Mandatory Arbitration and the Growing Power of Corporations

The Federal Arbitration Act (FAA) was created by Congress in 1925 in order to validate the enforceability of arbitration agreements. These agreements are informal, streamlined adjudications that were intended to resolve disputes by replacing the cumbersome trial process.[1] While this concept appears relatively clear-cut, there have been numerous instances of litigation surrounding the validity and enforceability of mandatory arbitration. What seems to be a simplified resolution process has instead become a dangerous obstacle wherein the rights of consumers to take companies to court via lawsuits are limited.

A major Supreme Court case where consumers were pitted against companies and their binding mandatory arbitration contract clauses was AT&T Mobility LLC v. Concepcion (2011). After a dispute between the Concepcion family and AT&T Mobility over a sales tax being charged on allegedly “free phones,” the Court ruled in favor of AT&T’s motion to compel arbitration on the Concepcion family, as opposed to a class action lawsuit initiated by the family over the matter. The significance of this decision is two-fold: it validated the “fundamental principle that arbitration is a matter of contract”[2] and it preempted the California Supreme Court decision in the case Discover Bank v. Superior Court (2005) which found class action waivers in arbitration agreements to be unconscionable in certain situations.[3]

This decision validated the contractual status of arbitration agreements and established the precedent that the enforcement of arbitration agreements shall be given the same stringent enforcement guidelines as other forms of contracts. Following the Concepcion decision, this principle has been upheld in several cases such as in American Express Co. et al. v. Italian Colors Restaurant et al. (2013). In this case, the Italian Colors Restaurant brought a lawsuit against American Express on the grounds that American Express violated United States antitrust laws with their mandatory arbitration clause in their “Card Acceptance Agreement” contract. However, due to the contract nature of the agreement, the Court held that other courts must “rigorously enforce arbitration agreements according to their terms,” as established in AT&T v. Concepcion.[4] Finding exceptions within regular contracts is very challenging in and of itself; thus—after American Express Co. v. Italian Colors Restaurant— it has become even more difficult for people to work around and find exceptions within the rigid arbitration agreements found in contracts.

When discussing mandatory arbitration, it is important to note the aforementioned Discover Bank decision because of its connection to the ruling in AT&T v. Concepcion. The Discover Bank case is so significant because its ruling, handed down from the California Supreme Court, championed the rights of consumers and their right to invalidate class action waivers in arbitration agreements. The California Supreme Court held that these waivers were unconscionable on the grounds that 1) the matter was an adhesion contract 2) the disputes between the parties involved small amounts of damages and 3) the plaintiff alleged a deliberate scheme to defraud by the defendants. The Concepcion case, though, found this decision “to stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” and therefore held that the FAA preempted the California Court ruling.[5] The preemption of the Discover Bank decision established the FAA as the reigning power over arbitration, minimizing state influence on the matter, and tightening the grip that arbitration contracts had over consumers and their right to trial.

Such a tightened grip of arbitration contracts through the courts has not been limited to consumer-company agreements— courts have recently ruled on arbitration contracts regarding employee-employer agreements. The cases Epic Systems Corporation v. Lewis (2018), Ernst & Young LLP v. Morris (2018), and National Labor Relations Board v. Murphy Oil USA, Inc. (2018), were a conglomerate series of cases that all dealt with employees contracting into individualized arbitration agreements to resolve any intra company disputes.[6] As the basis for their case to invalidate their arbitration agreements, the employees used Section 7 of the National Labor Relations Act (NLRA) and the savings clause of the FAA. Section 7 of the NRLA grants employees the right to engage in protected concerted activities such as “[bargaining] collectively through representatives of their own choosing,”[7] and the savings clause of the FAA allows for the invalidation of arbitration agreements given that it can be shown to violate a pre-existing federal statute (in this case, the NLRA)[8]. Despite the employees’ attempts to invalidate their arbitration agreements based on the above statutes, the Court again ruled in favor of the FAA, holding that “The Arbitration Act requires courts to enforce agreements to arbitrate, including the terms of arbitration the parties select.”[9] The implications of this decision are huge, as they exemplify and confirm the Court’s long standing position in favor of arbitration. With each sweeping decision, the right of Americans to initiate lawsuits is being increasingly restricted.

While some contend that entering into a contract is not compulsory by nature, it is important to note that hundreds of companies utilize this practice and control market schemes, leaving Americans with minimal alternatives for products and employment. Corporate giants such as DirecTV, Verizon, T-Mobile, Wells Fargo, Charles Schwab, Dell, Starbucks, Ticketmaster, and so many others engage in the predatory practice of binding consumers and employees in contracts that sign away their right to take them to court.[10] According to a study by the Economic Policy Institute, 56.2% of private-sector employees not affiliated with a union are bound by contracts that force mandatory arbitration procedures. Similarly, among companies with 1,000 or more employees, 65.1% have mandatory arbitration policies that must be agreed upon before employment.[11]

As more and more companies implement mandatory arbitration procedures, the future of consumer and employee rights seems precarious. In the cases following AT&T Mobility LLC v. Concepcion, it appears to be that the Federal Arbitration Act reigns supreme over all issues dealing with arbitration contracts and their enforceability. Unbeknownst to the Court or not, this precedent may create the foundation for a potential abuse of power, as it increasingly forces Americans to sign away their right to sue in court.

[1] Shimabukuro, Jon O., and Jennifer A. Staman. Mandatory Arbitration and the Federal Arbitration Act. Report. Congressional Research Service. 1-17.

[2] AT&T Mobility LLC v. Concepcion et ux., 23 Touro Law Leon D. Lazer Supreme Court Review (April 27, 2011).

[3] Supreme Court Finds the Discover Bank Rule Preempted by FAA. Report. Report From Washington. Washington D.C.: Simpson Thacher & Bartlett LLP., 2011. 1-4.

[4] American Express Co. et al. v. Italian Colors Restaurant et al., 25 Touro Law Leon D. Lazer Supreme Court Review (June 20, 2013).

[5] AT&T Mobility LLC v. Concepcion et ux., 23 Touro Law Leon D. Lazer Supreme Court Review (April 27, 2011).

[6] "Epic Systems Corp. v. Lewis." Oyez. Accessed August 14, 2018.

[7] National Labor Relations Act, §§ 7-7-7 (National Labor Relations Board 1935).

[8] National Labor Relations Act, §§ 7-7-7 (National Labor Relations Board 1935).

[9] Epic Systems Court v. Lewis (May 21, 2018).

[10] "Forced Arbitration Rogues Gallery." Panama-U.S. FTA Overview, Public Citizen. Accessed August 14, 2018.

[11] Colvin, Alexander J.S. The Growing Use of Mandatory Arbitration. Report. Economic Policy Institute. 2017. 1-8.