Ever since the Federal Arbitration Act was enacted in 1925, the Supreme Court and state courts routinely remind us that they have adopted a “liberal federal policy favoring arbitration agreements.” Moses Cone Memorial Hosp. v. Mercury. However, there is no legislative history or court dicta favoring or presumptively upholding mandatory arbitration agreements, which are found in most standard consumer contracts. We dare say that most of our readers do not realize that their credit card agreements mandate arbitration of any dispute they might have. One cannot buy or sell a publicly traded security without signing a boiler-plate client agreement mandating arbitration of any broker-client dispute. The Economic Policy Institute in a report a year ago found that 53.9 percent of the nonunion private sector, 65 percent of those hired by companies with more than 1,000 employees, must arbitrate any employment dispute. Employees not only waive the usual benefits of civil litigation, but like the plaintiffs in Epic Systems v. Ernst & Young, about which we recently commented, also give up the right to initiate a class action. This drastic waiver has severe consequences with regard to consumer contracts because individual claims usually are so small that they are not worth pursuing.
These “take it or leave it” mandatory arbitration agreements fit the classic hornbook definition of an unlawful contract of adhesion. As our Supreme Court has held, the essential nature of a contract of adhesion is that it is presented on a take-it-or leave-it basis, commonly in a standardized printed form, without opportunity for the “adhering party to negotiate….” In evaluating such a contract, courts must, among other things, “determine whether the contract is so oppressive or inconsistent with the vindication of public policy, that it would be unconscionable to permit its enforcement… Vitale v. Schering-Plough Corp. (citations omitted). Surely credit card and broker-client agreements satisfy this standard.
The recent Epic Systems v. Lewis decision sidestepped the issue. The Supreme Court held that the FAA was not contradicted or trumped by the National Labor Relations Act, which secures to employees the right “to engage in … concerted activities” for their “mutual aid or protection,” and therefore their agreements to arbitrate their grievances were enforceable. Although dissenting Justice Ginsburg did note that plaintiff employees “faced a Hobson’s choice: accept arbitration on their employer’s terms or give up their jobs,” she did not dissent for this reason. Neither she nor the majority considered the validity, per se, of such agreements.
One would think that these adhesive mandatory arbitration agreements would be “revoked” or nullified under the savings clause in Section 2 of the Federal Arbitration Act, which mandates enforcement of arbitration agreements “save upon such grounds as exist at law or in equity for the revocation of any contract.” Yet they have been uniformly upheld. Why is that? As the Epic majority ruled: “[G]rounds for revocation of a contract are those that concern the ‘formation of the arbitration agreement,’” (citations omitted), or as concurring Justice Thomas put it: “[G]rounds for revocation of a contract are those that concern the ‘formation of the arbitration agreement.’” In Epic, the employees argued that the FAA’s savings clause applied because the NLRA rendered “their class and collective action waivers illegal, (thus) a ground that exists at law…. for revocation” of their agreement to arbitrate. Not so, said the majority: “The savings clause recognizes only defenses that apply to ‘any’ contract.” It “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses’ …. [it] offers no refuge for defenses that apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue.” Since the Epic employees did not argue that their agreements were induced by “an act of fraud or duress or in some other unconscionable way that would render any contract unenforceable” but challenged “[only] the individualized nature of the arbitration proceedings,” they were not saved by Section 2. We know of no legislative history that supports this view, and frankly we think it strange that Congress would “save” a contractual provision invalid “at law or in equity” merely because it was just one part of an otherwise valid agreement.
Our Supreme Court in Atalese v. U.S. Legal Sevs (2014) (certiorari denied), and its progeny have made it very clear that to be enforceable, arbitration agreements must clearly and unambiguously alert the signatory that he is waiving the right to seek relief in court. While no “particular language” is required, the contract must “at least in some general and sufficiently broad way … explain that [one] is giving up [the] right to bring … claims in court.” While this edict has been followed in many states and FINRA, the securities industry’s self-regulating agency, it is not enough. It is illusionary to expect that a broker, meeting a prospective client for the first time, warns that “if you ever have a claim against us, you can’t sue; you have to go to arbitration.” Moreover, the standard broker-client agreement with the mandatory arbitration provision usually is provided by mail several weeks after the broker-client relationship already has been established with the request that the client sign and return it. As to credit cards, there is no personal contact between card holder and issuer at all; the credit card agreement is mailed or emailed to the customer, who like most of us signs and returns it without reading it. Although the Epic majority wrote that the plaintiff employees had “signed” agreements to arbitrate, Justice Ginsburg stated that Epic and Ernst &Young emailed the compulsory arbitration agreement, alone, to employees after they had been hired, stating that “their continued employment would indicate their assent to the agreement’s terms.”
So, what is the answer? Probably the only way is by Congressional legislation amending the FAA by specifically banning mandatory arbitration agreements. Given the present administration and congressional makeup, that is highly unlikely. An excellent report, “Mandatory Arbitration and the FAA” by staff attorneys for the Congressional Research Service, tallies four bills introduced in the 115th Congress doing just that; none got anywhere, not even a committee hearing. Presently pending is S.550, “Restoring Statutory Rights and Interests of the States Act of 2017,” introduced by Sen. Patrick Leahy and co-sponsored by New Jersey’s Cory Booker (among others), which would ban compulsory pre-dispute agreements to arbitrate any “claim … arising from the alleged violation of a Federal or State statute, the Constitution of the U.S. or a constitution of a State,” the same legislation he unsuccessfully introduced in 2007, 2008, 2011 and 2013. It does not have the remotest chance of reaching a hearing.
In 2016, the Centers for Medicare and Medicaid Services, a part of the Department of Health and Human Services, barred long-term care facilities from demanding that residents sign pre-dispute arbitration agreements. After a federal district court enjoined its enforcement, CMS backed down, withdrew the prohibition, and merely mandated Atalese transparency requirements.
The Consumer Financial Protection Bureau came close when it issued a rule barring mandatory pre-dispute arbitration clauses and banned class action waivers in consumer financial agreements after March 2018. It lasted no more than a few weeks before President Trump signed legislation, permitted by the Congressional Review Act, nullifying it because, among other things, the “CFPB’s harmful rule would benefit trial lawyers by increasing frivolous class-action lawsuits.” Then came a claim that we think is erroneous: It “will harm consumers by denying them the full benefits and efficiencies of arbitration.” Finally, this nonsensical approbation: “This legislation [protects] consumer choices by eliminating a costly and burdensome regulation and reining in the bureaucracy and inadvisable regulatory actions of the CFPB.”
Given the present climate, we regret not much can be done except voluntary surrender of mandatory pre-dispute arbitration by companies such as Uber and Microsoft. At best, we caution our readers to know what they are signing, and if they have any bargaining power, resist such clauses.