Wednesday, November 14, 2012

Is There Any Defense to a Lopsided Arbitration Agreement?

CoffinLast week, while I was on the road, the Supreme Court granted the petition for a writ of certiorari in American Express Co. v. Italian Colors Restaurant, No. 12-133, 2012 WL 3096737 (U.S. Nov. 9, 2012).  At issue is "[w]hether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal law claim.”  See generally Jill Gross's post over at ADR Prof Blog.

Recall that in AT&T Mobility v. Concepcion, the Supreme Court enforced an arbitration agreement containing a class-action waiver over a finding that under state law the waiver was unconscionable.  In Italian Colors, the Second Circuit has held that a similar waiver is unenforceable because it interferes with the vindication of federal statutory (antitrust) rights.

The Federal Arbitration Act requires enforcement of arbitrtion agreements "save for" generally applicable defenses available under state contract law.  The Supreme Court in Concepcion effectively read the "save for" language out of the statute.  The one defense left to lopsided arbitration agreements is that they interfere with the vindication of federal statutory rights such as the right to be free from workplace discrimination created by Title VII.  In other words, when a lopsided arbitration agreement forces a court to choose between enforcing the FAA on the one hand and vindicating Title VII rights on the other, courts should choose the latter.

I expect the Supreme Court will choose the former, and will advance three grounds for doing so.  First, the Court will argue that the either/or proposition of FAA v. statutes such as Title VII is chimerical -- consumers and employees can still pursue their claims individually even if they are barred from pursuing the claims as class actions.  The Court will ignore, as it did in Concepcion, the contrary argument that aggregating claims is practically -- albeit not legally -- the only way to bring high-volume low-dollar claims.

Second, the Court will argue that the "plain language" of the FAA should trump the "policies" behind federal statutes such as Title VII.  Of course, the really plain language of the FAA creates a state-contract-law defense that the Supreme Court white-outed in Concepcion in favor of the pro-arbitration policy of that statute.

Third, the Court will argue that the "presumption of arbitrability" articulated in Mitsubishi v. Soler Chrysler-Plymouth (1985) means that if the FAA is inconsistent with other federal statutes, the FAA should trump later-enacted statutes because Congress, in enacting those statutes, could have but chose not to write into those statutes provisions saying that those statutes trump the FAA.  Never mind that the Congresses that passed both the FAA and the later statutes never dreamed that an activist Supreme Court would apply the FAA to employment and consumer disputes, way beyond the commercial disputes for which the statute was designed.

One final note.  When the Supreme Court accepted cert in Concepcion, it did so in an extraordinarily atypical arbitration case in which the defendant had gone way out of its way to ensure that individual rights could be pursued notwithstanding the class-action waiver.  This allowed the Court to hand down a pro-arbitration ruling while ignoring the anti-consumer/employee effect the ruling would have on the vast majority of cases to which the FAA now is being applied.  In Italian Colors, the Court has done it again.  Plantiffs are merchants who have sued American Express over the terms AmEx imposes on merchants who accept AmEx credit cards from consumers.  Thus, the Court will have the opportunity to issue yet another pro-arbitration ruling in a context that hides the the anti-consumer/employee effect the ruling will have on the vast majority of cases now subject to the FAA.  Maybe the likely outcome of Italian Colors is justified in the context of the commercial cases for which the FAA originally was designed.  But it certainly is not justified in the context of the commercial/employment cases to which the Court now is requiring that it be applied.


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I agree with almost all of these points, but I would contest the notion that the business owner plaintiffs in this case are really that dissimilar from consumers and employees. For a while, at least (can't remember what the current version is), the Arbitration Fairness Act specifically exempted franchisees from onerous arbitration clauses.

These merchants likely wouldn't count as franchisees, but their situation is very similar-- smaller businesses effectively compelled by the raw market power of a larger business to either play by unilaterally imposed rules, or decline to do business with the larger entity at all. The problem the franchisee clause is intended to address is a very real one; small business owners are often hurt by the ability of oligopolists to impose one-sided contract terms. But the draft AFA's solution is too deep (eliminating the ability to arbitrate franchise disputes entirely) and insufficiently broad (failing to cover many exceptionally one-sided contracts, of which the Italian Colors contract is typical).

The implication for reformers is, I think, clear. It's not sufficient, or probably even desirable, to try to cherrypick particular categories of "vulnerable" people and define their legal claims as "not suitable for arbitration." The problem is not "arbitration," it's "unfair arbitration." What we should be requiring is not litigation in preference to arbitration, but a fair forum (whether arbitral or not) in preference to an unfair one. This arbitration scheme is transparently unfair. There simply is no excuse for permitting claims to be legally disposed of by a tribunal which does not provide for procedural rights as basic as the ability to join identical claims together.

Posted by: Anon | Nov 14, 2012 5:29:25 PM

Deepak Gupta is the counsel of record for the respondents' (merchants) cert. petition and was also the attorney who argued in Concepcion on behalf of the consumers (note: the Supreme Court website has the attorneys incorrectly aligned). I'm interested to see whether he can adjust his argument from that case to attract a conservative justice to his side in this one. Sotomayor took no part in the decision to grant certiorari, but it remains to be seen whether she will recuse herself from the case itself as a result of sitting on the original Second Circuit panel in 2009. She sided with Italian Colors merchants in 2009, with the consumers in Concepcion, and would likely side with the merchants again here if she stays in.

Posted by: Ian Mitchell | Nov 14, 2012 8:54:59 PM

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