In 1925, Congress enacted the Federal Arbitration Act, 9 U.S.C. Sections 1-16 (2012), and in the space of 16 sparsely worded sections covering a few pages forever changed the contractual dispute resolution process in the United States. Congress intended the FAA to counteract judicial hostility to the private dispute resolution regime by validating the enforceability of agreements requiring private arbitration of certain disputes that parties otherwise would have litigated in courts, see American Express v. Italian Colors Restaurant, 570 U.S. 228, 232 (2013); AT&T Mobility v. Concepcion, 563 U.S. 333, 339 (2011); Hall St. Associates v. Mattel, 552 U.S. 576, 581 (2008) and Allied-Bruce Terminix v. Dobson, 513 U.S. 265, 270 (1995).
This intent remained mostly true for the remainder of the century and FAA jurisprudence largely only affected commercial disputes between business entities. Everything changed in 1999 when the U.S. Chamber of Commerce, other business organizations, and their legal advisers realized they could limit employees’, consumers’ and individuals’ rights to sue in court by inserting arbitration clauses in their standard mass form contracts. This strategy’s impact metastasized over the following twenty years via the widespread inclusion of arbitration clauses in employment agreements and handbooks, consumer goods package inserts, and the ubiquitous terms and conditions in a web-based world that we click to apply for a credit card, join a gym, rent a car or make internet purchases. Because most businesses’ employment or purchase agreements now include arbitration clauses, finding a comparable non-arbitration alternative is a near impossibility. As a result, tens of millions of Americans are parties to arbitration agreements and—whether they realize it or not—have agreed to resolve all disputes through private, confidential arbitration; waived their right to seek judicial remedies, including the right to a jury trial, and—depending upon the language of the clause—surrendered their right to bring or participate in a class or collective action. More troubling is that arbitration may not be the most fair mechanism to resolve their disputes, see Styczynski v. MarketSource, No. 18-2662, 2018 U.S. Dist. LEXIS 203871, at *29 (E.D. Pa. Nov. 30, 2018) (noting recent empirical studies, academic publications, and news articles discussing the inequities and difficulties employees and consumers encounter in forced arbitration proceedings).
The growing use of arbitration agreements has spawned a collection of U.S. Supreme Court and lower federal and state court decisions attempting to navigate the choppy waters of ambiguity created by the FAA’s terse language. These rulings touch on an array of issues including the interrelationship between federal and state courts, as in Southland v. Keating, 465 U.S. 1 (1984) and Moses H. Cone Memorial Hospital v. Mercury Construction, 460 U.S. 1 (1983), interplay between federal statutes, see, e.g., Epic Systems v. Lewis, 138 S. Ct. 1612 (2018); American Express v. Italian Colors Restaurant, 570 U.S. 228 (2013); Gilmer v. Interstate/Johnson Lane, 500 U.S. 20 (1991), federal pre-emption of state law, (see Kindred Nursing Centers Partnership v. Clark, 137 S. Ct. 1421 (2017); DIRECTV v. Imburgia, 136 S. Ct. 463 (2015); AT&T Mobility v. Concepcion, 563 U.S. 333 (2011)) and applicable contractual standards, see Oxford Health Plans v. Sutter, 569 U.S. 564 (2013); Stolt-Nielsen v. AnimalFeeds International, 559 U.S. 662 (2010); Green Tree Financial v. Bazzle, 539 U.S. 444 (2003); compare Spirit Airlines v. Maizes, 899 F.3d 1230 (11th Cir. 2018) with Chesapeake Appalachia v. Scout Petroleum, 809 F.3d 746 (3d Cir. 2016). The arbitration legal landscape is far from complete, however, and the U.S. Supreme Court’s 2018 fall term presented three cases that will further fill out the picture.
In New Prime v. Oliveira, the court appears ready to interpret the FAA’s provision exempting transportation workers involved in interstate commerce from arbitration to include independent contractor truck drivers. Next, in Henry Schein v. Archer and White Sales, the court is likely to follow the arbitration agreement’s language strictly and hold that despite the basis for arbitration being “wholly groundless,” the arbitrator, not the district court, will decide arbitrability questions because that is what the agreement “clearly and unmistakably” requires. The oral argument in Lamps Plus v. Varela, however, suggests that the court may split 5-4 against holding that an arbitration agreement’s language construed pursuant to governing state contract law is sufficient to establish a contractual basis permitting class arbitration.
Looking further ahead, another case concerning applicable state contract law principles and collective arbitration may be heard during the 2019 fall term to resolve a circuit split on “who decides” class arbitrability. Compare Catamaran v. Towncrest Pharmacy, 864 F.3d 966 (8th Cir. 2017); Chesapeake Appalachia v. Scout Petroleum 809 F.3d 746 (3d Cir. 2016); Del Webb Communities v. Carlson, 817 F.3d 867 (4th Cir. 2016); Reed Elsevier v. Crockett, 734 F.3d 594 (6th Cir. 2013) (collectively finding that the district court decides class arbitrability) with Wells Fargo Advisors v. Sappington, 884 F.3d 392 (2d. Cir. 2018); Dish Network v. Ray, 900 F.3d 1240 (10th Cir. 2018); Spirit Airlines. v. Maizes, 899 F.3d 1230 (11th Cir. 2018); Reed v. Florida Metropolitan University, 681 F.3d 630 (5th Cir. 2012) (collectively finding that the arbitrator decides class arbitrability). In Spirit Airlines v. Maizes, petitioner argues in its request for a writ of certiorari that an arbitration agreement’s express reference to the American Arbitration Association rules—which incorporate supplementary rules for class arbitration that direct an arbitrator to decide class arbitrability—is not “clear and unmistakable” evidence that the parties agreed the arbitrator shall determine class arbitration availability.
Despite this ever-increasing pro-individual arbitration climate, there are still multiple ways for an employee or consumer to fight forced arbitration. First, because the FAA places arbitration agreements on the same footing as any contract, as in Prima Paint v. Flood & Conklin Manufacturing, 388 U.S. 395, 404 n.12 (1967), sound legal arguments on contract formation and validity can defeat arbitration clause enforceability. See Doctor’s Associations v. Casarotto, 517 U.S. 681, 687 (1996).
- Scope: Arbitration is prohibited if the claims and parties at issue fall outside the arbitration agreement’s scope. In White v. Sunoco, 870 F.3d 257 (3d Cir. 2017), the U.S. Court of Appeals for the Third Circuit declined to compel arbitration when defendant Sunoco, Inc. was not a signatory to the credit card agreement between the plaintiff and her bank that contained the arbitration clause, and when that arbitration agreement did not contemplate defendant Sunoco Inc.’s conduct, see also Herzfeld v. 1416 Chancellor, 666 F. App’x 124 (3d Cir. 2016) (finding that an individual’s wage-and-hour claim did not fall within the scope of the arbitration agreement contained in the landlord/tenant lease).Similarly, an Eastern District of Pennsylvania court recently declined to compel arbitration in In re Remicade Antitrust Litigation, finding that plaintiff’s antitrust claims against Johnson & Johnson were not swept up by an arbitration clause in a distribution agreement between plaintiff and a J&J subsidiary.
- Unconscionability: In Capili v. Finish Line, a Ninth Circuit panel struck down an arbitration agreement as substantively and procedurally unconscionable when employment was contingent on agreeing to arbitration, and when arbitration proceedings required the retail employee—who made $15 per hour—to pay up to $10,000 in fees at the outset of arbitration.
- Lack of Mutual Assent: The Third Circuit declined to compel arbitration in James v. Global Tel.*Link, finding lack of mutual assent when the telecommunication company advised collect call users via a pre-call recording that each call made was subject to the company’s terms and conditions, but when those terms and conditions—which included the arbitration agreement—were only posted on the company’s website, 852 F.3d 262 (3d Cir. 2017); see also National Federation of the Blind v. Container Store, 904 F.3d 70 (1st Cir. 2018) (finding no mutual assent as to arbitration when the defendant business failed to clearly communicate that its terms and conditions for a preferred purchasers program included an arbitration clause to plaintiff purchasers).This ruling followed basic New Jersey law that requires the parties have a “mutual understanding of the ramifications” of agreeing to arbitration, and that an arbitration clause be conspicuously, clearly, and unambiguously stated. See Atalese v. U.S. Legal Services Group, 99 A.3d 306 (N.J. 2014). Subsequent New Jersey decisions developed the Atalese holding, explaining that an arbitration clause must be conspicuous (i.e. not buried in an agreement and should be capitalized, bolded, or underlined), plainly advise that the signing party agrees to waive their right to a jury trial, and clearly designate the arbitral body and types of claims subject to arbitration. See Kleine v. Emeritus at Emerson, 139 A.3d 148 (N.J. Super. Ct. App. Div. 2016); Morgan v. Raymours Furniture, 128 A.3d 1127 (N.J. Super. Ct. App. Div. 2016); Barr v. Bishop Rosen & Co.126 A.3d 328 (N.J. Super. Ct. App. Div. 2015).
- Waiver: Parties can also waive their contractual right to arbitration, as recently demonstrated in Forby v. One Technologies, No. 17-10883, 2018 U.S. App. LEXIS 33408 (5th Cir. Nov. 28, 2018); where the Fifth Circuit found the defendant waived arbitration by requesting arbitration after the district court had already ruled on several key issues in the case, and when compelling arbitration would prejudice the plaintiff by causing unnecessary expense and time, see also Martin v. Yasuda, 829 F.3d 1118 (9th Cir. 2016) (finding defendant waived its right to arbitration when it litigated the case for seventeen months in district court before requesting arbitration, and when compelling arbitration would cause the plaintiff increased cost and delay).
- Duress: Establishing duress is another way to defeat an arbitration agreement, as shown by the Fourth Circuit in Degidio v. Crazy Horse Saloon & Restaurant, where the circuit court voided an arbitration agreement an adult entertainment club forced its workers to sign while a minimum wage and overtime pay collective action remained pending against the club in the federal district court, and when the workers’ ability to perform hinged on agreeing to arbitration.
What’s more, lawyers are now calling businesses’ bluff by demanding scrupulous adherence to the businesses’ duties in arbitration. In light of the U.S. Supreme Court’s Epic Systems decision upholding class action waivers in employment arbitration agreements, petitioner/drivers in Abadilla v. Uber Technologies, seek to compel arbitration of approximately 12,500 demands filed with JAMS, after Uber stalled in paying contractually obligated arbitration fees and confirming arbitrator appointments. This arbitral barrage could put Uber on the hook for approximately $19 million in fees. Certainly an unintended consequence of compelling individual arbitration—a dispute resolution framework that businesses contend to be more efficient and cost-effective than class action litigation.
In addition to lawyers and the courts, state legislatures can pass laws establishing equal bargaining power between parties with respect to arbitration agreements. The Kentucky Supreme Court recently held in North Kentucky Area Development District v. Snyder that the FAA does not pre-empt a Kentucky statute prohibiting employers from conditioning employment on an existing employee’s or prospective employee’s agreement to arbitration. The Kentucky high court observed that Kentucky Revised Statute 336.700(2) does not limit the parties’ ability to enter into an arbitration agreement, but instead, only voids an arbitration agreement “diminishing an employee’s rights against an employer when that agreement had to be signed by the employee on penalty of termination or a predicate to working for that employer.” On this basis, the Synder court noted that the statute is an anti-employment discrimination, not anti-arbitration provision, and does not contravene the U.S. Supreme Court’s holdings in Kindred, Imburgia, or Concepcion (collectively holding that the FAA preempts state laws hostile to arbitration). The Northern Kentucky Area Development District’s rehearing motion is presently pending before the Kentucky Supreme Court, but if a petition for writ of certiorari with the U.S. Supreme Court is eventually pursued and, if the case is taken, a decision would significantly affect an employer’s ability to force employment disputes into arbitration. Indeed, if the Kentucky Supreme Court is affirmed, Revised Statute 336.700(2) and the Snyder opinion could serve as a blueprint for other states to pass similar laws promoting bargaining power equality between the employer and employee regarding arbitration.
Congress should also amend or replace the century-old, paper-based FAA with legislation that recognizes the reality of consumer and employment transactions in this digital age. The proposed Arbitration Fairness Act of 2018 (S. 2591) prohibits a pre-dispute arbitration agreement from being valid or enforceable if it requires arbitration of an employment dispute, consumer dispute, antitrust dispute, or civil rights dispute; the proposed Ending Forced Arbitration of Sexual Harassment Act (S. 2203) bars arbitration in sexual harassment or sex discrimination cases, and the proposed Restoring Justice for Workers Act (H.R. 7109) upends the U.S. Supreme Court’s Epic Systems decision, prohibiting employers from using class action waivers in an arbitration agreement. It remains to be seen if these bills will become laws under the current administration and Congress, but lawmakers are waking up to forced arbitration’s unjust effects on employees and consumers.
Outside of the courts and government, social movement campaigns can also push private companies to restrict their use of arbitration agreements. In a perceived response to the #MeToo movement, Google, Facebook, Microsoft, Uber, Lyft, Airbnb and eBay have ended their policies forcing workers to resolve sexual harassment claims through private arbitration. Similarly, international law firm Kirkland & Ellis recently announced it would no longer require arbitration to settle employment disputes involving associates or summer associates, less than two weeks after the Pipeline Parity Project, a Harvard Law School student group, started a #DumpKirkland campaign on social media over the firm’s use of mandatory arbitration. Some believe these partial responses to forced arbitration are not enough, however, as four Google employees just published a statement calling for an end to all forced arbitration and created the #endforcedarbitration hashtag.
In sum, although the U.S. Supreme Court this term may continue to bow to the FAA’s primacy and enforcement of arbitration agreements, there are still ways to challenge forced arbitration. Until Congress amends the FAA to fix its abuses, lawyers and the courts, state legislatures, and social movement campaigns are all avenues employees and consumers can take to assert their rights and fight forced arbitration agreements.
Robert Pratter is a member and Silvio Trentalange is an associate at Cohen, Placitella and Roth in Philadelphia. Their firm was counsel in Chesapeake Appalachia v. Scout Petroleum, on behalf of lessors who unsuccessfully sought class arbitration in a gas royalty dispute.