Challenging Arbitration Agreements for Unconscionability: An Uphill Battle for Employees and Others

Article excerpt

In stating that contracts to settle "by arbitration" controversies involving commerce "shall be valid, irrevocable, and enforceable," the Federal Arbitration Act (FAA) clearly expresses a preference for arbitration over litigation. The FAA leaves the door ajar for the possibility that arbitration agreements are subject to nullification if "grounds ... exist at law or in equity for the revocation of any contract."1 Consistent with this provision, courts have recognized a number of grounds for invalidating arbitration agreements, one of which is unconscionability arising from excessive economic power of one party.

The settled law is that "private agreements to arbitrate are enforced according to their terms" without regard to the subject matter of the dispute and subject only to the threshold issue as to whether the clause is unconscionable.2 The FAA's endor sement of arbitration was incorporated into the original Uniform Arbitration Act, and continued in the revised UAA (RUAA) approved in 2000 by the National Conference of Com missioners on Uniform State Laws (NCCUSL), which has been adopted in some 14 jur isdictions and is pending in a few others.3 What is true at the federal level is generally (although not universally) true at the state level. As a result, parties who desire to be released from the obligation to arbitrate face an uphill battle when they seek to have a court declare an arbitration agreement invalid and unenforceable. What is termed unconscionable by the complaining party may be no more than a subjective sense of oppressiveness. Too frequently, parties seeking relief from arbitration agreements offer argument rather than evidence. They fail to understand that no amount of legal argument can persuade a court without factual evidence.

The uphill nature of the complaining party's battle is evidenced in three recent decisions discussed in this article: one by New York's highest court, another by the 2nd Circuit, and the third by a district court in the same circuit. Col lectively, they illustrate the strength of the policy in favor of enforcing arbitration agreements and the difficulty of invalidating such agreements for unconscionability in New York State and the 2nd Circuit, courts at the center of commerce in the United States. It has been done but it is a Sisy phean task.4

The purpose of the FAA was to reverse judicial hostility to private arbitration agreements and "to place arbitration agreements on the same footing as other contracts."5 This meant simply that such agreements should be enforced as written. As explained by the Supreme Court in Southland v. Keating, "We see nothing in the [Federal Arbitration] Act indicating that the broad principle of enforceability is subject to any additional limitations under state law than the generally applicable contract defenses of fraud, duress, or unconscionability. 6 In Volt Information Sciences v. Leland Stanford Jr. University, the Supreme Court observed that the parties may limit by contract the issues that they will arbitrate, or opt for a broad arbitration clause that encompasses all disputes. They also may agree to arbitrate "gateway" arbitrability questions.7 In Rent-A-Center v. Jackson, one of the Court's most recent decisions, the Court emphasized that arbitration is a matter of consent, not coercion, "so parties are generally free to structure their arbitration agreements as they see fit."8

In many challenges to the enforceability of an arbitration agreement, the complaining party alleges that the repugnant contract is one of adhesion, a contract prepared by the party with greater bargaining power that is essentially non-negotiable. However, adhesion contracts generally are enforceable. The business community argues that without them, little business would be conducted.

Another often-challenged provision calls for the parties to share arbitration fees and costs, which include the arbitrator's compensation, but not attorney or witness fees. …