New Report Comparing Arbitration and Litigation in Employment Disputes Sparks Backlash

By Andrew Garcia

In May, the U.S. Chamber of Commerce affiliate, the Institute for Legal Reform, released a report praising the results of arbitration in encouraging settlement, providing more wins for employees, higher awards, and faster outcomes versus litigation in employment disputes.

The Chamber’s report, “Fairer, Faster, Better: An Empirical Assessment of Employment Arbitration,” authored by Nam D. Pham and Mary Donovan, researchers at Washington, D.C., consulting firm NDP Analytics, seemed awash in good news.

It was based on a five-year review between 2014 and 2018 of 10,000 employment arbitrations with data from arbitration providers American Arbitration Association and JAMS. The report compared the arbitrations with more than 90,000 employment lawsuits in federal courts between 2014-2018. It found that employees were three times more likely to prevail in arbitration than in litigation, arbitrations lasted on average 96 days shorter than litigated cases, and the average amount awarded was almost twice as much in employment arbitration, at more than $520,000,  compared to litigation.

Twitter erupted. Critics slammed the report saying that it ignored key data, failed to account for cases cut off by compulsory alternative dispute resolution processes, and flat-out cooked the awards data conclusions by using the mean to skew the size of awards, rather than the median.

More significantly, labor forces moved to debunk the Chamber’s  report saying it was designed for a May Congressional hearing, Justice Denied: Forced Arbitration and the Erosion of our Legal System, where it was the crux of the Chamber’s pro-arbitration argument.

A principle criticism is the report doesn’t cite the contrary significant data that emerged over the past decade from the Economic Policy Institute, a Washington, D.C., nonprofit that researches economic data from low- and middle-income workers’ perspective. The 2015 EPI report criticized arbitration as a litigation alternative in employment cases.

That December 2015 EPI report, “The Arbitration Epidemic,” authored by UCLA School of Law Prof. Katherine Stone, and Alexander Colvin, who is dean and the Martin F. Scheinman Professor of Conflict Resolution at Cornell University’s ILR School, argued that employees who are contractually bound to arbitrate disputes are less likely to receive favorable outcomes or substantial awards compared to employees that initiate disputes through litigation.

Stone and Colvin compared two separate studies that examined outcomes in arbitration and litigation actions, An Empirical Study of Employment Arbitration: Case Outcomes and Processes (2011), and Arbitration and Litigation of Employment Claims: An Empirical Comparison (2003).  They found that employee arbitration win rates were 59% as often as in federal court actions, and 38% as often in state court actions.

A subsequent 2015 study on employment litigations indicated that the employee win rates in federal court cases lowered to an average of 29.7%, while another 2015 study on employment arbitrations found that employee win rates in arbitrations also lowered to an average of 19.1%. The EPI report commented that even though the outcome gap narrowed in 2015 compared to the 59% gap in 2011, the employee win rate in arbitration was still 35.7% lower than in federal court actions.

A subsequent 2018 report by Alexander Colvin found that only one in 10,400 employees subject to arbitration files a claim, which is a rate 35 to 80 times less than employees who file claims in federal and state courts.

So the new Chamber Institute for Legal Reform report served to reignite fights that have taken place over the past decade in courts and legislatures over employment and consumer arbitration. Yet despite the recurring arguments, there may be middle ground. Myriam Gilles, a professor at Cardozo School of Law in New York,  stated in her testimony at the May Congressional hearing that advocates opposed to mandatory arbitration are not arguing that arbitration be banned altogether, but that mandatory arbitration in a consumer or employment context that bars class actions is unworkable.

In addition, the Stone and Colvin report offers an in-house ADR solution that companies can adopt. The report cites that the former TRW Inc. in the 1990s adopted successful internal dispute resolution procedures that included local management complaint procedures, peer review panels, and then mediation. A 2004 study by Colvin found that only 72 TRW cases even reached mediation over the first three years of the program, and only three of the cases reached arbitration. In addition, TRW set up the process to be binding on the company but not on the employee, who would then be able to go to court after arbitration if the employee was not pleased with the outcome.

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The author, a Summer 2019 CPR Institute intern, is a law student at Brooklyn Law School.

 

NJ’s Top Court Backs Arbitration in Car Sales Fraud Cases

By Brian Chihera

In Janell Goffe v. Foulke Management Corp (A-3/4-18/081258 ) (N.J. S.Ct.  June 5) (available at http://bit.ly/2X8njco), a unanimous N.J. Supreme court recently stated that two sales fraud claims against auto dealers must be decided through arbitration.

The Court followed longstanding U.S. Supreme Court law in holding that the plaintiffs’ challenges to their sales agreements were attacks on the contract formation, but not on the language used in the agreements to arbitrate.

Justice Jaynee LaVecchia wrote for the 7-0 Court, “Those rulings do not permit threshold issues about overall contract validity to be resolved by the courts when the arbitration agreement itself is not specifically challenged.”

The plaintiffs, who were customers of two Cherry Hill, N.J., auto dealerships, challenged the sales agreements they had entered into because they claimed that the contracts were concluded through fraud—at least one of which appeared to be a bait-and-switch scheme.

Previously, New Jersey’s top Court in Atalese v. U.S. Legal Servs. Grp., L.P., 99 A.3d 306, 311 (N.J. 2014) (available at http://bit.ly/2NpTG6W), cert. denied, 135 S. Ct. 2804 (2015), backed a plaintiffs’ challenge to an arbitration agreement because “ the wording of the service agreement did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court.”

But the Goffe court found that the challenge was to the overall contract’s formation, not the arbitration agreement.

The first plaintiff, Janell Goffe, had gone to Cherry Hill Mitsubishi, where she was told that she could get a Buick for a trade-in.  She paid $250 the same day and then would pay $750 two weeks later. Goffe was also told that the financing had been approved.  She then signed the sales contract, which included an arbitration clause.

After a few days, however, she was told that the financing had been declined and had she had to make a larger down payment and higher monthly payments, but she opted to return the Buick to the dealership, canceling the deal.

Sasha Robinson, the second plaintiff, asked about buying a car with Mall Chevrolet, and was told that she would have two days to change her mind about the purchase. She signed the contract, including the arbitration clause, the same day. When she tried to return the car to the dealership, Robinson was told that there was a mistake and she was bound by the contract, which meant that the matter would be taken for arbitration.

Goffe did not involve any challenge to the arbitration clause nor the language that was used in it. The plaintiffs alleged that they had been made to sign the contracts through fraudulent means, which constitutes challenges to the entirety of the contracts. They wanted the courts to nullify the contracts because they alleged fraud was committed.

In reaching its decision, the N.J. Supreme Court looked at how the U.S. Supreme Court had dealt with such issues. “The United States Supreme Court has held that when a plaintiff raises a claim of fraud in the inducement of a contract as a whole–rather than fraud in the making of the arbitration agreement itself–the Federal Arbitration Act requires that the dispute be resolved by the arbitrator,” stated Justice LaVecchia in the opinion, citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967).

She concluded, “based on the complaint and the certifications provided to the trial court, it is apparent to us that the parties’ claims are subject to an enforceable arbitration agreement. Therefore, the arbitration agreement is severable and enforceable. Plaintiffs must arbitrate their claims. Before the arbitrator, plaintiffs can raise any arbitrability issues consistent with the delegation clauses in these agreements.”

The Court reversed its Appellate Division, reinstating the trial courts’ orders to compel.

 

The author, a CPR Institute Summer 2019 intern, graduated in May with an LLM in dispute resolution from the University of Missouri School of Law in Columbia, Mo.

US Sup Ct Grants Review to Decide Whether New York Convention Permits Non-Signatory to Compel International Arbitration on Equitable Estoppel Grounds

By Mark Kantor

Kantor Photo (8-2012)

This morning the U.S. Supreme Court granted certiorari and agreed to hear in its next Term the international arbitration case of GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC (Docket No. 18-1048, case documents available at https://www.scotusblog.com/case-files/cases/ge-energy-power-conversion-france-sas-v-outokumpu-stainless-usa-llc/).  The dispute addresses whether, under the New York Convention, a non-signatory can compel arbitration.  The Question Presented is:

Whether the Convention on the Recognition and Enforcement of Foreign Arbitral Awards permits a nonsignatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel.

As described in GE’s petition for cert, “Sometimes, a signatory to a contract may sue a non-signatory for claims that arise out of the contract.  When that happens, is the signatory bound by the arbitration clause it agreed to in the contract?  For domestic arbitration agreements, the answer is yes: Equitable estoppel allows the non-signatory to enforce the arbitration clause.  But the Eleventh Circuit [Court of Appeals] held that a non-signatory cannot compel arbitration if one of the parties is a foreign entity.  That erroneous holding deepens a 2-to-2 circuit split and warrants this Court’s review.”

Readers will note that GE’s quoted description of the issue speaks confusingly about both (i) a signatory compelling arbitration with a non-signatory and (ii) a non-signatory compelling arbitration with a signatory.  One hopes the U.S. Supreme Court will be able to distinguish the two situations and determine whether that distinction is relevant to resolving the question.  The 11th Circuit decision declining to compel arbitration rested in part on the non-US nature of one of the parties.

We shall learn within the next year how the U.S. Supreme Court believes non-signatories fit into the commercial arbitration universe.

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Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.

Faulty Procedure? Fifth Circuit Vacates an Arbitration Order for Unconscionability Inquiry

By Savannah Billingham-Hemminger

The Fifth U.S. Circuit Court of Appeals has reversed, vacated and remanded an order to compel arbitration in an age discrimination case so that the federal district court can re-examine the merits of a procedural unconscionability claim.

The circuit judges in Bowles v. OneMain Fin. Grp. LLC, No. 18-60749, 2019 U.S. App. LEXIS 18414 (June 19) (available at http://bit.ly/2KBXcJf) found that the district court had erroneously referred a procedural unconscionability challenge to an arbitrator after determining that such a claim was about the enforceability of the arbitration agreement.

Senior Circuit Judge E. Grady Jolly, writing for a unanimous three-judge panel, determined that procedural unconscionability instead goes toward contract formation, not contract enforcement, under Mississippi law. Contract formation issues are to be decided by the court, while contract enforcement is to be decided by the arbitrator.

According to the case, plaintiff Cathy Bowles worked for lender OneMain Financial Group for nearly 20 years when she was terminated for “allegedly inappropriate interactions with employees under her supervision.” During her time there, she was required to “review and acknowledge” the Employee Dispute Resolution Program/Agreement on multiple occasions.

After her termination, she filed a complaint with the U.S. Equal Employment Opportunity Commission, which was unsuccessful, and then filed a federal court suit under the Age Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964. OneMain responded with a motion to compel arbitration under the Federal Arbitration Act and pursuant to a 2016 Arbitration Agreement that Bowles had acknowledged electronically.

Bowles objected to arbitration on two grounds: that there was no “meeting of the minds” resulting in mutual assent for contract formation, and that OneMain obtained consent through misrepresentation, which was procedurally unconscionable.

The district court granted the motion to compel, finding that the necessary meeting of the minds for contract formation was met under Mississippi law. Whether Bowles did or did not understand was irrelevant because lack of diligence before her acknowledgment does not impede formation of the contract.

On the second ground, the district court ruled against her as well. “The district court found that Bowles’s procedural unconscionability challenge went to the enforceability rather than the formation of the Arbitration Agreement and therefore referred it to the arbitrator for decision, in accordance with the Arbitration Agreement’s delegation clause.”

But the federal appellate court disagreed with the trial court on the second point.  It reviewed OneMain’s motion to compel arbitration de novo. The opinion noted that in determining the validity of an arbitration agreement, state-law principles should ordinarily apply to the formation of contracts, citing First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

The panel opinion found that the district court correctly concluded that mutual assent existed because on multiple occasions the Arbitration Agreement was communicated clearly to Bowles, and she acknowledged receipt.

But citing West v. West, 891 So. 2d 203 (Miss. 2013), the panel opinion said that in Mississippi, procedural unconscionability is a claim on the formation of the contract—”it is pellucid that ‘[p]rocedural unconscionability goes to the formation of the contract.’” In such a case, the court has a duty to resolve the challenge.

The opinion examines unconscionability factors using another Fifth Circuit case, Begole v. N. Miss. Med. Ctr., 761 Fed. Appx. 248 (2019). In a footnote, the court explained that general allegations of unconscionability going to the formation of the entire contract is an issue for the arbitrator. But in challenging the specific decision to agree to arbitrate as unconscionable, the district court must weigh in.

The opinion repeats Begole’s specific distinctions “between procedural and substantive unconscionability under Mississippi law:

Under substantive unconscionability, we look within the four corners of an agreement in order to discover any abuses relating to the specific terms which violate the expectations of, or cause gross disparity between, the contracting parties. Procedural unconscionability may be proved by showing a lack of knowledge, lack of voluntariness, inconspicuous print, the use of complex legalistic language, disparity in sophistication or bargaining power of the parties and/or a lack of opportunity to study the contract and inquire about the contract terms.”

Because the trial court needs to determine the procedural unconscionability claim on the merits, the Fifth Circuit panel reversed and remanded.

The author, a Summer 2019 CPR Intern, is a law student at Pepperdine University School of Law in Malibu, Calif.

 

Was It Really a Foreign Arbitral Award? Ninth Circuit Says No.

By Brian Chihera

The Ninth U.S. Court of Appeals has reversed a district court’s order which had treated an order made by a Philippines arbitrator as a foreign arbitral award.

The appeals court ruled on an unusual situation.  It found that the case had been settled, and there was no outstanding dispute to arbitrate by the time the arbitrator got the case, and therefore nothing for the federal district court to confirm.

In Castro v. Tri Marine Fish Co., No. 17-35703 (Feb. 27) (available at http://bit.ly/2Zwoa8x), the three-judge appellate panel said that the arbitration decision was not a decision at all and should not be enforced under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, best known as the New York Convention.

“We review foreign arbitral awards deferentially, but we do not blind ourselves to reality when presented with an order purporting to be one,” concluded Circuit Judge M. Margaret McKeown, writing for a unanimous Ninth Circuit panel. “To cloak its free-floating settlement agreement in the New York Convention’s favorable enforcement regime, Tri Marine asked an arbitrator to wave his wand and transform the settlement into an arbitral award. That is not sufficient to produce an award subject to the Convention.”

At the heart of the convention and related federal law, notes Circuit Judge McKeown, “is the principle insulating foreign arbitral awards from second-guessing by courts. But this appeal involves an even more fundamental question—whether we are presented with a foreign arbitral award at all. In the mine run of cases, the answer is uncontroversial: when it looks, swims, and quacks like an arbitral award, it typically is. Yet, in this unusual appeal, we have an arbitral award in name only. There was no dispute to arbitrate, as the parties had fully settled their claims before approaching an arbitrator.”

Michael Castro, a Philippines citizen, moved to American Samoa where he lived with his fiancé. Castro was employed by Tri Marine and worked in the company’s warehouse. He was offered a deck-hand position on a fishing vessel it owned, which he accepted.

The dispute between Castro and his employer started with an employment contract that was signed just before the fishing expedition launched. Both parties dispute the contents of what was signed. Castro said he believed that he was only signing a “a half sheet of paper with a few sentences on it” that designated the pay rate, and the employer contended that Castro signed an employment contract.

Castro, however, said that he signed the employment contract when he appeared before an arbitrator. The contract contained a clause which was applicable to all disputes or claims arising out of the employment on the vessel.

Castro injured his knee after falling down ship stairs two weeks into the trip, and immediately requested to be returned to American Samoa so he could travel to Hawaii for medical care. Tri Marine arranged for Castro to be treated in the Philippines, where he also underwent surgery for a torn anterior cruciate ligament and a torn meniscus. Castro also received physical therapy and his employer paid for the medical expenses and his monthly maintenance.

Castro approached Rhodylyn De Torres, a Tri Marine agent in the Philippines after his father had been diagnosed with kidney cancer. He negotiated a settlement of his disability claims in exchange for an advance of $5,000 to help pay for his father’s care. This was followed by an agreement in principle to release Castro’s claims in exchange for an additional $16,160.

Castro was accompanied by his fiancé when he went to see De Torres at her office to finalize the settlement. Castro was not aware of the fact that he was participating in an arbitration. Castro and De Torres both gave different versions of events of their meeting. Castro is not fluent in English and disputes that De Torres translated documents into Tagalog, the Philippine language. There was a dispute as to when the agreement was signed, although Castro did not dispute signing the agreement.

The settlement agreement signed between Castro and De Torres meant that he had released himself from any and all liability or claims. After the meeting on the release, Castro was told that he had to pick up the settlement receipt at the National Conciliation and Mediation Board, but in fact he was led to an arbitration.

Gregorio Biares was present as the arbitrator. This was the first time for Castro to be in an arbitration hearing and he was not aware of any dispute between himself and his former employer. Castro asserted that Biares hurriedly flipped through papers asking Castro to sign  and stating that the settlement was favorable to Castro. Biares reportedly told Castro that the settlement papers were “just a first payment.”

But there was no arbitral case filed by either party. Tri Marine provided Biares the release paperwork signed by Castro and a joint two-page motion to dismiss.

The New York Convention recognizes the enforcement of foreign arbitral awards. A court is obliged to confirm a foreign arbitral award unless the party resisting enforcement meets the substantial burden of proving one of the seven interpreted defenses.

The major question for the U.S. courts was whether there was an “arbitral award” that would fall under the New York Convention. In coming to its decision, the courts had to look at the definitions of “arbitration” and “arbitral award”.

The two terms, however, do not have definitions under the New York Convention and in the Federal Arbitration Act. Case law provided direction.  Using the definitions from American Law Institute’s Restatement, the Ninth Circuit decided that there was no arbitral award, tribunal or arbitration because the requirements of the parties’ arbitration agreements and the forum were not met.

Although the order was issued as an arbitral order, there were aspects of it that indicated otherwise. First, there was no dispute between Castro and his former employer Tri Marine. There was no genuine disagreement between the parties.  Therefore, they reached an agreement and there was no arbitral award handed down. Castro and Tri Marine had settled their dispute before they visited the arbitrator, with Castro releasing Tri Marine of any liability and all claims.

Arbitration is a consensual procedure, and there was no consent between Castro and Tri Marine to participate in an arbitration that was a meeting with a third party. Parties may waive contractual terms, but by his conduct, Castro did not have any intent to arbitrate the dispute in the Philippines. The meeting between the parties did not follow Philippines arbitral procedures.

The Ninth Circuit opinion stated that the parties’ free-floating settlement agreement did not transform into an arbitral award and the fact that there was an arbitrator present does not make it an arbitral award. The appeals court concluded that Tri Marine could seek to enforce the release as a contract matter, but the arbitrator’s order was not an award and it did not fall under a foreign arbitral award.

The author, a CPR Institute Summer 2019 intern, graduated last month with an LLM in dispute resolution from the University of Missouri School of Law in Columbia, Mo.

Workplace Mandatory Arb Ban Reversed by Kentucky Lawmakers

By Vincent Sauvet

Kentucky has re-authorized the use of mandatory arbitration in employment contracts less than five months after the state’s top Court declared the agreements void.

For a short time, Kentucky was the only state prohibiting the mandatory arbitration of employment disputes. Its legislature has now brought the Commonwealth back into the flock with Senate Bill 7.

In a unanimous 2018 decision, the Kentucky Supreme Court held that the state’s Revised Statutes § 336.700(2) prohibited employers from conditioning employment on an existing employee’s or prospective employee’s agreement to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit to which the employee or person seeking employment would otherwise be entitled.” N. Ky. Area Dev. Dist. v. Snyder, No. 2017-SC-000277-DG, 2018 Ky. LEXIS 363 (Sep. 27, 2018) (available at http://bit.ly/2HmZp8B) (quoting the statute, which is available in full in the opinion).

While the Snyder ruling made Kentucky the nation’s first state to prohibit mandatory employee arbitration agreements, it didn’t last long. With Senate Bill 7, sponsored by state Senate President Robert Stivers, Kentucky reinstated the use of mandatory arbitration in employment contracts,  rendering such agreements enforceable. The provisions of Senate Bill 7 are to be applied retroactively and prospectively.

The bill was signed by Kentucky Gov. Matt Belvin on March 25. The bill passed in the Senate the day before following a 25-11 vote, and a 51-45 vote in the House a day earlier. Save for a few Republicans voting against the bill–eight in the House and three in the Senate–both votes showed a partisan split, with majority Republicans voting for the measure and the Democratic minority voting against (one House Democrat joined 50 Republican colleagues in approving the measure). The bill also had strong support from the Kentucky Chamber of Commerce, the Kentucky League of Cities and numerous other employer and business groups.

This move happens in a context of long-running disagreement over the question of arbitration in nursing home care agreements between the Kentucky Supreme Court and the U.S. Supreme Court. In that dispute, the nation’s top Court set down the law, but the Kentucky Court managed to get in the last word and squash an arbitration agreement.

In Kindred, the Kentucky Supreme Court refused to enforce arbitration agreements signed on behalf of two nursing home residents on the ground that since the right to a trial by jury was “constitutionally sacred” and “inviolate,” the holder of a non-specific power of attorney was barred from entering any agreement on behalf of a principal that would forfeit that right to a jury trial, such as an arbitration agreement.

The U.S. Supreme Court held that the Federal Arbitration Act  “preempts any statute rule discriminating on its face against arbitration” and “displaces any rule that covertly accomplished the same objective by disfavoring contracts that have the defining features of arbitration agreements.” It reversed the Kentucky decision in Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017) (available at http://bit.ly/2JAWZ7Q).

But in the decision, the U.S. Supreme Court remanded one of the Kindred combined cases for further consideration to examine whether a power of attorney contract was broad enough to allow the attorney to enter into an arbitration agreement on behalf of a nursing home resident.

On remand, the Kentucky Supreme Court stuck to its view that the power of attorney didn’t allow the attorney to make the arbitration agreement, and it upheld its original determination striking arbitration. Kindred Nursing Ctrs. Ltd. P’ship v. Wellner, No. 2013-SC-000431-I (Ky. S.Ct. corrected Nov. 22, 2017) (available at http://bit.ly/2Q3k18A)).

In its first week of the current term last October, the U.S. Supreme Court denied the nursing home’s request to review the case, so it won’t be heard in Washington a second time. That leaves a narrow standard related to powers of attorney that could void an arbitration agreement in Kentucky.

But the broader Snyder decision went directly against the Kindred holding, as well as last year’s Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) (available at http://bit.ly/2Y66dwK), which permitted mandatory pre-dispute arbitration agreements as a condition of employment.  Snyder therefore was likely to constitute the start of another counterattack on the Kentucky Supreme Court’s arbitration agreement jurisprudence.

Instead, the Kentucky legislature decided to take the matter into its own hands.  The new law now ensures that Snyder is nothing more than a one-off.

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The author was a CPR Institute Spring 2019 intern. 

 

Update: J&J Defeats Move For Annual Meeting Vote on Mandatory Shareholder Arbitration

By Shannon Collins

Harvard Law School Professor Emeritus Hal Scott filed a complaint in a New Jersey federal court against health care giant Johnson & Johnson on behalf of a shareholder trust seeking to force J&J to hold a shareholder vote on barring arbitration in disputes between the company and its stockholders.

The U.S. Securities and Exchange Commission had previously issued a no-action letter that allowed J&J to exclude the provision from proxy materials based on a New Jersey law interpretation.

Scott, on behalf of the Doris Behr 2012 Irrevocable Trust, alleged that J&J violated federal securities laws by excluding the proposal he sent the company in November, on behalf of the trust, from its proxy materials for the shareholder meeting, scheduled for this week.

The complaint sought declaratory judgment stating that J&J violated the federal securities laws, in addition to injunctive relief under which J&J would be required to submit supplementary proxy materials to the shareholders, including Scott’s original proposal.

The injunction would have allowed a vote to go forward at the April 25 shareholders meeting, and also include a statement from J&J affirming that Scott’s proposal violates neither federal nor New Jersey laws. The injunction also requested that  J&J be prohibited from excluding any future, similar proposals.

U.S. District Court Judge Michael Shipp, of Trenton, N.J., denied the trust’s order to show cause on March 29 in an unpublished opinion, letting the SEC letter and J&J action stand.  (Available here.)

But Prof. Scott, joined by two law firms in his work on behalf of the trust, may have tapped into a future use for mandatory arbitration.  For background, see Shannon Collins, “Mandatory Shareholder Arbitration: J&J View Passes SEC’s Test,” CPR Speaks blog (March 18). The blog post  discusses the back and forth between Scott and J&J over Scott’s shareholder proposal. The controversial proposal advocates for a change to the J&J by-laws requiring all disputes brought by shareholders against the company to go through individual arbitration.

Per J&J’s request, the SEC issued the no-action letter stating the agency would not act against J&J if the company excluded Scott’s proposal from the proxy materials for its annual shareholder meeting.

In a brief supporting a “Motion for Order to Show Cause Why a Preliminary Injunction Should Not Issue,” Prof. Scott and the trust argued that J&J violated federal securities laws by excluding Scott’s shareholder proposal from the proxy materials.

Under 17 C.F.R. § 240.14a-8, all shareholder proposals must be included in the proxy materials unless they fall under one or more of several statutory exceptions. One of these exceptions, 14a-8(i)(2), allows exclusion of a proposal if it “would, if implemented, cause the company to violate state, federal, or foreign law to which it is subject.”

The SEC premised its no-action letter in large part on a statement from the New Jersey Attorney General Gurbir Grewal, who concluded that the proposal would violate state law. (Johnson & Johnson’s headquarters is in New Brunswick, N.J.) Grewal contended that recent changes to New Jersey law voids by-laws with forum-selection clauses regarding federal securities law claims. He also relied on the Delaware Chancery Court case Sciabacucchi v. Salzberg, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018), holding that by-law amendments generally only relate to matters of internal concern, and forum selection is an external concern.

The trust’s main focus in its suit was the legal validity of its 2018 proposal. The trust argued that the arbitration-requirement proposal violates neither federal nor state law.  It also argued that the N.J. Attorney General’s opinion predicting state courts are likely to follow Delaware Chancery law prohibiting mandatory individual shareholder arbitration is not dispositive on the issue.

The trust relied principally on the Federal Arbitration Act, and the recent Supreme Court case of Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), as support for the legality of its proposal. The trust asserted that N.J. Attorney General Grewal did not identify any New Jersey statutory language or court decision that expressly applied to shareholder arbitration concerning federal securities law claims, and thus the proposal would not cause the company to violate state law.

The trust further bolstered its claim by declaring that even if New Jersey state law were to prohibit such a proposal, that state law would be preempted by the FAA, which would permit the proposal.

The FAA mandates that contractual arbitration provisions must be enforced. The trust argued that corporate by-laws are contracts between shareholders and the corporation, citing several New Jersey cases. It follows then that arbitration agreements in company by-laws should be enforced under the FAA just as they would in express contracts.

Therefore, following the Epic Systems case—which permitted predispute mandatory arbitration provisions with waivers of class processes as a condition of employment–shareholder arbitration of federal securities claims do not violate federal law. The trust stipulates that agreeing to arbitrate federal securities laws in no way waives compliance with the 1934 Securities Exchange Act. Waiver of compliance is prohibited by § 29(a).

Arbitrating securities law claims still preserves a shareholder’s right to enforce securities laws, the trust argued, it just does so through a specific proceeding.

The trust strongly advocated against the deference given to Sciabacucchi by the N.J. Attorney General, stating that it is not the law of New Jersey and that corporations are free to ignore it until it is. It also attempted to distinguish Sciabacucchi from the present situation by pointing out that Sciabacucchi concerns a forum-selection clause. Arbitration, the trust contended, is an entirely different matter because it is protected by the FAA.

Furthermore, the trust maintained that Sciabacucchi cannot be extended to another state regarding arbitration because the Sciabacucchi holding only applies to a subset of contracts; corporate by-laws and certificates of incorporation. Under the FAA, rules that forbid enforcement of arbitration agreements must apply to every contract in the state equally. Therefore, applying Sciabacucchi and treating contracts unequally would run afoul of the FAA.

Sciabacucchi held that corporate by-laws will only apply to internal affairs. Securities claims have been held to be external by the Delaware court, so J&J countered that including the proposal in its by-laws would be unenforceable.

J&J additionally consulted Pennsylvania law and concluded that New Jersey would likely follow corporate precedent from the state decision Kirleis v. Dickie, McCamey & Chilcote P.C., 560 F.3d 156 (2009). The Pennsylvania Kirleis court held in this case that arbitration clauses in corporate by-laws would not be enforceable unless shareholders expressly consent to the arbitration provision.

The trust points out, however, that the court recognized that it is generally assumed that shareholders and directors have knowledge of and accept the corporate bylaws. Emphasizing this, the trust pointed out that Pennsylvania has not affirmatively ruled that express agreement trumps the presumptive consent of by-laws by shareholders.

But J&J predicts that Pennsylvania would require express consent over a presumption of consent, and further predicts that New Jersey would use Pennsylvania as persuasive authority and follow suit. Once again, the trust pointed out that while the arbitration clause may be unenforceable, including an unenforceable provision in corporate by-laws is in no way a violation of state or federal law.

Prof. Scott’s brief criticizes the New Jersey Attorney General’s reliance on recent amendments to New Jersey corporate law by pointing out that that N.J. Stat. Ann. § 14A:2-9(5)(a), while authorizing certain forum-selection clauses in corporate by-laws, does not prohibit arbitration provisions and so the proposal does not violate any state law.

In response to the trust’s motion, Johnson & Johnson attorney Andrew Muscato, counsel to Skadden, Arps, Slate, Meagher & Flom in New York, wrote in a March 27 letter to U.S. District Court Judge Michael Shipp, in Trenton, N.J., that the trust failed to satisfy a single prong of the four-part test for a preliminary injunction.

Muscato particularly highlighted the trust’s lack of irreparable harm, pointing out the ample time the trust had to bring its claim against the company. Muscato posited that if the trust truly suffered irreparable harm, it would not have waited more than four-and-a-half months to bring suit.

The trust defended this delay in a letter also dated March 27 by claiming that it would not have had sufficient Article III standing prior to the release of the proxy materials. Up until the actual distribution of the proxy materials, the trust’s only injury was the potential for future harm, the letter stated.

The trust insisted that standing questions can be raised at any point during litigation and it refused to take the risk of bringing suit too early only to have its claims subject to rejection as premature several years down the line.

Muscato rebutted the standing issue introduced by the trust by citing several cases in which shareholders brought suit prior to the distribution of proxy materials.

Muscato insisted the reason for emergency relief was undue delay by the trust. If the trust had taken action sooner, then the complex matter could have been resolved.

Judge Shipp ultimately declined the order sought by the Trust for failure to show irreparable harm, agreeing with Muscato and J&J. (Linked above.)

* * *

Historically, courts have favored arbitration, but the shareholder arbitration requirement proposals faces a volatile moment for the alternative dispute resolution process. SEC Chairman Jay Clayton seems to be open to the idea of shareholder arbitration in a publicly traded company. But groups like Secure Our Savings have strongly advocated against forced arbitration of shareholders.

The recent #MeToo movement has resulted in a push for repeals of arbitration clauses in employment contracts, specifically as they relate to sexual harassment.

So the potential ramifications of the J&J shareholder proposal could be go beyond the parties and have an effect on corporate governance. If it passes, it even could initiate a domino effect in which company after company implements mandatory individual shareholder arbitration. Should this occur, Congress could decide to step in and create a uniform standard for these clauses . . . or bar them altogether.

Either way, there is doubt about the future of processes to address shareholder disputes.

* * *

The author is a CPR Institute Spring 2019 intern.

 

UPDATED/No Class: Supreme Court Reverses Ninth Circuit On State Law Over FAA

By Echo K.X. Wang and Russ Bleemer

The U.S. Supreme Court this morning re-affirmed that if parties want class arbitration, they need to contract for it.  Specifically.

The Court today issued a long-anticipated opinion for Lamp Plus Inc. v. Varela, No. 17-988 (April 24) (available on the Court’s website at The decision is available on the Supreme Court website at http://bit.ly/2GxwFbC), holding that as a “fundamental arbitration” question, ambiguity in a contract “cannot provide the necessary contractual basis for concluding that the parties agreed to submit to class arbitration.”

The 5-4 decision by Chief Justice John G. Roberts Jr. reverses a Ninth U.S. Circuit Court of Appeals decision that used a California state law interpretation to allow a class arbitration.  The divided appellate panel opinion inferred mutual assent to class arbitration from language in the parties’ agreement.

But the statutory interpretation principle deployed by the appeals court, relying on public policy, was rejected. “[C]lass arbitration, to the extent it is manufactured by [state law] rather than consen[t], is inconsistent with the FAA,” wrote Roberts, adding,

We recently reiterated that courts may not rely on state contract principles to ‘reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.’ . . . . But that is precisely what the court below did, requiring class arbitration on the basis of a doctrine that ‘does not help to determine the meaning that the two parties gave to the words, or even the meaning that a reasonable person would have given to the language used.’ 3 Corbin, Contracts §559, at 269–270. Such an approach is flatly inconsistent with “the foundational FAA principle that arbitration is a matter of consent.  . . .

In that key passage, Roberts cited three seminal class arbitration cases to back up his point: AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011) (available at https://bit.ly/2KJc8RE), Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) (available at https://bit.ly/2rWzAE8), and on the last point, the key Court case rejecting class arbitration unless it was permitted in the parties’ contract, Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010) (available at http://bit.ly/2Pp3Jq4).

The chief justice began and ended the opinion emphasizing Stolt-Nielsen.

Today’s Lamps Plus decision demonstrates the court’s profound conservative-liberal split. There are four dissents—the first by Justice Ruth Bader Ginsburg, joined by Justices Stephen G. Breyer and Sonia Sotomayor; two solo dissents by Breyer and Sotomayor, and the last by Justice Elena Kagan, joined by Breyer and Ginsburg, and, for one part of the opinion, Sotomayor.

Kagan’s 14-page opinion, the longest of the dissents, rejects the Court’s Stolt-Nielsen backing and suggests it’s a screen for the majority’s own preferences. She writes that the Lamps Plus holding “is rooted instead in the majority’s belief that class arbitration ‘undermine[s] the central benefits of arbitration itself.’ But that policy view—of a piece with the majority’s ideas about class litigation—cannot justify displacing generally applicable state law about how to interpret ambiguous contracts.” [Citations omitted.]

Kagan writes that the Ninth Circuit applied a neutral interpretation rule in dealing with an ambiguity.

But Roberts rejected her reasoning in the majority opinion, the only dissent discussed beyond the footnotes in his majority opinion.  He cites AT&T Mobility for the principle that the interpretation “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  He states that the same rule applies in Lamps Plus: “[The] rule cannot be applied to impose class arbitration in the absence of the parties’ consent.”

Roberts continues:

Our opinion today is far from the watershed Justice Kagan claims it to be. Rather, it is consistent with a long line of cases holding that the FAA provides the default rule for resolving certain ambiguities in arbitration agreements. For example, we have repeatedly held that ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration. See, e.g., [Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614 (1985 (available at http://bit.ly/2VmubpU); Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U. S. 1, 24–25 (1983) (available at http://bit.ly/2VhK0OE)%5D. In those cases, we did not seek to resolve the ambiguity by asking who drafted the agreement. Instead, we held that the FAA itself provided the rule. As in those cases, the FAA provides the default rule for resolving ambiguity here.

Justice Clarence Thomas wrote a separate concurrence noting that he remains skeptical of the Court’s use of the Federal Arbitration Act to preempt state law, but concurs in the majority opinion because of its backing of the Epic Systems and AT&T Mobility precedents.

* * *

 

Lamps Plus, the last of three arbitration cases to be decided in the Court’s current term, resolves a circuit splits between the Ninth and the Sixth, Third and Fifth Circuits on whether an arbitration agreement can be read to permit class wide arbitration where the agreement is silent on the matter. Compare, e.g., AlixPartne LLP v. Brewington, 836 F.3d 543, 547 (6th Cir. 2016), with Varela v. Lamps Plus Inc., No. 16-56085, 701 F. App’x 670, 673 (9th Cir. 2017)(unpublished)(available at http://bit.ly/2W66tv1), cert. granted, 138 S. Ct. 1697 (2018).

The case marks a return to a class arbitration issue after the Court’s first two 2018-2019 cases were mostly focused on other Federal Arbitration Act areas.  Both were decided in January:

  • Henry Schein v. Archer & White Sales, 139 S.Ct. 524 (Jan, 8, 2019) (available at https://bit.ly/2CXAgPw), mandating that arbitrators, rather than the courts, decide whether a case should be arbitrated in the face of an allegation that an argument for arbitration is “wholly groundless,” and
  • New Prime v. Oliveira, No. 17–340 (Jan. 15) (available at https://bit.ly/2JnrFWf), which enforced an FAA exclusion from arbitration a pre-dispute agreement with independent contractors who work in interstate transportation.

The Lamps Plus issue was “[w]hether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.”

In its statement on the question presented, the Court invoked its best-known class arbitration case, Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., which it noted held that a court could not order arbitration to proceed using class procedures unless there was a “contractual basis” for concluding that the parties have “agreed to” class arbitration. 559 U.S. at 684. The Court’s introduction to the Lamps Plus issue explained that courts may not “presume” such consent from “mere silence on the issue of class arbitration” or “from the fact of the parties’ agreement to arbitrate.” Id. at 685, 687.

That presumption carried today’s opinion, which focused on arbitration agreement ambiguity, rather than silence. The Ninth Circuit majority had inferred mutual assent to class arbitration, according to Lamps Plus’s court papers, from language stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings” and a description of the substantive claims subject to arbitration.

Plaintiff Frank Varela, filed suit in 2016 against his employer, Lamp Plus Inc., a Chatsworth, Calif., home lighting retailer. Varela, who had worked at the company for nine years, has signed documents as a condition of his employment, including an arbitration agreement.  He also provided personal information to Lamp Plus prior to starting his job.

In March 2016, Lamp Plus was subject to a phish scam attack, resulting in sensitive personal information, such as employee tax forms for 1,300 Lamp Plus current and former employees, to be sent to a third party. As a result of the breach, Varela’s 2015 income tax was fraudulently filed with the stolen information.

Varela initiated a class action suit in California’s Central District state court on behalf of current and former employees affected by the breach, asserting both statutory and common law claims for the data breach, negligence, contract breach, and invasion of privacy. Lamp Plus moved to compel individual arbitration.

The court interpreted the contract under California state law and granted Lamp Plus’s motion compel to arbitration. The court, however, found ambiguities about whether class arbitration is permissible under the employer-drafted agreement. Varela v. Lamp Plus Inc., 2016 WL 9110161, at *7 (C.D. Cal. July 7, 2016), aff’d, No. 16-56085, 701 F. App’x 670, 673 (9th Cir. 2017)(unpublished)(available at http://bit.ly/2W66tv1).

Lamp Plus argued that the arbitration should be compelled on an individual basis, because since the agreement does not mention class arbitration, there was “no contractual basis for finding that the parties intended to arbitrate on a class-wide basis.” Id. at *6. Relying on Stolt-Nielsen, Lamp Plus contended that if an arbitration clause is “silent” as to class arbitration, that parties cannot be compelled to submit their disputes to class arbitration. Id.

The district court rejected this argument. The district court distinguished the case from Stolt-Nielsen by interpreting the “silence” in Stolt-Nielsen to mean an “absence of agreement” rather than the absence of language within an agreement that explicitly refers to class arbitration (“The lack of an explicit mention of class arbitration does not constitute the ‘silence’ contemplated in Stolt-Nielsen, as the parties did not affirmatively agree to a waiver of class claims in arbitration.”) Lamp Plus, 2016 WL 9110161, at *7.

The court then found that the arbitration agreement was ambiguous as to the class claim, and interpreted the ambiguity against the contract drafter, noting that “the drafter of an adhesion contract must be held responsible for any ambiguity in the agreement”. Lamp Plus, 2016 WL 9110161, at *7 (citing Jacobs v. Fire Ins. Exch., 36 Cali. App. 4th 1258, 1281 (1995)).  Accordingly, the district court granted Lamp Post’s motion to compel arbitration, but compelled arbitration on a class-wide basis rather than an individual basis.

Lamp Plus appealed to the Ninth U.S. Circuit Court of Appeals. Before a panel of Senior Circuit Judge Ferdinand F. Fernandez, Circuit Judge Kim M. Wardlaw, and the late Circuit Judge Stephen Reinhardt, Lamps Plus argued that the parties did not intend to permit class arbitration.

In an unpublished opinion, the Circuit court affirmed the district court decision authorizing class proceedings. Varela v. Lamps Plus Inc., No. 16-56085, 701 F. App’x 670, 673 (9th Cir. 2017)(unpublished)(available at http://bit.ly/2W66tv1). Judge Fernandez authored a short dissenting opinion, in which he opined that the majority opinion as a “palpable evasion of Stolt-Nielsen.”  Id.

Lamp Plus then petitioned and was granted certiorari at the Supreme Court. Oral argument was heard on Oct. 29, 2018 (a transcript of the oral argument is available at https://bit.ly/2FukX2d).

Between the grant of certiorari and the oral argument, several organizations filed amicus curiae briefs to the Supreme Court in favor of reversing the Ninth Circuit decision, including the U.S. Chamber of Commerce, the New England Legal Foundation, the Retail Litigation Center, Inc., the Voice of the Defense Bar, and the Center for Workplace Compliance. Friend-of-the-court briefs in favor of Respondent Varela were filed by a group of contract law scholars, and the American Association for Justice. The amicus curiae briefs can be accessed from https://bit.ly/2Ojt44n.

* * *

In his brief 13-page majority opinion, Chief Justice Roberts first disposes of a late-in-the-litigation motion Varela challenging both the Ninth Circuit’s and the Supreme Court’s jurisdiction over the case. The opinion states that the determination of class over individual arbitration affects a fundamental characteristic of arbitration, and the result did not provide the defense what it sought—therefore, a final and appealable decision.

The meat of the majority opinion was reserved for the Ninth Circuit’s examination of California state law, which allowed for the class arbitration determination. It accepted the lower court’s state law “interpretation and application” that the agreement “should be regarded as ambiguous.”

But ambiguity from the state law statute wasn’t enough—“a conclusion,” Roberts writes, “that follows directly from our decision in Stolt-Nielsen.” He continues:

Class arbitration is not only markedly different from the “traditional individualized arbitration” contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration. [Citing Epic Systems and Stolt-Nielsen.] The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.

Roberts notes that in carrying out the parties’ arbitration contracting wishes and intent, courts must “recognize the ‘fundamental’ difference between class arbitration and the individualized form of arbitration envisioned by the FAA,” again citing Epic Systems, AT&T Mobility and Stolt-Nielsen.  Noting that class arbitration lacks the benefits of lower costs, greater efficiency and speed—“‘crucial differences’ between individual and class arbitration”—mutual consent is needed.

The opinion states that Stolt-Nielsen’s reasoning on silence being insufficient to infer class arbitration applies to ambiguity, too. “This conclusion aligns with our refusal to infer consent when it comes to other fundamental arbitration questions,” Roberts writes.

The chief justice explains that the Ninth’s Circuit’s use of the contra proferentem doctrine—construe the ambiguous document against the drafter—produced the result in favor of class arbitration. But the doctrine should only be invoked where “a court determines that it cannot discern the intent of the parties.” (The emphasis is Roberts’.)

Class arbitration provided by state law, explains Roberts, is inconsistent with the Federal Arbitration Act. “The general contra proferentem rule cannot be applied to impose class arbitration in the absence of the parties’ consent,” the chief justice concludes.

* * *

In addition to Justice Thomas’s concurrence, and Justice Kagan’s dissent, Justice Ruth Bader Ginsburg joined Kagan’s opinion but writes separately “to emphasize once again how treacherously the Court has strayed from the principle that ‘arbitration is a matter of consent, not coercion,’” also citing to Stolt-Nielsen at 681.

Decrying the Court’s use of mandatory arbitration in consumer disputes, Ginsburg says that the majority’s Lamps Plus decision “underscores the irony of invoking ‘the first principle’ that “arbitration is strictly a matter of consent,” citing to the majority opinion.

Invoking her own dissents in three cases, among others, Ginsburg concludes that “mandatory individual arbitration continues to thwart ‘effective access to justice’ for those encountering diverse violations of their legal rights,” and repeats her Epic Systems dissent calling on Congress to intervene.

* * *

Justice Stephen G. Breyer joined in the Kagan and Ginsburg dissents, but also provides a nine-page analysis disputing the Court’s quick work on the jurisdiction question.

Breyer writes that the case should be arbitrated as determined by the California courts. “[T]he appellate scheme of the FAA reflects Congress’ policy decision that, if a district court determines that arbitration of a claim is called for, there should be no appellate interference with the arbitral process unless and until that process has run its course,” he writes.

Breyer notes later that Lamps Plus successfully obtained appellate review by “transform[ing]” an interlocutory order in a final decision.

* * *

Justice Sonia Sotomayor also joined Justices Ginsburg’s and Kagan’s separate dissents, but added her view that the Court’s class arbitration view is, at best, highly confused.  She began:

This Court went wrong years ago in concluding that a “shift from bilateral arbitration to class-action arbitration” imposes such “fundamental changes,” Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662, 686 (2010), that class-action arbitration “is not arbitration as envisioned by the” Federal Arbitration Act (FAA), AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 351 (2011). See, e.g., id., at 362–365 (Breyer, J., dissenting). A class action is simply “a procedural device” that allows multiple plaintiffs to aggregate their claims, 1 W. Rubenstein, Newberg on Class Actions § 1:1 (5th ed. 2011), “[f]or convenience . . . and to prevent a failure of justice,” Supreme Tribe of Ben-Hur v. Cauble, 255 U. S. 356, 363 (1921).

Sotomayor says that the FAA should not preempt a “neutral principle of state contract law,” at least not in this instance. She concludes, “[T]he majority today invades California contract law without pausing to address whether its incursion is necessary. Such haste is as ill-advised as the new federal common law of arbitration contracts it has begotten.”

 

* * *

Wang was a Spring 2019 CPR Institute intern, and a student at Brooklyn Law School. Bleemer edits Alternatives, which the CPR Institute publishes. See altnewsletter.com.

 

“Arbitration in America” – A Summary of the Senate Judiciary Committee Meeting

By Echo K.X. Wang 

An April 2 Senate Judiciary Committee hearing, “Arbitration in America,” chaired by North Carolina Republican Lindsey Graham, examined the values of the practice, focusing on mandatory arbitration clauses in consumer contracts.

The Senate is closely divided on the subject. Democrats have pushed strongly against mandatory arbitration clauses in reaction to Supreme Court decisions. In the past two months, several bills limiting or eliminating mandatory arbitration clauses in consumer contracts have been introduced.

In February, Rep. Hank Johnson, D., Ga., joined Sen. Richard Blumenthal, D., Conn., to introduce the Forced Arbitration Injustice Repeal Act–the FAIR Act–in the House (H.R. 1423), which would “prohibit predispute arbitration agreements that force arbitration of future employment, consumer, antitrust, or civil rights dispute.” (Text and information can be found at https://bit.ly/2UTQoeO.)

More recently, on April 10, Sen. Sherrod Brown, D. Ohio, introduced another bill, Arbitration Fairness for Consumers Act (S. 630), which would restrict mandatory arbitration and class action waivers in contracts that relate to a “consumer financial product or service.” (S.630 can be found at https://bit.ly/2UvCuQs).

The bill would reverse last fall’s vote by the Senate to overturn Consumer Financial Protection Bureau rules that barred mandatory pre-dispute arbitration combined with class processes in litigation and arbitration in consumer financial services contracts. The CFPB rule, which had been in the works for more than four years, was rescinded by a 51-50 Senate vote, with Vice President Mike Pence casting the deciding vote.

For more details on these bills and more, see Vincent Sauvet, New Push Coming for Familiar Arbitration Bills? CPR Speaks blog (April 3) (available at https://bit.ly/2UynZeJ).

While the proposals are facing pushbacks from Republicans and business owners, the committee meeting provided a venue for the two sides to engage in discussions. Most important, the fact that Sen. Graham organized and led this meeting signals that there is a bipartisan opening for negotiation on arbitration reform.

In his initial statement, Graham noted that while arbitration has a place in society, everything good for business is not necessarily best for society. The hearing, he said, therefore sought to address the applicability of arbitration where it conflicts with social issues, in matters including sexual harassment and employment disputes.

Sen. Blumenthal followed, noting that “a right without remedy is [a] dead letter.” Throughout the meeting, Chairman Graham repeatedly stated he wanted to find a “middle-ground” solution to allow businesses to thrive while at the same time provide consumer protection.

But during the two-hour hearing, the divergent views clashed more than they found common ground. The Judiciary Committee listened to testimony from a small business owner, a Navy Reservist, practitioners on both sides, and business owners, all focusing on whether there should be a limit or bar to the use of “forced” arbitration agreements.

The hearing participants discussed the degree to which mandatory arbitration harms consumers, the effects of class-action waivers, and the way that businesses can be affected by mandatory arbitrations.

Sens. Graham and Blumenthal, as well as Sen. Dianne Feinstein, D., Calif., and Sheldon Whitehouse, D., R.I., spoke in favor of establishing limits to the arbitration use.

Kevin Ziober, a Newport Beach, Calif., Navy reservist and federal employee, spoke about his experience in which he was forced to arbitrate an employment dispute. Ziober worked as a federal employee for six months when he signed a mandatory arbitration agreement as a condition to keep his job.

When Ziober left his job to join the Navy Reserve, he was fired from his position on the last day of work. As a result, he was forced to arbitrate his rights under the Uniformed Services Employment & Reemployment Rights Act. Ziober argued that “no Americans should be denied the choice to enforce their rights.”

In response to a question from Sen. Joni Ernst, R. Iowa, on the impact of being forced into arbitration, Ziober described the anxiety and hardship he faced after being fired, knowing that he would not have a job after serving in the military. Ziober advocated that “an option to go to court should be something all servicemen be allowed.”

Prof. Myriam Gilles, a professor at New York’s Benjamin N. Cardozo School of Law, argued that when the Federal Arbitration Act was enacted in 1925, Congress intended to help ensure businesses so that their “agreements to arbitrate with each other can be enforced.” But, she said, the FAA was never meant to be applied to massive employment arbitrations that strip away individuals’ rights under state and federal law, providing a litigation shield for companies. Nor was it meant to be used in take-it-or-leave-it boilerplate agreements against individuals with no bargaining power, according to Gilles.

In response to a question from Sen. Graham, Gilles clarified that she does not wish to “do away” with arbitration. “We only want to get rid of arbitration clauses that are forced upon consumers and employees who have no choice,” she said.

Prof. Gilles also spoke extensively against class action bans, noting that it is often too expensive and time intensive for each individual to arbitrate their cases alone. As a result, forced arbitration provisions are shielding companies from liability, she said.

Alan Carlson, an owner and chef of Italian Colors Restaurant in Oakland, Calif., described his experiences with arbitration clauses as a small business owner. Carlson said he was forced to arbitrate a claim with the credit card company American Express, which took more than 10 years to conclude, and included a trip to the U.S. Supreme Court that sent him to arbitration. (See American Express Co. v. Italian Colors Restaurant, 559 U.S. 1103 (2010) (available at http://bit.ly/2Zb41FD).)

He said he was “shocked” when he learned that the documents he signed included a mandatory arbitration clause. He noted that small businesses like his have no bargaining power to negotiate contracts with credit card companies, while big companies like Walgreens and Safeway have the power to negotiate and remove mandatory arbitration clauses in their contracts with those same companies.

Carlson stated that “small businesses do not get their day in court because they have no power,” and that it is impossible for small businesses to hold large corporations accountable for their actions.

Carlson’s statement evoked strong empathy in Sen. Blumenthal, who echoed the unfairness that the big companies had their day in court, but Carlson was denied his. In response to questions from Blumenthal and Sen. Amy Klobuchar, D., Minn., Carlson stated that mandatory arbitration handcuffs and prevents small businesses from “getting a fair shot of leveling the playing field.” In addition, Carlson stated that the companies often don’t give contracting parties enough time to get through all the fine print “unless you have an attorney on hand.”

  1. Paul Bland, Jr., executive director of Washington,, D.C., public interest law firm Public Justice, argued that forced arbitration clauses are “rigged and unfair.” He notes that it is getting harder to challenge arbitration clauses, and the clauses are often written to the disadvantage of consumers.

As examples, Bland cited to a Consumer Financial Protection Bureau report that suggests even when a person is directed to read an arbitration provision, only 9% of the people knew it means they cannot go to court.

Furthermore, Bland cited an instance where a rape victim was forced to arbitrate, and was given a choice to select from a list of arbitrators. But, explained Bland, all of the arbitrators were defense attorneys that he said presumptively are pro-corporations.

Previous witnesses Kevin Ziober and Alan Carlson affirmed this point, stating that neither of them had a choice in selecting their arbitrators. Chairman Lindsey Graham expressed concern about this practice, and stated that he will look into the issue.

New Jersey Democratic Sen. Cory Booker spoke passionately against arbitration provisions, arguing that it unfairly stacks the deck against consumers and impedes individuals’ ability to seek redress. Citing a study suggesting that big corporations win 98% of arbitrations, Booker exclaimed, “This is not justice. This is not equal justice. This is corporate favoritism.”

Finally, Sen. Dick Durbin, D. Ill., suggested that mandatory arbitration clauses should be barred from student agreements to attend for-profit college, especially those that guarantee job placement. He said that in these situations, the arbitration clauses especially harm middle-income people.

Durbin noted that that if a student starts with a busboy job, goes to a for-profit school paying tens of thousands of dollars yet still comes out a bus boy, the school considers that a “placement” and can’t be sued for misrepresentation.

Arbitration proponents then had a chance to fire back, demanding that consumer arbitrations be allowed to continue.

Sen. Chuck Grassley, R., Iowa, advocated to have more transparency in arbitration clauses to help bring accountability. He said that “consumers should know what they are agreeing to.” He raised the concern that banning mandatory pre-dispute arbitration clauses may impose extraordinary costs to corporations, which may in turn result in the costs being passed down to consumers.

Alan Kaplinsky, a partner at Ballard Spahr in Philadelphia and longtime business arbitration advocate, argued that arbitration under the FAA is important for companies. He said that the arbitration system is dynamic, and most of the times it works for both companies and individual consumers. He also rejected the argument that arbitration provisions offer no choices for consumers.

When questioned by Sen. Grassley about best practices to enforce transparency in arbitration clauses, Kaplinsky noted that it is important to draft arbitration agreements to “create fundamental fairness, give the consumer or employee the right to reject or opt out of the arbitration within some reasonable period of time.” He notes that these are not practices “required” under existing arbitration rules such as those issued by providers like the American Arbitration Association and JAMs.

Kaplinsky agreed with Sen. Grassley’s point that banning arbitration would create billions of dollars in costs for corporations, in addition to costs in defending against potential influxes of class action suits.

Victor E. Schwartz, a co-chair at the Public Policy Practice Group of Shook, Hardy, & Bacon, and a well-known as a Washington tort reform advocate and a supporter of class-action restrictions, also argued for consumer arbitration. He said that arbitration is generally a cheaper and faster alternative to litigation.

Schwartz also argued that consumers have the duty to read contracts and agreements, even if the clause is buried within the agreement. He rejected the view that consumers lack choice, noting that consumers enter binding arbitrations willingly. “You can choose to go to an employment office that does not require you to sign binding arbitration,” he said.

In addressing the argument that mandatory class action waivers harm the ability to address smaller claims, Schwartz countered that most employees are not eligible for class action anyway, given that the cases are usually factually different, and therefore class action is not a viable alternative.

Finally, Schwartz criticized plaintiffs’ attorneys, noting that since they usually are not paid by the hour, they are unlikely to accept litigation cases to represent employees in small claims cases. Thus, he said, in cases involving claims of $20,000-$30,000, arbitration is likely the only way for employees to get their claims addressed.

* * *

To read further about this committee meeting from a different perspective, see Ellis Kim, “Arbitration Gets the Spotlight at Senate Judiciary Hearing,” Law.com (April 2) (available at https://bit.ly/2Ug7KxU).

A video of the hearing, as well as transcripts of the individuals’ remarks, is available from the Senate Judiciary Committee here: http://bit.ly/2KBiB6c.

* * *

The author is a Spring 2019 CPR Institute intern, and a student at Brooklyn Law School.

 

Prospective Higher Education Reform to Ban Arbitration of Student Claims

By Vincent Sauvet

Another legislative proposal that would curtail arbitration was introduced in Congress on March 26.

The PROTECT Students Act of 2019 (S.867) was introduced on the Senate floor by New Hampshire Democrat Maggie Hassan. The bill, a general higher education reform which includes provisions related to institutions oversight and accountability, student loans and healthcare, would ban arbitration of claims brought by students against their institutions.

This follows up on CPR Speaks’ recent post on recent legislative efforts by congressional Democrats to limit the use of arbitration in various kind of disputes. See “New Push Coming for Familiar Arbitration Bills?” (April 3).

The text of Hassan’s bill would create add an exception to the enforcement of Chapter 1 of U.S. Code Title 9—the Federal Arbitration Act. It would bar enforcement of arbitration agreements in an enrollment agreement made between a student and an institution of higher education.

Combined with a prohibition for the institution to require a student to agree to, and enforce “any limitation or restriction on the ability of a student to pursue a claim, individually or with others, against an institution in court,” the provision would effectively ban even the possibility of arbitration of a claim a student may have against their institution.

Although the PROTECT Act is not really focused on arbitration—the name is an acronym for “Preventing Risky Operations from Threatening the Education and Career Trajectories of Students Act of 2019–it nevertheless includes provisions that can be found in other bills specifically targeting arbitration.

In fact, similar provisions are the entire point of the closely related Court Legal Access and Student Support (CLASS) Act of 2019.  The bill, introduced on Feb. 28 as S.608 by Sen. Richard Durbin, D., Ill., and as H.R. 1430 in the House by Rep. Maxine Waters, D., Cal., was part of a flurry of arbitration bills spearheaded by the FAIR Act of 2019, discussed in the previous CPR Speaks post.

Both the PROTECT and CLASS acts have been referred to committees and await further action.

While all of these bills face a tough climb to passage, the inclusion of such provisions in sector- specific reform bills could contribute to a “normalization” of criticism of arbitration.

* * *

The author, an international LLM student at the Benjamin N. Cardozo School of Law in New York, is a 2019 CPR Institute spring intern.