Monday, March 7, 2016
As Stacey writes just below this post, much is happening in the arbitration arena currently.
In December, the United States Supreme Court ruled that the 1925 Federal Arbitration Act pre-empts state law. Thus, when parties have executed agreements calling for arbitration rather than court resolutions, the arbiration clause will be upheld. The case was DirectTV, Inc. v. Imburgia, No. 14-462.
In the case, Imburgia’s contract stated that “[i]f ... the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 [the arbitration section] is unenforceable.” http://www.supremecourt.gov/opinions/15pdf/14-462_2co3.pdf
The Supreme Court noted that when DIRECTV drafted the contract, the parties likely believed that the words “law of your state” included California law that then made class-arbitration waivers unenforceable. But the Court’s subsequent holding in AT&T Mobility LLC v. Conception found that the Federal Arbitration Act pre-empts state law on the issue. Thus, parties cannot contractually bind themselves to invalid state law. When they refer to “state law,” this means only valid state law.
These rulings favor businesses, not consumers. This is so particularly so in cases between consumers and banks or credit card companies. A 2007 report found that over four years, arbitrators ruled in favor of the financial institutions in no less than 94% of the cases. Of course, in the typical take-it-or-leave it style contract, consumers have the choice only of agreeing to arbitrate or not getting the desired service.
As for the belief that arbitration saves scarce judicial resources, it is noteworthy that businesses file four times as many lawsuits as individuals. “It is hard to imagine any company giving up its own right to sue another company in a business dispute.” Double standards abound here.
Meanwhile, in early February, Senators Leahy and Franken introduced the Restoring Statutory Rights Act. This would create an exception in the Arbitration Act for disputes involving individuals and small businesses. The only way individuals would enter into arbitration is if they agreed to do so after the dispute has been filed. That’s very different from the current process, which automatically shunts all customer disputes into binding arbitration.
The Consumer Financial Protection Bureau is also considering a ban in mandatory-arbitration provisions in contracts for credit cards and other financial services. The Centers for Medicare and Medicaid Services is looking to do the same in relation to nursing home contracts.
Acts and regulations are highly warranted in this context. We know where the Supreme Court currently stands on the issue. We do not know where it will go with a new justice soon to be appointed, but judicial branch action in this area may not be forthcoming any time soon.