Judge Easterbrook: Arbitration for All!

In January, Judge Easterbrook wrote for the unanimous Seventh Circuit in Campbell v. Keagle, Inc.  That case involved a straightforward challenge to an arbitration clause in an employment agreement between plaintiff Campbell and her employer, the Silver Bullet Bar (the Bar).  Ms. Campbell was an exotic dancer, who brought a Fair Labor Standards Act claim against the Bar.  The arbitration clause was laughably one-sided (with one-sided terms in bold):

The owners of the Silver Bullet Bar reserve the right to choose the arbitrator and location of any such proceedings. I agree that all claims between me and the Silver Bullet Bar, its owners, or management will not [sic] be litigated individually and that I will not consolidate or file a class suit for any claim against the Silver Bullet Bar, its owners, or management. I will pay the cost of my arbitration and legal costs, regardless of the out- come of any such action.

The provision is so obviously one-sided that the defendant did not even claim otherwise on appeal.  Are we done here?  Not quite.  Defendant argued that the court should sever the unconscionable bits but still dismiss the claim and compel arbitration.  Defendant's sole goal was to arbitrate rather than litigate, and so it would be satisfied if the district court would choose the venue and the arbitrator who could then adopt appropriate arbitral rules.  

The Seventh Circuit agreed.  The district court had not determined that the entire agreement was unconscionable, nor would plaintiff want it to do so, and so the district could could not set aside the entire agreement. Fortunately for defendant, in Green v. U.S. Cash Advance, the Seventh Circuit held that when the terms of an arbitration provision are unconscionable, the court should, pursuant to § 5 of the Federal Arbitration Act, appoint an arbitrator within its jurisdiction, and that arbitrator will then establish the arbitral terms.  Green was authored by, you guessed it, Judge Easterbrook.  

You can listen to the oral argument here.  Judge Easterbrook keeps bringing the attorneys back to Green. Q.E.D.  It's ProCD v. Zeidenberg and Hill v. Gateway all over again.

After all, Judge Easterbrook points out, one can imagine an agreement with one-sided provisions going both directions.  Well, perhaps one can, but Judge Easterbrook's attempt to imagine such a contract is unsuccessful.  

Consider a contract with four clauses. Clause 1 requires Seller to deliver 100 merchantable widgets to Buyer. Clause 2 requires Buyer to pay $1 million to Seller. Clause 3 provides that any dispute about the widgets’ merchantability will be resolved by an expert, chosen by Buyer from a trade association’s list. Clause 4 provides that Buyer has only 30 days to contest the widgets’ merchantability, even though state law otherwise allows two years.  Each of these four clauses is one-sided, if considered in isolation; Clauses 1 and 3 favor Buyer, while Clauses 2 and 4 favor Seller. Yet no one would contend that the contract as a whole is unconscionable (if widgets are worth roughly $10,000 apiece) or that any of the clauses is unenforceable.

Two points.  First, Clauses 1 and 2 are not remotely one-sided.  Second, it is unlikely that Clauses 3 and 4 would not appear in the same contract because most contracts are drafted by one party with as many one-sided terms as that party thinks it can get away with.  

And that's the main point here.  Perhaps there could be a contract with one-sided terms going in both directions, but there can also be contracts that are generally one-sided and so there is no reason to give effect to any part of an arbitration clause that could have been drafted by Dr. Evil. 

Judge Easterbrook faults the district court for assuming that the agreement to arbitrate was one-sided because it had a whole bunch of ridiculously one-sided provisions.  Given that defendant did not challenge that part of the district court's holding, there seem to be only two options consistent with the role of a court of appeal: summary affirmance or remand to determine whether arbitration as a whole would be  unconscionable in this instance.  Given what we have seen of the contract, option one seems like the easy choice. 

But the Seventh Circuit decided to save the district court from doing all of that extra work.  Instead, the panel remanded the case to the district court with instructions that the district court could must choose an arbitrator and suspend all further judicial proceedings.

The real problem is the panel's blinkered formalism, reading § 5 in isolation and putting excessive weight on the word "shall."  Following Green, the panel seems to think it incumbent upon every trial court to compel arbitration every time there is an arbitration clause, however one-sided.  That does not seem to be the purpose of § 5.  Rather, § 5 seems to contemplate a situation where the parties have entered into an otherwise binding arbitration agreement but have neglected to name an arbiter.  Section 5 does not speak to a situation like that in Campbell, where there the entire arbitration provision is parodically one-sided.  Campbell's attorney tried to make such arguments in the oral argument, but Judge Easterbrook kept telling her that she was taking issue with Green, which she knew was not a path to glory. 

H/T to Timothy Murray