the policies extended coverage to injuries that occurred in the U.S. but were caused by negligence in the product's manufacture that occurred abroad. The Seventh Circuit found that Illinois law does not permit such an extension of coverage where the policy exclusion is clear and thus reversed the district court.
RC2 had separate insurance to deal with domestic occurrences. Unfortunately for RC2, those policies had a lead paint exclusion. RC2 thus had to turn to its international insurer. The Seventh Circuit held that under Illinois law "an accident occurs when and where all the factors come together at once to produce the force that inflicts injury and not where some antecedent negligence takes place." Since the plaintiffs in the underlying litigation all alleged injury from exposure to lead paint in the United States, the claims clearly were not covered under RC2's policy with Ace.
Monday, April 26, 2010
The U.S. Supreme Court heard oral arguments this morning in Rent-A-Center West v. Jackson, a case that has occupied us for much of this month. [Yes, I know that the picture at right does not actually represent oral argument at the U.S. Supreme Court, but it is a court and people are arguing.]
We hope that we will benefit from some post-argument analysis from some of our arbitration law experts who have already weighed in on the importance of the case in advance.
Over at the Legal Profession Blog, Jeff Lipshaw has a post in which he asks the non-musical question, "Can a discussion of contract theory up front allay the usual first-year angst about consideration (and everything else)?"
Having read Jeff's discussion, my answer to his question would be as follows: I doubt it, but there might be other reasons to set out one's theoretical approach to contracts law in advance. I ask my students to read my casebook's theoretical introduction, which covers Socratic teaching and the case method, formalism, realism and all that jazz, giving a critical perspective on each. I do it, not in the expectation that students will get much out of the assignment on the first reading, but it contains material to which I can refer back throughout the semester.
My own preference is to reveal my own theoretical perspectives piecemeal, when they seem relevant to particular subjects that come up throughout the course. But I am also often cautious to present such perspectives, whether or not they are my own, as possible perspectives one might have on contracts law and contracts theory. Because law students are so often attempting to get the "right answer" in their notes, I try to present them with possible answers and perspectives so that they are not tempted to confuse the "right answer" with my opinion. I want them to be formulating their own approaches to the material and to give them as many perspectives as possible. I prefer to offer theoretical approaches to them in digestible chunks, over the course of the semester, so that they can wrestle with it on their own.
It is far easier for me to adopt such an approach than it might be for Jeff because I have the advantage of not having developed a systematic approach to contracts theory. A slipshod eclecticism is the hobgoblin of my little mind.
Friday, April 23, 2010
This story from Fox News:
A computer game retailer revealed that it legally owns the souls of thousands of online shoppers, thanks to a clause in the terms and conditions agreed to by online shoppers.
The retailer, British firm GameStation, added the "immortal soul clause" to the contract signed before making any online purchases earlier this month. It states that customers grant the company the right to claim their soul.
"By placing an order via this Web site on the first day of the fourth month of the year 2010 Anno Domini, you agree to grant Us a non transferable option to claim, for now and for ever more, your immortal soul. Should We wish to exercise this option, you agree to surrender your immortal soul, and any claim you may have on it, within 5 (five) working days of receiving written notification from gamesation.co.uk or one of its duly authorised minions."
GameStation's form also points out that "we reserve the right to serve such notice in 6 (six) foot high letters of fire, however we can accept no liability for any loss or damage caused by such an act. If you a) do not believe you have an immortal soul, b) have already given it to another party, or c) do not wish to grant Us such a license, please click the link below to nullify this sub-clause and proceed with your transaction."
The terms of service were updated on April Fool's Day as a gag, but the retailer did so to make a very real point: No one reads the online terms and conditions of shopping, and companies are free to insert whatever language they want into the documents.
While all shoppers during the test were given a simple tick box option to opt out, very few did this, which would have also rewarded them with a £5 voucher, according to news:lite. Due to the number of people who ticked the box, GameStation claims believes as many as 88 percent of people do not read the terms and conditions of a Web site before they make a purchase. The company noted that it would not be enforcing the ownership rights, and planned to e-mail customers nullifying any claim on their soul.
This reminds me of the episode of the Simpsons when Bart sells his soul to Millhouse. Though Bart had agreed to sell his soul to Millhouse in a negotiated deal - and, of course, Millhouse went and resold it for Alf pogs:
[Meredith R. Miller – h/t Cynthea Motschmann]
Thursday, April 22, 2010
Gawker has it here. Apparently Hunter Thompson wasn't a fan of signing anything, deciding instead to scrawl Dick Cheney's name on the signature block, along with expletives and swastikas. Ironically, even if there is an argument that the scrawling evidences an intent to be bound, at least it also serves as strong evidence of incapacity.
[Meredith R. Miller]
As reported in the Setonian here, Bobby Gonzalez, former head coach of the Seton Hall University men's basketball team, the Pirates, filed suit last week, alleging that he was terminated in violation of the covenant of good faith and fair dealing. Gonzalez was fired following a Seton Hall loss in the post-season NIT. During that loss, a Seton Hall player was ejected after having twice punched an opposing player in the groin. Usually such behavior just leads to the Pirate in question being told to swab the decks. But that was not the only incident during the game. Gonzalez was assessed his seventh technical foul of the season, which is kind of a lot for a college basketball coach, and so they made him walk the plank.
Announcing the decision to fire Coach Gonzalez, University President Msgr. Robert Sheeran remarked that the NIT loss was "the crystallization of all that was really wrong with the coaching and leadership." According to the Setonian, two former members of the team were arrested after the game and charged with kidnapping, aggravated assault, robbery, burglary and weapons violations. These events may have been the last straw. However, as reported on Wikipedia, there may have been grounds for Seton Hall administrators' discomfort with Gonzalez already. There was concern that he was filling his roster with transfer students who, while gifted on the court, struggled academically and may have appeared too many times in courts without hoops or hardwood.
Apparently, Gonzalez's suit turns on the suspicious timing of his for-cause termination, which deprived him of entitlement to two years of base salary.
Wednesday, April 21, 2010
Thanks to Jeremy for the invitation to participate in this discussion. (Full disclosure: I’m currently trapped in London after a conference, with limited access to things like the internet, and sleep. So I may have missed some of the discussion. If so, my apologies.)
The core question in Rent-A-Center is whether courts should respect contract terms that clearly allocate unconscionability questions to the arbitrator. I want to use this post to explain why this strikes me as a relatively easy question in a case like Rent-A-Center, but a more difficult question generally. In Rent-A-Center, Jackson objects that the arbitration clause allows RAC to go to court in some cases, requires him to pay half the arbitrator’s fee (unless the law requires otherwise), and limits discovery. Importantly, none of these objections implies that the arbitrator cannot reach a fair decision on the unconscionability question. For example, Jackson doesn’t identify any discovery related to that question that will be unavailable to him, and his complaint about fee-splitting seems to ignore the fact that both AAA and JAMS, the providers designated in the contract, cap employee fees at relatively low amounts.
Once we accept that Jackson’s unconscionability challenge can be resolved as fairly as any other issue in arbitration, I have trouble understanding why it shouldn’t be resolved there. Let’s assume that you and I form a contract that includes an arbitration clause with various bells and whistles, like discovery restrictions, that we know can be challenged as unconscionable. We’d prefer to arbitrate these challenges, too, so we draft an arbitration clause that encompasses all issues related “to the … enforceability” of our contract or any part of it. Why shouldn’t our agreement be enforced? There’s nothing illogical about concluding that we have “made” an agreement to arbitrate that permits the arbitrator to decide whether the “bells and whistles” are unconscionable. After all, an arbitrator who is unbiased and competent enough to resolve complex federal statutory claims surely can manage to decide whether to enforce a limit on discovery. Nor is this like the example of a forged signature on a contract containing an arbitration clause. A party whose signature was forged hasn’t manifested assent to anything, including arbitration. The forgery claim calls into question the very existence of the arbitration agreement and is plainly for the court to decide, whatever the arbitration clause might have to say on the subject. That is why RAC correctly concedes that such issues relate to the “making” of the arbitration agreement. But a party who has agreed to arbitrate unconscionability challenges has, well, agreed to arbitrate unconscionability challenges. (As an aside, I mean “agree” in the objective sense important to contract law. In many cases, of course, consumers and employees do not actually agree to each contract term. But under current law, if objectively manifested assent is good enough to enforce other contract terms, it’s good enough to enforce the arbitration clause.)
The difficulty arises when the unconscionability challenge cannot be resolved fairly (or at all) in arbitration. Examples might include challenges to clauses that impose very high initial filing fees, or clauses that require arbitration in remote locations or before a biased arbitrator. Given the length of this post already, I won’t elaborate on this difficulty here. Suffice it to say that it seems like courts should resolve these kinds of challenges, even if the contract purports to send them to arbitration. And there is a further difficulty: how should courts identify whether an unconscionability challenge is one that cannot be resolved fairly in arbitration? These questions strike me as the difficult ones, and also the ones on which the Court’s decision in Rent-A-Center is likely to provide the least guidance.
[Posted on behalf of Mark Weidemaier by Jeremy Telman]
Many thanks to Jeremy for letting me chime in. I’ve also really enjoyed both Karen and Christopher’s posts and work on this subject.
A bit of shameless self-promotion: I’ve got a (very) short essay in the Virginia Law Review In Brief on Rent-A-Center. You can find it here. In the piece, I argue that section 4 of the Federal Arbitration Act (“FAA”) bars parties from delegating the issue of whether an arbitration clause is valid to an arbitrator. Section 4 instructs courts on what to do when a party moves to compel arbitration. Here’s its key language:
The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration . . . is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement . . . . If the making of the arbitration agreement . . . be in issue, the court shall proceed summarily to the trial thereof.
In addition, the statute empowers a party to request a jury trial on the issue of whether “no agreement in writing for arbitration was made.”
In my essay, I argue that (1) the statute vests courts (and thus not arbitrators) with the exclusive authority to resolve claims that place “the making of the agreement for arbitration . . . in issue” and (2) any challenge to the validity of an arbitration clause under a traditional contract law defense (including unconscionability) places “the making of the agreement for arbitration . . . in issue.”
In the brief, which Karen deftly summarized, Rent-A-Center (much to my surprise!) seems to concede the first point: that courts enjoy a monopoly on resolving any claim that revolves around “the making of the agreement for arbitration.” However, Rent-A-Center makes three related arguments about why the phrase “making of the agreement for arbitration” doesn’t include unconscionability challenges.
First, Rent-A-Center notes that section 4 allows the parties to demand a jury trial, and limits the jury to resolving the discrete issue of whether “no agreement in writing for arbitration was made.” Thus, Rent-A-Center suggests that section 4 governs only the bald claim that no arbitration clause actually exists. One difficulty with this argument, though, is that the phrase “no agreement in writing for arbitration was made” appears only toward the end of section 4. Toward the beginning of the statute, Congress described the judiciary’s role in broader terms: to hear all claims that place “the making of the agreement to arbitrate . . . in issue.” If Congress intended to limit section 4 to bare assertions that there is no arbitration clause, presumably it would’ve used the narrower phrase “no agreement in writing for arbitration was made” throughout. Moreover, the Supreme Court has construed the phrase “the making of the agreement to arbitrate” to include a claim of fraud in the inducement—a claim that goes beyond a mere assertion that no arbitration clause exists. See, e.g., Prima Paint v. Conklin, 388 U.S. 395, 403-04 (1967).
Second, Rent-A-Center contends that because section 4 entitles a party to a jury trial, it can’t encompass unconscionability, which juries don’t decide. Yet the statute also cross-references the Federal Rules of Civil Procedure, which limits the availability of jury trials. Arguably, then, section 4 merely preserves the right to a jury trial when it would otherwise exist, but stops short of conferring the right to a jury trial on any litigant who challenges “the making of the arbitration agreement.” This means that even if section 4’s jury trial guarantee doesn’t apply to unconscionability, section 4 still governs unconscionability claims.
Third, Rent-A-Center claims that the phrase “making of the agreement for arbitration” refers not to unconscionability, but to particular contract defenses, such as fraud in the inducement or duress, “which question[ ] the very existence of mutual assent.” (Brief at 12). Yet it seems bizarre that Congress would make such arbitrary distinctions in section 4. Section 2 of the FAA requires courts to consider whether an arbitration clause is invalid under any contract defense. Unless section 4 is equally broad—unless it instructs courts how to resolve any challenge to the enforceability of an arbitration clause—then the FAA contains a gaping hole. The statute would say absolutely nothing about how courts must go about entertaining a vast class of possible challenges to arbitration clauses. (For example, in addition to unconscionability, claims of incapacity and minority also don’t challenge “the very existence of mutual assent.”). Thus, section 4 must be keyed to section 2, and a claim that all or part of an arbitration clause is unconscionable places “the making of the agreement for arbitration . . . in issue.” In my essay, I argue that (1) the statute vests courts (and thus not arbitrators) with the exclusive authority to resolve claims that place “the making of the agreement for arbitration . . . in issue” and (2) any challenge to the validity of an arbitration clause under a traditional contract law defense (including unconscionability) places “the making of the agreement for arbitration . . . in issue.”
[Posted, on behalf of David Horton, by Jeremy Telman]
Tuesday, April 20, 2010
Yep. We're imperialistic, so what are you gonna do about? Throw some fulminated mercury at us?!?
We've already pretty much taken over the realms of business associations, alternative dispute resolution, national security law, international law, and law and literature. Well, now we're taking over intellectual property. And why? Because other blawgers are dropping the ball, in this case by not reporting on the relevant intellectual property issues in AMC's Breaking Bad. If you don't have cable or have cable but think (incorrectly in this case) that you have better ways to use your time than watching television on a Sunday night, you can get a re-cap of most of the relevant issues from the first two seasons of the show here.
In Season 3, our hero, Walter White, is taking a sabbatical from his Heisenberg identity and has given up his career as a producer (cook) of crystal meth. His partner in the business, Jesse Pinkman, decides to continue the business on his own, cooking up a batch of crystal meth by using Walt's formula. He sells this product through Walt's distributor, Gus. Gus pays Jesse half of his producer's fee and gives the other half to Walt. Jesse is quite understandably furious and Walt is equally furious but less understandably so. As he explained to Gus on Sunday night, for Walt, it's really all about the chemistry, and he cannot stand to have his formula reproduced by someone like Jesse, who whatever other endearing qualities he may have, is not a master chef.
I don't want to give away too much more of the plot, in case some of our readers are waiting to watch the entire season through Netflix, which BTW is a method I highly recommend, since watching television series about addictive drugs is, ironically enough, highly addictive. It's hard to wait a week between episodes and to endure commercials.
In any case, the plot gives rise to certain intellectual property concerns in the context of a now-defunct -- or at least non-functioning partnership. In this case, the partnership never operated according to a written partnership agreement. Still, Walt and Jesse were operating according to a contract of sorts, and we might look to their conduct to establish who has the right to the intellectual property developed in their joint venture. Walt clearly has the stronger claim, since he was the inventor of the recipe, while Jesse was just in charge of distribution. However, Walt had made clear that he was not interested in continuing the business and the business, which was illegal and thus never properly formed, was also never officially dissolved or terminated.
Walt seems to think he has a right to exclusive use of the recipe, even if he elects not to use it. Jesse seems to think he has a non-exclusive right. Since their claims are unlikely to be adjudicated in any court, we had better hash things out here.
While we are discussing the arguments pending before the U.S. Supreme Court in Rent-A-Center West v. Jackson, Loyola Law School Los Angeles's David Horton have moved on to the next issue in the world of arbitration agreements. Professor Horton's article, The Shadow Terms: Contract Procedure and Unilateral Amendments has appeared in the current issue of the UCLA Law Review. The full text is here. The abstract is reproduced below:
For decades, courts and commentators have debated the normative implications of contract procedure. Conservatives argue that mandatory arbitration clauses reduce the burden on the judicial system and that class arbitration waivers, choice-of-law clauses, and jury trial waivers allow businesses to pass litigation savings to their consumers in the form of lower prices. In response, liberals object that contract procedure dilutes substantive rights and runs roughshod over important jurisdictional and constitutional values.
This Article argues that neither view has accounted for a defining trait of contract procedure: the regularity with which drafters unilaterally amend procedural terms. Indeed, many standard form consumer agreements and a growing number of state statutes authorize drafters to revise procedural terms unilaterally. The frequency with which drafters exercise this power undermines the foundational conservative theory that sophisticated adherents can exert market pressure on drafters to offer efficient procedural terms. However, the liberal model of contract procedure—which urges courts to nullify procedural terms that erode substantive, jurisdictional, or constitutional interests—creates perverse incentives. Drafters respond to judicial decisions voiding procedural terms by amending their terms again. The target audience for these revisions is not the adherents who will be subject to them, but the courts who will adjudicate their validity. This “private conversation” between corporations and courts not only widens the informational gulf between drafters and adherents, but increases the burden on the judicial system. To end this pernicious feedback loop, the Article encourages policymakers to eliminate drafters’ ability to amend procedural terms unilaterally.