The United States Congress moved one step closer this summer to passing the 2007 Arbitration Fairness Act (AFA), which would restrict manufacturers, employers and franchisers from imposing contractual terms that force individuals to resolve their disputes before arbitrators.

On July 12, Sens. Russell Feingold and Richard Durbin introduced S. 1782, the Senate version of the AFA. Rep. Hank Johnson sponsored H.R. 3010, the House version. The bills have been referred to the Senate and House Judiciary Committees.

Proponents of the legislation say the AFA will redress the unfairness inherent in mandatory arbitration, which they argue limits damage awards and is less transparent than the court process. What concerns many businesses, however, is that the proposed legislation would be retroactive and could open the door to an onslaught of expensive and time-consuming litigation. Meanwhile, more neutral observers worry that the proposed legislation might actually hurt plaintiffs.

“Sometimes arbitration is more efficient, and if you have a case without a pressing need for elaborate discovery, the process can work as well for the employee as it does for the company,” says Susan Egan, a sole practitioner in New York who specializes in employment law for both employers and employees.

FA’s Impact
Both the Senate and House versions of the AFA would void mandatory arbitration clauses in contracts corporations make with consumers. They also would prohibit such clauses in contracts between an “employer” and “employee” as defined in the Fair Labor Standards Act. The law also covers franchisees subject to franchisers’ marketing plans, whose businesses are substantially associated with the franchiser’s trademarks and who have paid a franchise fee.

Because the legislation is retroactive, if it becomes law arbitration clauses in existing contracts will be unenforceable. Not surprisingly, the fact that the new law applies to existing contracts is among the most contentious of its provisions.

“The difficulty with retroactivity is that it offends the freedom of contract guarantees in the U.S. Constitution,” says Mark Nadeau, a managing partner in DLA Piper’s Phoenix office. “If the law passes in its present form, it will almost certainly bring on constitutional challenges.”

The AFA also upends long-standing law that allows arbitrators to determine the scope of their own jurisdiction–that is, they, rather than the courts, decide whether a dispute is arbitrable under a particular contract. It also would let judges rule on disputes about whether the legislation applies to a particular contract.

But perhaps the greatest impact of the legislation is that it revives the specter of jury trials and the prospect of huge punitive damage awards.

“The settlement of many cases hinges on the kind of dollars at risk in the litigation,” Nadeau says. “The dollars at risk go down almost by definition when you have mandatory arbitration. So this legislation will increase considerably the leverage of plaintiffs.”

But Egan says than in employment cases, the courts often aren’t a good alternative for plaintiffs.

“It takes almost two years to get a case to trial almost anywhere in the country, and that’s hard on individuals who have lost their jobs,” she says. “Besides, after eight years of Bush appointees, we have scores of district court judges who take a very conservative view of issues such as harassment and discrimination.”

Growing Criticism
Ironically, business may have only itself to blame for the AFA’s far-reaching impact. Since Congress enacted the Federal Arbitration Act (FAA) in 1925, contracts mandating binding arbitration of disputes have been “valid, irrevocable or enforceable.” For the most part, courts limited the rights of consumers and employees to invalidate these clauses by requiring them to meet the burden of proving that fraud had induced them to agree to arbitration.

Around 2000, however, consumer and employee advocates renewed and broadened their attempts to overturn arbitration clauses. When they failed, not only was there an immediate increase in the use of mandatory arbitration clauses, but manufacturers and employers began including waiver of class action and waiver of punitive damages provisions in all their arbitration clauses. At that point, the jurisprudence became more uncertain, as some courts took offense at what they perceived as unfairness and an unconstitutional intrusion on individuals’ access to courts and juries.

“Overkill on the part of business has given renewed impetus to the anti-arbitration movement and led to the introduction of the Arbitration Fairness Act in Congress,” says Merton Marks, a full-time arbitrator and former head of Lewis & Roca’s arbitration department.

And the overkill only made arguments from opponents more compelling. Their primary argument was that courts have distorted the FAA, which they maintain Congress intended to apply only to commercial entities of similar sophistication and bargaining power. Consumers and employees, they argued, have nowhere near the bargaining power of the corporations with which they deal. The upshot is that many individuals have little choice in accepting the agreements, and many don’t understand the implications.

Proponents of the AFA also maintain that mandatory arbitration is not as transparent as court rulings, which are publicly available and whose authors can be held accountable for their decisions. They also claim that arbitration leaves little scope for judicial review and that the companies hired to devise arbitration systems favor the corporate customers who represent repeat business for them.

No Solution
However persuasive these arguments may be, there’s real doubt that the AFA will become law. “A Republican president will almost certainly veto such legislation,” Marks argues, “but we could see another try after the elections.”

For his part, Nadeau believes the legislation is doomed. “The AFA is legislation that, in the end, will impact business negatively at a time when the economy is in flux, and while the political climate is changing, there is still a pro-business bent at the congressional level,” he says.

Egan says it doesn’t much matter either way. “The AFA is a remedy that provides no solution,” she says. “When I first saw the legislation, I thought it was very exciting, but on further reflection, I don’t think putting an additional burden on the courts will assist in a meaningful way those whom the legislation means to assist.”