Arbitration About Arbitration.

Author:Horton, David
 
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The U.S. Supreme Court's interpretation of the Federal Arbitration Act (FAA) has nearly eliminated consumer and employment class actions, sparking vigorous debate. But another important development in federal arbitration law has flown largely under the radar. Traditionally, judges granted motions to compel arbitration only after confirming that the parties had formed a valid agreement to arbitrate that applied to the underlying lawsuit. But now, through the use of "delegation clauses," businesses are giving arbitrators the exclusive power to decide these issues. Increasingly, critical questions about the arbitration--including whether the process is fair--are being resolved in the arbitration itself.

This Article gives this trend the attention it deserves. It demonstrates that courts once regarded agreements to arbitrate about arbitration with greater skepticism than agreements to arbitrate the merits of a case. However, in 2010, the Supreme Court seemed to cast doubt on this distinction in Rent-A-Center West, Inc. v. Jackson by opining that delegation clauses are their own freestanding arbitration clauses: (1) agreements to arbitrate disputes (2) over the broader agreement to arbitrate the underlying complaint. Seen this way, delegation clauses are entitled to the same extraordinary deference enjoyed by conventional arbitration provisions.

This Article challenges that account of delegation clauses. Drawing on the FAA's text and history and reading Rent-A-Center carefully, it argues that agreements to arbitrate the scope or enforceability of an arbitration clause should not enjoy the same exalted status as agreements to arbitrate substantive claims. Instead, delegation clauses should be understood as watered-down arbitration clauses that are more amenable to regulation than industrial-strength agreements to arbitrate a cause of action. Finally, this Article explains how its thesis would help resolve many of the questions about arbitral power that are currently dividing courts.

Table of Contents Introduction I. The Rise of Arbitration About Arbitration A. The Early Years B. The Arbitration War C. Rent-A-Center II. Rethinking Arbitration About Arbitration A. Delegation Versus Arbitration B. Reading Rent-A-Center Narrowly III. Doctrinal Implications A. Clear and Unmistakable B. Assent to the Container Contract C. Wholly Groundless D. Unconscionability E. Limits on the FAA Conclusion Introduction

Uber drivers recently filed a wave of class actions challenging the popular ridesharing service's labor practices. (1) Uber's first line of defense was fine print. The company argued that the plaintiffs assented to its software license and online services agreement by accessing its smartphone application--which they needed to do in order to pick up passengers--and clicking "Yes, I agree." (2) This contract stated that drivers needed to resolve any lawsuit against Uber in arbitration rather than in the judicial system. (3) It waived the drivers' right to bring a class action and required them to pay part of the arbitrator's fees. (4) But it did not stop there. In a seeming paradox, it also mandated that disputes over the '"validity of the arbitration provision ...' be decided by the arbitrator." (5) Citing this language, Uber asserted that an arbitrator, not a court, must decide whether the agreement to arbitrate the drivers' labor claims was enforceable. (6)

In 2002, Shirley Douglas opened an account with Union Planters Bank. (7) She agreed to arbitrate any future dispute arising out of her contract with the company, including those involving the "scope of th[e] arbitration provision." (8) Eight months later, Douglas closed her account. (9) In 2005, Union merged with Regions Bank. (10)

In 2007, Douglas was injured in a car accident. (11) She received a $500,000 settlement from the other driver. (12) One of Douglas's lawyers deposited these funds into his client trust account--which happened to be at Regions--and then embezzled money from the account. (13) In 2012, Douglas sued Regions in state court for failing to prevent her attorney's wrongdoing. (14) Regions responded by removing to federal court (15) and invoking the arbitration provision that governed Douglas's 2002 account with Union Planters. (16) Douglas protested that her current claims against Regions had nothing to do with her long-defunct contract with Union Planters. (17) As Douglas put it, her "allegations [did] not relate in any way to the Union Planters account or any banking relationship between [her] and Regions." (18) But Regions countered that this was an issue about the "scope" of the arbitration clause in the 2002 Union Planters agreement, which the arbitrator needed to resolve. (19)

Former students filed a class action against the Daymar Institute, a forprofit college in Tennessee, alleging that it had misrepresented its educational offerings and its graduates' job prospects. (20) However, the students' enrollment agreements contained an arbitration clause declaring that its "enforceability ... shall be determined by the arbitrator, and not by a court." (21) At the district court, the students protested that enforcing the arbitration agreement would require them "to pay arbitration fees and costs they [could not] possibly afford--buried as they [were] in ... tens of thousands of dollars of [student] debt." (22) In response, Daymar asked the court to honor the contract and require the students to arbitrate the issue whether they could afford to arbitrate their lawsuit. (23)

These are scenes from a quiet coup in the U.S. civil justice system. As is well known, consumer and employment arbitration has long been controversial. (24) In 1925, Congress passed the Federal Arbitration Act (FAA) (25) to make arbitration clauses specifically enforceable in federal court and to encourage merchants to resolve conflict outside the court system. (26) Half a century later, the U.S. Supreme Court began to interpret the statute broadly, holding that it applies in state courts, (27) preempts state law, (28) and embodies a "liberal federal policy favoring arbitration." (29) Then, starting in 2011, the Justices decided AT&T Mobility LLC v. Concepcion, (30) American Express Co. v. Italian Colors Restaurant, (31) and DIRECTV, Inc. v. Imburgia, (32) cases that effectively allowed businesses to use arbitration clauses as a shield against class action liability. Scores of articles in prominent law journals have criticized these opinions. (33) The New York Times ran a series of front-page stories on the Court's FAA jurisprudence in which a federal judge--an appointee of President Reagan, no less--called it one of the "most profound shifts in our legal history." (34)

After decades of sitting on the sidelines, federal lawmakers and bureaucrats have leapt into the fray. In 2010, Congress passed the Franken Amendment, which prohibited the Department of Defense from entering into contracts for more than $1 million in goods or services with entities that mandate arbitration of certain employment-related claims. (35) In 2014, President Obama signed Executive Order 13,673 (EO 13,673), "Fair Pay and Safe Workplaces," which extended a similar ban to all federal agencies. (36) Likewise, the U.S. Department of Education (DoE) and the U.S. Department of Health and Human Services (HHS) have floated proposals to protect student borrowers (37) and nursing home patients, (38) respectively. This flurry of regulation may be the next battleground in the "arbitration war." (39)

However, another sea change in federal arbitration law has received less attention. The FAA gives trial courts the responsibility for determining whether a dispute is "arbitrable": that is, subject to arbitration. (40) For decades, this gatekeeping function has been a vital check on the integrity of private dispute resolution. If a company tried to gain an advantage by mandating confidentiality, shortening the statute of limitations, selecting a biased arbitrator, waiving a plaintiffs right to recover certain damages, or imposing hefty costs or fees, a judge would strike down all or part of the agreement to arbitrate. (41) Similarly, if a firm contended that the parties had agreed to arbitrate a matter that fell outside the scope of the arbitration provision, or to which the FAA did not apply, a court would refuse to order arbitration. (42) Nevertheless, as the vignettes at the beginning of this Article illustrate, corporations have begun drafting around this prophylactic layer of judicial review. Through the use of what are known as "delegation clauses," (43) they are giving the arbitrator the exclusive right to decide whether arbitration should proceed. (44)

This mind-bending issue--arbitration about arbitration--has become one of the most important and unsettled areas on the docket. In 2016 alone, there were more than two hundred decisions dealing with delegation clauses. (45) Unfortunately, these cases are a tangled mess. The mist descends at the first step in the analysis, where courts disagree about how to tell whether a contract assigns gateway matters about the arbitration to the arbitrator. (46) For instance, a federal district court in California held that Uber's software license and online services agreement was not clear enough to deputize the arbitrator with deciding whether the agreement to arbitrate the merits of the drivers' labor claims was enforceable. (47) But the Ninth Circuit and federal judges in Arizona, Florida, Illinois, Maryland, and Texas have reached the opposite conclusion. (48)

Moreover, courts are struggling with cases like Shirley Douglas s, in which a delegation clause purports to give the arbitrator the right to decide whether a lawsuit falls within the ambit of an arbitration clause. (49) Two members of a Fifth Circuit panel thought it self-evident that Douglas's former arbitration agreement with Union Planters Bank did not apply to her current dispute with Regions Bank...

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