Consumer Law & Policy Blog

The Dodd-Frank Wall Street Reform Act: Mandatory Arbitration Provisions

by Deepak Gupta

The Wall Street Reform bill has a lot of stuff in it. If you have time to kill, you can pore through the actual text of the legislation here. If you're looking for something beyond the relatively superficial accounts in the newspapers, a few big law firms have already produced impressive summaries of the legislation, including Davis Polk, Mayer Brown, and Skadden.  Davis Polk also created a nifty set of slides showing the complex implementation process for the legislation (skip to slide 24 for the consumer financial protection provisions).  By their count, the bill will require a whopping 243 rulemakings and 67 studies.

One sure-to-be-closely-watched study/rulemaking combination is called for by Sec. 1028, which requires the new Bureau of Consumer Financial Protection to conduct a study of, and provide a report to Congress concerning, the use of mandatory pre-dispute arbitration in consumer financial services. The Bureau then has the authority, by rulemaking, to "prohibit or impose conditions or limitations on the use of" mandatory arbitration clauses, consistent with the study. This provision had its origins in the Obama Administration's initial white paper on financial reform and, amazingly, it stayed in the legislation all the way.  

Needless to say, Sec. 1028 is an enormous step forward in the campaign to end forced arbitration in the consumer-protection context. Corporate lobbyists, however, will use every opportunity to thwart a pro-consumer rulemaking and will likely return to Congress if they don't like what the study says.

The Act also confers similar authority on the SEC to ban mandatory arbitration in the securities context (Sec. 921) and flatly prohibits mandatory arbitration in mortgage and home equity loans--without the need for any further study or rulemaking (Sec. 1414).  Finally, the Act bans mandatory arbitration that would waive protections for those who blow the whistle on securities fraud (Sec. 922) and commodities fraud (Sec. 748).  The text of Sec. 1028 is below the jump.

FTC Issues Major Report on Debt Collection and Forced Arbitration: System is "Broken"

by Deepak Gupta

The Federal Trade Commission today issued a major report on debt collection and the forced arbitration of consumer collection disputes. Concluding that "the system for resolving consumer debt collection disputes is broken," the FTC recommends a series of sweeping reforms. The new report, Repairing A Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration, reflects information gathered at roundtable discussions following a February 2009 report on the same subjects. The vote to issue today's report was 5-0.

Given the heated debate in Congress and the courts over forced arbitration, the arbitration-related material in today's report is likely to receive the most attention. The report addresses concerns about requiring consumers to resolve debt collection disputes through binding arbitration without meaningful choice, bias or the appearance of bias in arbitration proceedings, and procedural unfairness in arbitration proceedings. The FTC's principal recommendations are:

• Consumers should have a meaningful choice about arbitrating debt collection disputes.
• Arbitration forums and arbitrators should eliminate bias and the appearance of bias.
• Arbitration forums should conduct proceedings in a manner that makes it more likely that consumers will participate.
• Arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated.
• Arbitration forums should make their process and results more transparent.

Citing the scandal over the National Arbitration Forum, Commissioner Julie Brill issued a separate concurring statement in which she urged Congress to enact a temporary ban on the mandatory arbitration of consumer debt collection disputes:

Such a ban should remain in place until the arbitration process can be shown to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek. Once these conditions have been met, Congress could lift the ban itself, or it could delegate that authority to the Federal Trade Commission or another appropriate consumer financial protection agency or bureau established in the future.

Today's report also recommended a number of sweeping reforms to consumer collection litigation:

• States should consider adopting measures to make it more likely that consumers will defend themselves in litigation, decreasing the prevalence of default judgments.
• States should require collectors to include more information about the alleged debt in their complaints.
• States should take steps to make it less likely that collectors will sue on debt on which the statute of limitations has run.
• Federal and state laws should be changed to prevent the freezing of a specified amount in a bank account including funds exempt from garnishment.

Forced Arbitration and the Kagan Hearings

by Deepak Gupta

 The forced arbitration of claims arising out of statutory protections for consumers and employees has become a hot topic at the Kagan hearings. The parade of comments by Senators started even before the hearings began, with a written statement by Senator Leahy criticizing the Supreme Court's 5-4 decision in Rent-a-Center v. Jackson, and similar remarks on the Senator floor by Senator Franken (video of which we've already posted here). The topic was raised again in Senator Whitehouse's opening statement on Monday and in an extended colloquy between Franken and Kagan this morning.

In his statement, Leahy called the Rent-a-Center decision "a blow to our nation’s civil rights laws and the protections that American workers have long enjoyed under those laws." He noted that "more than one hundred million Americans work under binding mandatory arbitration agreements" and that "most Americans are not even aware that they have waived their constitutional right to a jury trial when they accept a job to provide for their families."

Congress worked for years on a bipartisan basis to pass laws to protect workers from race discrimination, gender discrimination and age discrimination.  . . . Rent-a-Center is unfortunately just the latest in a line of divisive and devastating Supreme Court decisions where five justices have, in effect, gutted those statutory protections. ... Congress should now take a closer look at the way in which binding mandatory arbitration is creating a legal underground where American workers are left without protection. 

There is no rule of law in arbitration. There are no juries or independent judges in the arbitration industry. There is no appellate review. There is no transparency. And as a result of today’s divisive ruling, there will likely be no justice for millions of American workers and their families.  The courthouse doors have simply been closed to them.  Today’s opinion also gives big business a disincentive to treat their employees fairly and will no doubt lead to virtually all companies requiring their employees to sign one-sided arbitration agreements as a condition of employment.

Senator Whitehouse's opening statement at the Kagan hearings struck a similar chord:

Unfortunately, the conservative wing of the current Supreme Court has departed from [the Court's] great institutional traditions. Precedents, whether of old or recent vintage, have been discarded at a startling rate. Statutes passed by Congress have been tossed aside with little hesitation, and constitutional questions of enormous import have been taken up hastily and needlessly. Only last week, the Rent-A-Center decision concluded that an employee who challenges as unconscionable an arbitration demand must have that challenge decided by the arbitrator. And the Citizens United decision -- yet another 5-4 decision -- created a constitutional right for corporations to spend unlimited money in American elections, opening our democratic system to a massive new threat of corruption and corporate control. There is an unmistakable pattern. For all the talk of umpires and balls and strikes at the Supreme Court, the strike zone for corporations gets better every day.

Finally, Senator Franken this morning used the hearings as an opportunity to sharply critique not only the recent Rent-a-Center decision, but also the Court's 2001 decision in Circuit City v. Adams, which rewrote the Federal Arbitration Act to include most employee claims.  The relevant portion of the transcript form this morning's hearings is available after the jump.

NY Times Editorial on Forced Arbitration and the Supreme Court

Today's New York Times contains this terrific editorial, linking to Public Citizen's research on mandatory arbitration outcomes, criticizing the Supreme Court's recent decision in Rent-a-Center v. Jackson, and endorsing intervention by Congress:

Beware the Fine Print

Buried in the fine print of most contracts for cellphones, health insurance and credit cards is a clause requiring that all disputes be decided by binding arbitration, rather than a court. Businesses love these provisions, because arbitrators act quickly and almost always rule in their favor, and many employers are requiring new hires to sign similar agreements.

All of this sounds pretty unfair, but apparently not unfair enough for the Supreme Court, which has now made the arbitration process even more onerous. The court ruled last Monday there was nothing wrong with requiring that the fairness of an arbitration clause be determined by — an arbitrator. To appreciate the absurdity, consider the case at hand, which was brought by Antonio Jackson, a black account manager for Rent-A-Center in Nevada who tried to sue the company for racial discrimination after being denied repeated promotions.

Mr. Jackson had earlier signed an employment agreement saying that all employee discrimination claims had to be arbitrated but a host of claims brought by Rent-A-Center against employees could go before a judge. Any challenge to the fairness of the arbitration clause would also have to go before an arbitrator.

A federal judge dismissed Mr. Jackson’s lawsuit because of the arbitration clause, but the Ninth Circuit Appeals Court revived it, saying courts could rule when arbitration agreements were “unconscionable.” That decision was reversed by Justice Antonin Scalia and the four other conservative members of the Supreme Court.

By challenging the entire arbitration agreement as lopsided and unfair, the majority said, Mr. Jackson triggered the need for arbitration and could not seek court relief. Justice John Paul Stevens, in one of his final fervent dissents, described that notion as “fantastic.” If a contract is invalid, he said, how can the arbitration clause it contains still be valid?

There are many ways in which an arbitration clause might be considered “unconscionable.” What if an employer inserts a provision that the employee has to pay all arbitration fees? Or that the employer gets to pick the arbitrator? In one famous case, a contract between the Hooters restaurant chain and its employees allowed the company to select two members of a three-arbitrator panel. That contract was struck down. Unless Congress changes the rules, these cases may never get back to the courts, where they have a chance for a fair resolution.

Senator Franken Condemns 5-4 Decision in Rent-a-Center v. Jackson

On the Senate floor, Senator Al Franken condemned the Supreme Court’s decision in Rent-A-Center v. Jackson (in which a 5-4 majority of the Court upheld the power of arbitration agreements to remove even threshold questions of validity from review by a court) and discussed how the case of Jamie Leigh Jones illustrates the effect of cases like Circuit City Stores v. Adams. 

“Clearly this is a ruling that Congress needs to fix and I look forward to working with my colleagues to do so,” said Franken. “Sometimes it’s easy to forget that Supreme Court matters to average people, to our neighbors and our kids."

 

Supreme Court Decides Rent-a-Center v. Jackson: Companies Can Delegate Unconscionability Challenges to the Arbitrator

A divided Supreme Court today dealt a major blow to consumers and employees seeking to challenge arbitration agreements on the ground that they are unfair or unconscionable. Public Citizen was co-counsel in the case, Rent-a-Center v. Jackson, and will be spearheading efforts in Congress to curtail its effects.

In a 5-4 decision by Justice Scalia, the Court held that if a company’s arbitration agreement includes a clause delegating fairness challenges to the arbitrator, a court must enforce that agreement and send the matter to arbitration. The Court's decision arose out of an employment discrimination claim brought by Antonio Jackson, an African-American Nevada man, against his former employer. When Mr. Jackson sued, the company invoked its arbitration agreement and claimed that, under the agreement, any challenges to the agreement had to be decided by the arbitrator.

Until today’s Supreme Court decision, consumers and employees had the right, under Section 2 of the Federal Arbitration Act, to go to court and ask a judge to find an arbitration agreement unconscionable or unfair and therefore unenforceable. Although most arbitration agreements are enforceable, court review weeded out the very worst abuses—like imposing exorbitant fees, forcing consumers or employees to travel great distances to arbitrate, or allowing a corporation to pick an arbitrator that is clearly biased in its favor.

Today’s Supreme Court decision will leave many challenges to the fairness of a corporate arbitration system entirely in the hands of arbitrators themselves. Nothing will stop companies from inserting clauses like the kind approved by today’s decision into standard-form arbitration agreements. Companies would then be free to impose one-sided terms or select clearly biased arbitrators with close ties to the company, secure in the knowledge that any challenge to the fairness of arbitration will be decided by the arbitrator whose very authority comes from the challenged arbitration agreement.

In a stinging dissent, Justice Stevens pointed out that neither party had urged the rule adopted by the Court and characterized the Court’s reasoning as “fantastic.”

Today’s decision will spur efforts in Congress to pass the Arbitration Fairness Act (H.R. 1020, S. 931), a measure that would ensure that any decision to arbitrate in a consumer, employment, or franchise dispute is made voluntarily and after a dispute has arisen, so that corporations cannot take advantage of their unfair bargaining power to force individuals into arbitration.

Public Citizen’s co-counsel in the case were the Hardy Law Group of Reno, Nevada, and Public Justice of Washington, D.C. Oral argument was presented by Ian Silverberg of the Hardy Law Group.

Supreme Court Agrees to Hear Class-Action Ban Issue

by Deepak Gupta

  Back in May 2008, I wrote a blog post that began like this:

A cutting-edge issue in the world of consumer law--and one that this blog has discussed many times before . . . is the extent to which corporations can enforce class-action bans placed in consumer adhesion contracts. Class-action bans are clauses that purport to strip consumers of the right to seek any classwide relief, whether through class-action litigation or classwide arbitration. 

The question matters because class actions are often the only thing stopping companies like cell phone or cable providers from getting away with practices that cheat large numbers of consumers out of small amounts of money. As Judge Posner has put it, "[t]he realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30." 

This morning, the Supreme Court granted certiorari in AT&T Mobility v. Concepcion, which presents the question whether the Federal Arbitration Act preempts rulings that particular class-action bans are unconscionable under generally applicable state contract law.  We are counsel for the respondents, Californians who seek to sue AT&T over violations of state consumer-protection law in connection with the sale of cellular phones.

You can read the briefs, including the cert petition and our brief in opposition, here.

The Shadow Terms: Contract Procedure and Unilateral Amendments

David Horton of Loyola Law School has an interesting and timely new article in the UCLA Law Review exploring the increasing phenomenon of companies using the authority of blanket "change-in-terms" provisions to unilaterally revise the terms of consumer contracts, often in an attempt to evade or stay one step ahead of court review.  For example, cell phone companies whose arbitration clauses have been struck down as unconscionable have have invoked change-in-terms provisions to impose more consumer-friendly arbitration clauses on their customers in an attempt to salvage their bans on class actions.

The article makes a case for legislation that would ban such unilateral revisions. Here's the abstract:

For decades, courts and commentators have debated the normative implications
of contract procedure. Conservatives argue that mandatory arbitration clauses reduce
the burden on the judicial system and that class arbitration waivers, choice-of-law
clauses, and jury trial waivers allow businesses to pass litigation savings to their
consumers in the form of lower prices. In response, liberals object that contract
procedure dilutes substantive rights and runs roughshod over important jurisdictional
and constitutional values.

This Article argues that neither view has accounted for a defining trait of contract
procedure: the regularity with which drafters unilaterally amend procedural terms.
Indeed, many standard form consumer agreements and a growing number of state
statutes authorize drafters to revise procedural terms unilaterally. The frequency
with which drafters exercise this power undermines the foundational conservative
theory that sophisticated adherents can exert market pressure on drafters to offer
efficient procedural terms. However, the liberal model of contract procedure—which
urges courts to nullify procedural terms that erode substantive, jurisdictional, or
constitutional interests—creates perverse incentives. Drafters respond to judicial decisions
voiding procedural terms by amending their terms again. The target audience
for these revisions is not the adherents who will be subject to them, but the courts who
will adjudicate their validity. This “private conversation” between corporations and
courts not only widens the informational gulf between drafters and adherents, but
increases the burden on the judicial system. To end this pernicious feedback loop, the
Article encourages policymakers to eliminate drafters’ ability to amend procedural
terms unilaterally.

Rent-an-Arbitrator

by Deepak Gupta

It's been a pretty busy week for arbitration issues at the Supreme Court.  Yesterday, the Court heard oral argument in Rent-a-Center v. Jackson, a potentially very important arbitration case that I've discussed here before. (Disclosure: We're co-counsel for respondents, along with Public Justice and the Hardy Law Firm of Reno, Nevada.) 

The question in Rent-a-Center is whether companies that draft forced arbitration clauses can delegate unconscionability challenges -- challenges by consumers and workers to the fairness of the arbitration clause itself -- to the arbitrator rather than the court.  If the Supreme Court answers yes, it could mean that the company's hand-picked arbitrator gets to decide whether it's fair for the company to hand pick the arbitrator. You can read the transcript here. All of the briefs are available here.

Justice Scalia's questions yesterday showed that he has little empathy for those who find themselves in the position of signing extremely one-sided arbitration agreements because of unequal bargaining power, often as a precondition of employment or the receipt of essential goods and services. Here's what he said:

JUSTICE SCALIA: you can be a stupid person who voluntarily signs an unconscionable contract. Now, the courts may protect you because you are stupid, but you haven't been coerced.

That's an actual quotation from the argument, not a caricature. I suppose this means that, in Justice Scalia's world, a person who takes a low-wage job as a dishwasher, say, or as a line worker at a chicken processing plant, because it's the only job he or she can get, is simply "stupid" if they sign an employment contract containing various unconscionably one-sided terms.

Thankfully, several other Justices (including Justices Breyer, Sotomayor, Stevens, Ginsburg, and Kennedy, and possibly even Chief Justice Roberts) seemed less sanguine about the prospects of leaving all unconscionability challenges to the arbitrator. Much of the questioning focused on whether the challenge to be decided goes to the whole agreement or only to specific provisions in the agreement, and there was much confusion on that point throughout the argument. I wonder whether these questions stem more from the Justices' unfamiliarity with how state-law unconscionability doctrine works than anything else. Perhaps an amicus brief of contract-law professors could have cleared things up.  The reality is that there's not much distinction between the two types of challenges; you challenge the whole clause as unconscionable and it's up to the court whether to sever the bad provisions or not (if they are in fact logically severable).

Here's a sampling of some of the more interesting coverage of the case:

• Tony Mauro's report on the argument at the National Law Journal quotes my prediction that this will be a "watershed" case if the badguys win, and highlights two amicus briefs that were mentioned during the argument, including the brief of prominent professional arbitrators supporting Mr. Jackson.

• Marcia Coyle, also of the NLJ, situates Rent-a-Center among the end-of-term blockbuster cases.

• Dahlia Lithwick at Slate offers her as-always colorful commentary on the argument (including some links to interesting articles on the debate over forced arbitration), but I think she may be misreading the Justices' votes based on some of yesterday's advocacy missteps.  My reading of the argument is that the case is actually much closer that she suggests.

• Elizabeth Wydra of the Constitutional Accountability Center has an excellent blog post on the arguments. She focuses on the same quotation from Justice Scalia that I mention above. She concludes: "If ever there were an oral argument that drove home the need to have a Supreme Court that understands, as President Obama and others have put it lately, how the law affects 'ordinary Americans'—this was it.

• Laurel Newby focuses on the Justice Breyer's odd "Joe Bananas" hypothetical.

• The ContractsProf Blog has had running coverage of the case over the past several weeks, including an online roundtable of scholars.

• Public Citizen President Rob Weissman had this op-ed on the case, which has run in several newspapers. At the Huffington Post, similar sentiments were expressed by Nan Aron of the Alliance for Justice and Anthony Tarricone of AAJ.

• Stanford law student Aaron Tang at SCOTUSblog offered this preview of the parties' arguments.

Supreme Court Decides Stolt-Nielsen: No Class Arbitration Where Clause is "Silent"

by Deepak Gupta

The opinions are here. The vote is 5-3. Justice Alito delivered the opinion of the Court, joined by Justices Roberts, Scalia, Kennedy, and Thomas.  Justice Ginsburg filed a dissenting opinion, joined by Justices Stevens and Breyer. Justice Sotomayor was recused.

The Court today holds that imposing class arbitration on parties who have not agreed to authorize class arbitration is inconsistent with the Federal Arbitration Act. The arbitration panel, in the Court's view, "exceeded its powers" under Section 10(a)(4) of the Act by imposing its own "policy choice" allowing a class action instead of identifying and applying a rule of decision derived from the FAA or from maritime or New York law.

The Court relies heavily on the basic principle that, under the FAA, arbitration “is a matter of consent, not coercion,” and that arbitration agreements must be "enforced according to their terms." (quoting the Volt case). It follows, the Court holds, that a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. An implicit agreement to authorize class action arbitration is not a term that the arbitrator may infer solely from the fact of an agreement to arbitrate. The differences between simple bilateral and complex class action arbitration are too great for such a presumption. 

All of this, supposedly, is based on the FAA and is what Congress intended when it passed the Act in 1924. If you like, you can think of it as a special clear-statement rule of federal common law -- a rule that elevates hostility to class actions above ordinary principles of contract interpretation, not to mention statutory limits on judicial review.

We had filed a brief arguing that this case was not ripe for judicial review, both as a prudential matter and as a matter of the Federal Arbitration Act, which limits judicial review of arbitral decisions to final "awards."  The arbitral panel had decided only a preliminary issue of clause construction, had not even certified a class, and issued no "award." Justice Ginsburg's dissent echoes those arguments. She would have dismissed the case as improvidently granted.

Even if Stolt-Nielsen had a plea ripe for judicial review, Justice Ginsburg goes on to say, the Court should have rejected it on the merits. She stresses that the parties jointly "asked the arbitrators to decide whether the arbitration clause in their shipping contracts permitted class proceedings. The panel did just what it was commissioned to do. It construed the broad arbitration clause and ruled,expressly and only, that the clause permitted class arbitration. The Court acts without warrant in allowing Stolt-Nielsen essentially to repudiate its submission of the contract-construction issue to the arbitration panel, and togain, in place of the arbitrators’ judgment, this Court’s de novo determination."

Stolt's implications for the larger debate over forced arbitration in consumer and employment cases are troubling -- especially for the ongoing fight over class-action bans. But the impact of the decision is unclear at this point, and will have to be worked out by the lower courts.

Although today's decision will undoubtedly affect consumers and workers, the Stolt case itself involved claims brought by a group of large businesses, who alleged that a handful of shipping companies had engaged in a global price-fixing conspiracy. One major question that will have to be addressed is how the decision will apply in cases where consumers' claims are especially small and a class action is the only realistic means of redress. The decision also does not address the fairness defenses that are available to consumers under general state contract law and the savings clause of FAA section 2.