Arbitration - Congress Considers Bill to Invalidate Pre-Dispute Arbitration Clauses for Consumers, Employees, and Franchisees. - Arbitration Fairness Act of 2007, S. 1782, 110th Cong. (2007)

Article excerpt

Arbitration has been hailed since at least the 1920s as one solution to the overcrowding of courts and complexity of litigation. Yet it may be failing to live up to its promises, at least for small players with limited bargaining power. A recently proposed piece of legislation purports to address shortcomings in the arbitration process, largely by invalidating the binding effect of pre-dispute arbitration clauses for certain classes of contract parties. This act would provide some protections for consumers and employees, and limited protections for franchisees as well. However, if Congress truly wishes to protect individuals in positions of inferior bargaining power, it may need to consider changing aspects of the arbitration process itself. Additionally, Congress may need to clarify its policy with regard to franchisees for the proposed legislation to have its most potent impact.

On July 12, 2007, Senator Russ Feingold proposed the Arbitration Fairness Act of 2007 (AFA). (1) The bill purports to address numerous failings of current arbitration practice in the United States by amending the Federal Arbitration Act (2) (FAA), which, along with subsequent case law interpreting it, largely shapes current arbitration practice. The FAA, passed in 1925, was initially designed to permit arbitration agreements to be enforceable across state lines. (3) Advocates of the FAA emphasized both the business and legal advantages of increasing arbitration's usefulness. (4) In addition to these gains, Congress hoped to confront longstanding suspicion of arbitral proceedings by promoting a policy favoring arbitration. (5) By its terms, the FAA implies a preference for extremely limited judicial review. While it permits the courts to enforce an agreement to arbitrate, (6) it allows review and possible reversal of an arbitral award only on narrow procedural grounds. (7)

For many years following the passage of the FAA, courts took a relatively modest approach in considering the scope of pre-dispute arbitration clauses. For example, in 1953 the Supreme Court refused to enforce an agreement to arbitrate, stating that the right to a judicial forum could not be waived. (8) Over time, however, the Supreme Court articulated two doctrines that gave pre-dispute arbitration clauses a uniquely powerful position among contracts. First, the separability doctrine effectively provides the arbitration clause with "its own legal identity." (9) A second doctrine, known as the kompetenz-kompetenz doctrine, gives the arbitrator sweeping authority to decide on matters concerning "the validity or the scope of the agreement to arbitrate." (10) In practical terms, these doctrines combined mean that even when the contract itself apparently contains problems of formation or illegality that would normally render an entire contract invalid, the arbitration clause is still binding; an arbitrator rather than a court must evaluate the validity of the contract. (11)

Despite the FAA's original focus on commercial settings, (12) judicial decisions interpreting the FAA have expanded its scope to reach all types of contracts. For example, the Supreme Court is credited with elaborating doctrines on arbitration that apply "to claims arising under federal statutes; to employment disputes; to consumer disputes; and finally to consumer class actions." (13) A burgeoning business of professional organizations has developed to accommodate the demand for the hundreds of thousands of arbitrations conducted annually.

The AFA is the attempt of some members of Congress to rein in expansive interpretations of the federal policy favoring arbitration. (14) The bill reflects concern about the fact that consumers often have little or no choice in whether to submit to arbitration, the pressures on arbitrators to make decisions favorable to large repeat players, the injustices that can result from the lack of transparency inherent to arbitration, and the fact that the federal policy in favor of arbitration has been used to justify even egregious breaches of individuals' rights. …