March 03, 2019
Proposed legislation seeks to limit the reach of the FAA and help potential plaintiffs (and class action lawyers) avoid mandatory arbitration. This alert discusses what businesses need to know.
On Thursday, February 28, 2019, Senator Richard Blumenthal (D-Conn.), together with House Judiciary Committee Chairman Jerrold Nadler (D-NY) and Subcommittee Chairs Hank Johnson (D-GA) and David Cicilline (D-RI), announced a coordinated bicameral legislative effort by Democrats to narrow the application of the Federal Arbitration Act (the “FAA”), 9 U.S.C. §§ 1-16. In particular, they seek to “restore” workers’ ability to pursue class actions against employers and otherwise to avoid mandatory arbitration. The newly introduced legislation, entitled The Forced Arbitration Injustice Repeal Act of 2019 (the “FAIR Act”), S. 635, H.R. 1423, represents the most recent political reaction to the Supreme Court’s continuing line of decisions requiring enforcement of mandatory arbitration agreements—including those with class waiver provisions—according to their terms under the FAA. Additional anticipated bills with similar anti-arbitration goals were unveiled, but not officially introduced by their congressional sponsors.
While much of the initial coverage of the FAIR Act focused on its expected employment law features, in fact the legislation would seek to bar arbitration agreements in many consumer, antitrust and civil rights disputes, as well as to preclude various provisions that would waive class action claims by both individuals and businesses. Like other attempts at broad arbitration prohibitions in the past several decades, such as the perennial “Arbitration Fairness Acts” of 2007 through 2018, the bill will almost certainly face decisive opposition in the Republican-controlled Senate and from the White House.
Over the past decade, employers’ uses of properly designed pre-dispute mandatory arbitration agreements have been repeatedly blessed by the Supreme Court (and, to a large extent, by many lower courts). Businesses have generally benefitted from these pro-arbitration decisions because many employers prefer to arbitrate individual claims rather than face potentially more costly, and less predictable, class action litigation in court. For years, Nixon Peabody’s Arbitration team, Class Action team and Labor and Employment team have closely followed legal developments in this area as plaintiffs’ lawyers looked for ways to circumvent the FAA’s preference in favor of arbitration (and the Supreme Court’s consistent upholding of that preference).
In May 2018, for example, the Supreme Court handed down its Epic Systems decision, holding that employers do not violate the National Labor Relations Act by forcing workers to relinquish their right to pursue class or collective actions through waiver provisions embedded in an arbitration provision in an employment agreement. More recently, in January of this year, in Henry Schein, Inc. v. Archer and White Sales Inc., the Court ruled in favor of strictly applying the FAA to a contract dispute subject to mandatory arbitration, holding that when a contract delegates the question of arbitrability to an arbitrator, courts must respect that delegation even if the arguments in favor of arbitrability appear “wholly groundless.” In other pending cases, the justices have continued to signal a pro-business stance on arbitration enforcement between employers and workers.
For many years, there have also been dissents to this established jurisprudence. Justice Ginsburg, in her Epic Systems dissent, asserted the existence of a “historic” imbalance in workplace rights and called for “[c]ongressional correction of the Court’s elevation of the FAA over workers’ rights[.]” A barrage of critics’ voices, most recently flavored in part by the #MeToo movement, have hypothesized that arbitration encourages employer misconduct by forcing aggrieved employees to resolve disputes privately. At a press conference on the proposed FAIR Act, sponsoring Senator Blumenthal (consistent with his positions on prior, similar bills) described arbitration as a “rigged system” that is “unfair, unjust [and] un-American.”
Some advocates claim that up to 56% of the private-sector labor force is subject to enforceable, mandatory pre-dispute arbitration provisions. Although arbitration is not automatically confidential, many employers also include confidentiality provisions in their arbitration clauses. When they can, it appears that many businesses do consider pre-dispute arbitration provisions for their labor force.
On the other hand, arbitration is hardly universal. Some businesses, including some well-known Silicon Valley companies and a few select law firms facing law student boycott pressure, have recently made highly publicized moves away from mandatory pre-dispute employment arbitration.. The FAIR Act would make such changes away from arbitration mandatory for virtually all employers, as well as exclude a wide range of other disputes from arbitration. Like some prior bills seeking to restrict arbitration, for example, the FAIR Act would preclude pre-dispute arbitration clauses for sex, race and other types of discrimination claims by employees (and by independent contractors, who comprise a considerable percentage of the American workforce). The bill would also preclude pre-dispute arbitration clauses for most consumer claims, such as those involving credit cards, cell phone service or nursing home admissions.
On its face, the FAIR Act would not ban arbitration entirely. It would, for example, leave room for employers and employees to choose arbitration once a dispute has arisen (but not before). The problem for businesses, of course, is that this eliminates the very predictability that is often an important benefit of contractual dispute resolution provisions.
While anti-arbitration advocates generally contend that mandatory arbitration cuts people off from traditional avenues of justice, there is little focus on the ability (or not) of existing court systems to handle small matters at high volumes effectively and fairly without additional funding, or on the availability (or not) of lawyers for such purposes. Anti-arbitration advocates will cite to selected examples of unfair practices and debatable claims about average or median outcomes. (Because the vast majority of lawsuits end in settlements in which amounts need not be public, such statistics face significant barriers to accuracy.) Businesses will likely focus opposition to the FAIR Act on the potential for lower-cost and faster dispute resolution outside the court system, and cite studies supporting that position. Both sides have been honing their respective arguments for years.
While arbitration has been roundly criticized by certain groups and finds itself cast as a villain in the #MeToo movement, the FAIR Act is unlikely to advance beyond the House in today’s government, given that Republicans control the Senate. (Indeed, similar measures have failed to pass for many years even when Democrats controlled both houses.) Moreover, the current president would not be likely to sign the FAIR Act into law even if it did pass both houses this year.
The importance of the proposed legislation, however, cannot be understated: it is a reminder to every business and workplace participant to consider the pluses and minuses of the particular dispute resolution choices they make. For businesses with existing arbitration provisions, it is worth reviewing them annually with fresh eyes and a sensitivity to the current environment. For businesses without such provisions, it is worth reconsidering whether they can be helpful because, for the present, arbitration clearly remains a useful tool for managing liability and risk.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.