Volume 10, Issue 1 - October 2011

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Sarah Cole

An important, but widely overlooked, issue has plagued arbitration for many years—the disconnect between the judicial embrace of predispute arbitration agreements in consumer (or employment) contracts and the negative public and legislative attitude toward such agreements. For many years, Democratic legislators attempted to pass a law banning the use of predispute arbitration agreements in employment disputes. In 2011, the legislators renamed this legislation and expanded its reach. Under the proposed Arbitration Fairness Act (AFA), all predispute arbitration agreements in employment and consumer agreements would be invalidated. At the same time, the Supreme Court repeatedly has enforced arbitration agreements of all types and in a variety of settings. While the Supreme Court’s rulings do much to reinforce the value and importance of arbitration as a dispute resolution mechanism, the rulings also ignore a growing problem in consumer arbitration—the inability of consumers to band together in either class arbitration or class actions in court, to vindicate low value claims. This problem deserves legislative attention rather than the issue of the viability of consumer arbitration agreements in general.

Given that empirical research continues to show that consumer arbitration benefits both consumers and businesses, rather than render consumer arbitration impermissible entirely, Congress would do well by more directly targeting the problem of the consumer with a low value claim. Consumers with these types of claims cannot afford to arbitrate unless they are able to band together in a class process. Over the last several years, courts disagreed about whether businesses could ban class arbitrations or class actions in court through the implementation of consumer arbitration agreements. A recent Supreme Court decision, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010), addressed this issue, ruling that an arbitral panel could not order class arbitration when the parties’ arbitration agreement did not expressly authorize the process. If extended to the consumer context, which it is likely to be, this ruling effectively precludes consumers with low value claims from vindicating their rights because businesses typically do not explicitly authorize class arbitration in the arbitration agreements they use with customers.

In 2011, the Court reiterated its difficulties with class arbitration in AT&T v. Concepcion. In that case, the question was whether California’s treatment of unconscionability in the context of arbitration agreements differed from its treatment of unconscionability in traditional contracts. The Federal Arbitration Act (FAA) preempts state attempts to treat arbitration agreements differently than other contracts. The Court concluded that the FAA preempted California’s decision to permit consumers with low value claims, who were bound by arbitration agreements, to pursue those claims in a class arbitration because California’s rule had a disproportionate impact on arbitration agreements (as compared to agreements without an arbitration clause).

In light of these cases, Congress should redesign the AFA to address the inability of individual plaintiffs, whether consumers or employees, to vindicate their low-value claims in the arbitral forum. Arbitration agreements between businesses and consumers are widespread, appearing in boilerplate language in contracts with wireless phone companies, banks, computer sellers, and cable companies. The vast number of potential claims arising from such services usually involve relatively small amounts of money. If class actions, either in court or arbitration, were available to consumers, consumers with low value claims might be able to vindicate their complaints. Yet, under current Supreme Court jurisprudence, the consumer’s acceptance of an arbitration agreement precludes recourse to those forums.

The AFA should be amended to permit the use of predispute arbitration agreements in the consumer and employment contexts but prohibit those arbitration agreements from containing a waiver of the individual’s right to pursue a class action in court or class action arbitration. The revamped legislation would permit consumers with low value claims to pursue class processes while retaining the benefits of arbitration in those cases where the consumer or employee has a higher value claim.

The final version will appear in the Houston Law Review, Volume 48 Issue 3, which will be published later this academic year.

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