The Federal Arbitration Act
There are several different kinds of arbitration clauses. These clauses can be drafted to include arbitration pre-dispute, as part of the transaction phase; post dispute, as part of enforcing the contract; or binding or nonbonding, binding acting as a preclusion against all other court judgments.
In addition to the several methods of application, there are several benefits to the clauses. In theory, arbitration is cheaper and quicker than going to court, parties have a choice of law that is typically always enforced, arbitration awards are more likely to be enforced by courts over state lines, parties have the freedom to outline certain qualities the arbitrator should have, etc. The main issue with arbitration agreements arises if one party has all the bargaining power—the arbitrator is likely to be heavily biased towards the party with all the power.
At one point, courts were opposed to arbitration, claiming it usurped court jurisdiction. The Federal Arbitration Act (FAA) changed this. According to the FAA, courts were to enforce arbitration clauses and awards unless the contract was revocable, stay any court proceedings that were to be resolved by arbitration, and make orders to arbitrate if the parties failed to do so. With development, the FAA applied to both federal and state laws and employment agreements (even though the FAA declined to say employment arbitration clauses were enforceable).
Policing Arbitration Clauses
As mentioned, arbitration agreements are subject to contract law; if the contract is revocable, then so are arbitration clauses. Currently, the primary method of policing the clauses is by rendering them unenforceable if they are unconscionable. Typically, courts will consider the bargaining power, whether there was meaningful choice, whether the contract was boilerplate, and whether the contract was an adhesion contract.
AT&T Mobility LLC v. Concepcion
503 U.S. 333 (2011).
Question
Whether an arbitration clause with a class action waiver is preempted by the FAA.
Rule
Arbitration agreements are unenforceable when they are unconscionable. A class action waiver is not unconscionable and thus preempted by the FAA.
Holding
Reversed and remanded.
Facts
Concepcion had purchased phones from AT&T. As part of a promotion the phones were free. However, AT&T still charged sales tax on the sale based on the retail value of the phones (about $30). For this reason, Concepcion filed a complaint against AT&T.
AT&T has several forms on how to handle a complaint. First, complainants are to complete a form outlining their dispute. If the dispute is not resolved within a specified period of time, then arbitration may be requested by completing another form. If the complainant is awarded more than they were initially offered, AT&T would not only cover costs, but pay the complainant double those costs plus an additional $7,500. However, the procedure did require the complainant to file their complaint individually, rather than as a class.
At trial and initial appeal, the court determined that the clause was unconscionable because “AT&T had not shown that bilateral arbitration adequately substituted for the decent effects of class actions.”
Analysis
This case presents the perfect analysis of how the California statute does not protect the purpose of the arbitration and enhances the risk of the defendant (an error in bilateral arbitration may be minimal while an error in class action may be quite enormous, there is no way to amend that error).
Justice Thomas concurred and essentially says that public policy should not be the purpose of preempting the statute but instead should rely on the provision in § 2 considering factors that may cause a contract to be unconscionable.
On the other hand, the dissent argues that the case is arbitration neutral (no class action waivers regardless). Additionally, class action is still consistent with the purpose of arbitration and does not see the same concerns about class action as noted by the majority.
Brewer v. Missouri Title Loans
304 S.W.3d 486 (Mo. 2012).
Brewer had obtained a 2,200 loan from Missouri Title Loans with a 300 percent interest rate and secured by Brewer’s car. After making two 1,000 installments, the principal amount had reduced by only 6 cents.
As part of the loan, Brewer agreed to individually (not as a class) arbitrate any disputes. Within this agreement, parties were responsible for respective attorney fees, the borrower could not go to court but the lender could judicially enforce against the security, and there was no fee multiplier or guaranteed minimum guarantee (as there was in AT&T). Additionally, no consumer had ever successfully negotiated the arbitration terms or conducted a successful arbitration dispute.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
