The Status of Arbitration in 2016: An Institution in Review

By: Matthew Lowe

I. Introduction

The role that arbitration has played in corporate affairs has transformed over the years. As industries have expanded, so too has the function of arbitration. While some may argue that such expansion has had a positive and healthy affect on the adjudicative processes of private disputes, others disagree. Currently, arbitration clauses found in purchase agreements continue to be expansive, despite recent mainstream dissent. The labor and employment field, on the other hand, is undergoing changes in deferral standards following a recent decision by the National Labor Relations Board (“NLRB”).

II. Background

Arbitration is a form of alternative dispute resolution that rests outside of the direct purview of the courts. Structurally, arbitration depends on the decision-making authority of an independent third-party (single or panel), which is chosen through the agreement of two contracting parties. As a practice, arbitration gained serious momentum in 1925, through the enactment of the Federal Arbitration Act (“FAA”).[1] Prior to the FAA, arbitration was a tool used primarily by trade associations in order to enhance certainty and reduce disputes.[2] Courts have expanded the utility and accessibility of the institution to the extent that it governs many private agreements between parties today.[3] While agreements differ across industries in nature and content, the clauses that designate arbitration as the adjudicative process to be utilized by the parties remain relatively similar.[4] Further, arbitration has become so legitimized by the courts that these types of clauses are generally found to require enforcement, even when they are obtained as a condition of employment, and would preclude employees or former employees from suing in court on their federal (or state) statutory discrimination claims.[5]

III. Concerns Raised Over Arbitration

With the features of present day arbitration functioning as they do, the question necessarily arises: is it fair? The short answer is yes, but groups exist that are highly critical of the role and pervasiveness of arbitration in its present form. As discussed, arbitration clauses are ubiquitous in modern contracts and they can present issues for consumers and employees alike. For one, ubiquity in itself can be problematic, as it forces parties to submit to arbitration as a prerequisite for purchase or employment.[6] Secondly, such submission has what some may consider severe and adverse consequences, including individuals’ preclusion from judicial review by vesting exclusive control in arbitration and extinguishing avenues for appeals.[7] And thirdly, there have been concerns that arbitration clauses may reference governing procedural rules that change after the point of initial contract signing, subjecting a consumer or employee to terms that were not originally contemplated by an agreeing party.[8]

Some of those concerns regarding arbitration have seeped through the gates of the otherwise exclusive legal community and into the mainstream. In October and November of 2015, The New York Times published a multitude of seemingly anti-arbitration articles. On October 31, 2015, the news outlet unleashed the first part of a three-part series entitled: “Arbitration Everywhere, Stacking the Deck of Justice,” in which journalists Jessica Silver-Greenberg and Robert Gebeloff touched on not only the aforementioned ubiquity of arbitration clauses (highlighting their presence in various major companies’ terms and conditions policies, including: Netflix, AT&T, TimeWarner, T-Mobile, eBay, Expedia, Discover, EA (Electronic Arts), Starbucks, and many more), but also the effect of these clauses on access to the courts.[9]

Arbitration clauses in purchase and employment agreements not only foreclose judicial review for single grievants, but, as an additional procedural feature, they also tend to foreclose attempts to bring class actions by multiple grievants.[10] The enforceability of these features is illustrated in recent case law. In 2014, judges upheld arbitration clauses banning class actions in 134 out of 162 cases.[11] In 2010, one of the most impactful Supreme Court decisions affecting the practice of arbitration in the United States occurred in AT&T v. Concepcion. In Concepcion, AT&T charged customers for products it had promised not to charge them for.[12] Upon customers’ attempts to form a class and sue the company, the Court held that they could not do so after they signed a contract with AT&T that included an arbitration clause forbidding class action.[13]

IV. The Vitality of Arbitration in Consumer Contracts

Criticisms of arbitration may have value for future reform efforts, but for now, those criticisms do nothing more than undermine the current need, purpose, functionality, and efficacy of the practice. The decision in Concepcion, for example, was reached due to the Court’s valid acknowledgments of a variety of considerations including, inter alia, matters of federal preemption and broader policy relating to the preservation of freedom of contract principles.[14] The central argument against the mandatory arbitration clauses at issue in the Concepcion case relied on the rights of the states. The attorney arguing against AT&T focused on the jurisdiction of the California courts — which had rejected the class action ban as “unconscionable” — and sought to have the Supreme Court hold in favor of the ability of state courts to enforce their own laws.[15] However, the Court found that “when state law prohibits outright the arbitration of a particular type of claim, the conflicting state rule is displaced by the FAA.”[16] They further stated that “the point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute.”[17] Ultimately, in such circumstances as those presented in Concepcion, the Court concluded that “requiring the availability of [class-wide] arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”[18]

The decision in Concepcion is illustrative of more than just an adherence to federal preemption rules. The decision also signals a broader policy in which there is a presumption in the courts favoring arbitrability and awards handed down by arbitrators.[19] This deference is due to a push towards enforcing and advancing the rights of private parties in the realm of contracts. The courts should play a very limited role in interfering with the terms agreed upon between such parties. Even where there is alleged unconscionability, such as in Concepcion, they should only intervene in very rare circumstances. To do otherwise would eviscerate not only arbitration agreements but also the principles upon which they are founded. Many times, unconscionability is an easy answer for litigants arguing against arbitration because it provides a legal method of alleging “unfairness”. Currently, the survival of a claim of unconscionability requires plaintiffs to use the terms in their arbitration clause to explain how it is sufficiently unconscionable and how it is inconsistent with the purpose of the FAA — if successful, the arbitration clause will be invalid and plaintiffs can pursue their class action lawsuit.[20] Thus, defenses to allegedly unfair arbitration clauses do still exist and Concepcion does not completely foreclose the possibility of filing a class action suit; the requirements are just reasonably and necessarily stringent so as to preserve the rights of contracting parties.

V. Changes to Arbitration Specific to Labor and Employment

In the realm of labor and employment, arbitration continues to be built into collective bargaining contracts and non-union employment contracts to the benefit of all contracting parties. Perhaps one of the most notable works regarding the importance of arbitration in labor and employment is Samuel Estreicher’s Saturns for Rickshaws: The Stakes In the Debate Over Predispute Employment Arbitration Agreements, in which Estreicher states:

The unspoken (yet undeniable) truth is that most claims filed by employees do not attract the attention of private lawyers because the stakes are too small and outcomes too uncertain to warrant the investment of lawyer time and resources. These claims have only one place to go: filings with administrative agencies where they essentially languish, for the agencies themselves lack the staffing (and often even the inclination) to serve as lawyers for average claimants. The people who benefit under a litigation-based system are those whose salaries are high enough to warrant the costs and risks of a law suit undertaken by competent counsel; these are the folks who are likely to derive benefit from the considerable upside potential of unpredictable jury awards. Very few claimants, however, are able to obtain a position in this “litigation lottery.”[21]

Estreicher’s rationale continues to permeate policy considerations within the scope of the NLRB. Still, while arbitration is normative within the labor and employment industry and NLRB review of arbitral decisions is relatively rare, aspects of this are set to change in the near future. In 2014, the NLRB, comprised of a more liberal board under President Obama, changed arbitration deferral standards, overturning its previous standard, which had been law for over three decades.[22] Under the new standard, the burden of proof is now on the party seeking deferral. Further, deferral is now appropriate only when: (1) the arbitrator has been explicitly authorized to decide the statutory issue; (2) the arbitrator was presented with and considered the statutory issue, or was prevented from doing so by the party opposing deferral; and (3) NLRB law reasonably permits the award.[23]

Fortunately for employers, application of the new standard is prospective, as the NLRB has announced that it will not apply the new standards until those contracts have expired or the parties have agreed to present particular statutory issues to the arbitrator.[24] Employers can therefore amend provisions to account for these changes following expiration. The effects of the new standard are numerous, including employer likely having to face duplicative litigation in the form of grievance-arbitration proceedings and factually related unfair labor practice charges.[25] In terms of overall impact to the arbitration landscape in labor and employment, perhaps NLRB member Philip A. Miscimarra summarized the effects best when he stated in his dissent that the new deferral standards “effectively guarantee that … arbitration will not be final and binding. The outcome will be more work for the [NLRB], at the expense of speed, predictability, and certainty for the long litigation treadmill that is associated with [NLRB] and court litigation of unfair labor practice claims.”[26]

VI. Conclusion

Arbitration, in many ways, serves to advance the principles of freedom of contract between private parties. As such, it is reasonable and expected that the courts have and continue to uphold arbitration clauses, especially in consumer contracts. Thus, despite recent mainstream attacks on the practice of executing compulsory arbitration agreements, the core principles underlying the practice create protection and maintain valid enforceability. Generally, these principles have extended to the labor and employment industry and, while they still do in most aspects, a recent NLRB decision has departed from its previous arbitral deferral standards, which may threaten the protections and validity of arbitration.

[1] 9 U.S.C. § 1

[2] Katherine Van Wezel Stone, Rustic Justice, 77 N.C.L. REV. 931, 936 (1998).

[3] 5 N.Y. Jur. 2d Arbitration and Award § 69

[4] JAMS Clause Workbook: A Guide to Drafting Dispute Resolution Clauses for Commercial Contracts (Apr. 1, 2015), available at http://www.jamsadr.com/clauses/

[5] Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (U.S. 1991)

[6] Michael A. Geibelson, Bernice Conn, Clause and Effect Parties Agreeing to Standard Arbitration Clauses May Unwittingly Alter Their Rights, L.A. Law., October 2006, at 35, 36

[7] Id. at 41.

[8] Id. at 40.

[9] Jessica Silver-Greenberg and Robert Gebeloff, Arbitration Everywhere, Stack the Deck of Justice, NY Times (Oct. 31, 2015), http://www.nytimes.com/2015/11/01/business/dealbook/arbitration-everywhere-stacking-the-deck-of-justice.html?_r=0

[10] Id.

[11] Id.

[12] AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)

[13] Id. at 351.

[14] Id.

[15] Id.

[16] Id. at 341.

[17] Id. at 344.

[18] Id. at 344.

[19] 6 C.J.S. Arbitration § 238

[20] Megan Barnett, There Is Still Hope for the Little Guy: Unconscionability Is Still A Defense Against Arbitration Clauses Despite AT&T Mobility v. Concepcion, 33 Whittier L. Rev. 651, 670 (2012)

[21] Samuel Estreicher, Saturns for Rickshaws: The Stakes in the Debate over Predisputes Employment Arbitration Agreements, 16 Ohio St. J. on Disp. Resol. 559, 563 (2001)

[22] Olin Corp., 268 NLRB 573 (1984)

[23] Babcock & Wilcox Construction Co., 361 NLRB No. 132 (2014)

[24] Id.

[25] McGuire Woods, NLRB Reverses Board Precedent on Arbitration Deferral Standards (Dec. 17, 2014), available at https://www.mcguirewoods.com/Client-Resources/Alerts/2014/12/NLRB-Reverses-Precedent-Arbitration-Deferral-Standards.aspx.

[26] Babock & Wilcox, supra note 22.

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