Changing Mandatory Arbitration to Optional Arbitration: a Better Business Decision

• Publication year: 2022

54 Creighton L. Rev. 497. CHANGING MANDATORY ARBITRATION TO OPTIONAL ARBITRATION: A BETTER BUSINESS DECISION

CHANGING MANDATORY ARBITRATION TO OPTIONAL ARBITRATION: A BETTER BUSINESS DECISION

KARL FISHER ^[D1]

ABSTRACT

Opponents of mandatory arbitration in consumer and employee contracts have filed numerous actions in courts across the United States, including the Supreme Court of the United States, challenging its legality. However, these attacks on mandatory arbitration under the Federal Arbitration Act (FAA) have consistently fallen short. As a result, the use of mandatory arbitration provisions in employee and consumer contracts in the United States has significantly increased over the past two decades. This has also led to a contentious national debate among jurists, legal scholars, and consumer and employee advocates. This Article seeks to end mandatory arbitration at the source by invoking a cost-benefit analysis that businesses should consider. This Article relies on both policy and empirical data to support the argument that it is a better business decision to remove mandatory arbitration provisions from contracts and replace them with provisions that give consumers and employees the option of either litigation or arbitration remedies. In fact, over the past two years, companies like Amazon and Google have already started to make such a shift. ^[1]

I. INTRODUCTION .......................

II. THE FEDERAL ARBITRATION ACT: LEGISLATIVE HISTORY.......................

III. MANDATORY ARBITRATION: LAW, POLICY, AND EMPIRICAL ANALYSIS .......................

1. The Court: Current Precedent

2. Congress: The National Policy

3. Academia: The Empirical Dilemma

a. Consumer Contracts

b. Employee Contracts

IV. CONCLUSION

I. INTRODUCTION

The widespread use of mandatory arbitration clauses in consumer and employee contracts has led to a contentious national debate among jurists, legal scholars, and consumer and employee advocates. ^[2] Mandatory arbitration begins when a consumer or employee enters a contract containing a mandatory arbitration clause. Mandatory arbitration "refers to arbitration pursuant to an adhesive, predispute arbitration agreement." ^[3] These clauses appear in a variety of contracts that average consumers enter into on a daily basis. ^[4] By signing a contract containing an arbitration clause, a consumer or employee essentially waives their right to resolve a dispute through the courts. ^[5] It is this consequence that is at the heart of the national debate between those who oppose mandatory arbitration and those who support it.

First, opponents of mandatory arbitration in consumer and employee contracts argue that it is fundamentally unfair because the contract that contains such a provision is, many times, unilaterally drafted. In most of these situations, the average consumer and employee has little to no bargaining power. ^[6] This leaves the consumer and employee in a position to either accept or decline the terms with no room for negotiation. ^[7] Given the widespread use of mandatory arbitration provisions in consumer and employee contracts, many consumers and employees will likely accept the terms as they appear. ^[8] Additionally, opponents argue that substantive legal rights and jurisprudence in the subject matter will not be advanced by the judicial process because an action under mandatory arbitration is usually resolved in a private forum. ^[9]

On the other hand, proponents of mandatory arbitration rebut these arguments in several ways. First, some proponents argue that private arbitration is fair because arbitration firms (e.g., the American Arbitration Association ("AAA") and JAMS Mediation, Arbitration and ADR Services) incorporate due process procedures established by adoptive measures known as the Due Process Protocol. ^[10] Proponents also argue that arbitration is efficient because it requires less time to resolve disputes when compared to litigation in court, which, they say, is good for both claimants and the court. ^[11] Lastly, proponents argue that arbitration promotes accessibility to justice for claimants who could not otherwise access the court because their claim is less than the cost of litigating the action to begin with. ^[12] The debate between the two positions will likely continue for a long time. Rather than take sides in this debate, this Article approaches the debate from a slightly different angle. Based on an analysis of law, policy, and empirical data, this Article looks to persuade businesses to shift from mandatory arbitration to optional, post-injury, arbitration. ^[13]

Convincing businesses to make this change is a challenge, but the recent change in trend by companies like Amazon and Google suggests that it is feasible. ^[14] It is clear by the widespread use of mandatory arbitration provisions that businesses opt to resolve claims through arbitration instead of litigation. A recent study by the Economic Policy Institute ("EPI") found that 53.9% "of nonunion private-sector employers have mandatory arbitration procedures," and "[a]mong companies with 1,000 or more employees, [65.1%] have mandatory arbitration procedures ...." ^[15] EPI also found that "[a]mong private sector nonunion employees, [56.2%] are subject to mandatory employment arbitration .... [T]his means that 60.1 million American workers no longer have access to the courts ...." ^[16] Moreover, 41.1% of employees-roughly 24.7 million people-have waived their right to be a part of a class action claim because of mandatory arbitration procedures. ^[17] EPI also found that in the twelve "largest states by population[,] over 40 percent of employers have mandatory arbitration policies." ^[18] This data supports an assumption that businesses incorporate mandatory arbitration because of cost savings and litigation risk aversion (i.e. losing in court). ^[19] Mandatory arbitration seems to be an effort to protect against litigation costs and a runaway jury verdict. ^[20] Also, arbitration is private, so businesses can avoid public outcry for misconduct. ^[21] Despite an argued financial benefit and being a risk avoidance tool, there are downsides.

For instance, mandatory arbitration has received an outpouring of negative national media coverage, especially as of late. ^[22] Additionally, in a twist of irony, companies that employ mandatory arbitration actually open themselves up to potential litigation revolving around the legality of the mandatory arbitration provision itself. ^[23] Finally, it is advantageous to be perceived as consumer and employee-friendly because business goodwill is a monetized asset, and mandatory arbitration does not have that perception. ^[24] While these points are sufficient reasons to encourage businesses to shift from mandatory arbitration, the next sections further propel the argument through a legal and empirical analysis that warrants skepticism of mandatory arbitration provisions in consumer and employee contracts.

The argument is addressed in two main sections. The first section reviews the Federal Arbitration Act ("FAA") and its legislative history. The second section, which addresses law, policy, and empirical data is broken into three subsections. The first two subsections analyze the United States Supreme Court's recent decisions on the matter and explores vulnerable aspects of the rational. The third subsection examines available empirical data. This data suggests that the cost savings and risk reducing measures that mandatory arbitration may afford is not worth the political, social, and actual financial cost that a business may suffer by requiring mandatory arbitration. ^[25] Despite mandatory arbitration's present legal status and common use, it is in the interest of businesses to move from mandatory to optional arbitration in consumer and employee contracts.

II. THE FEDERAL ARBITRATION ACT: LEGISLATIVE HISTORY

The Federal Arbitration Act ("FAA") is codified under 9 U.S.C. §§ 1-16, and it was enacted in 1925. The FAA was drafted by members of the American Bar Association, and members of the Committee on Commerce, Trade, and Commercial Law. ^[26] When the FAA was considered by Congress, several state legislatures had already passed laws that enforced arbitration agreements in state courts, and European countries had also passed similar arbitration enforcement protocols. The commercial sector in the United States wanted uniformity. ^[27] The FAA was meant to create not only uniformity in arbitration arising out of commercial transactions, ^[28] but also a solution to the problem of repudiation by parties that used the courts as a backstop. ^[29] The FAA sought to solve these problems through what are essentially congressionally mandated instructions to the courts. Those instructions call on courts to enforce bilaterally drafted contracts containing mandatory arbitration provisions. ^[30] The FAA fostered the concept of contractual freedom and sought to hold parties accountable to their contracts. ^[31]

However, the contracts that contain mandatory arbitration provisions described in the legislative history identify contracts between sophisticated commercial entities-not average consumers and employees. ^[32] As one proponent of the bill stated, "in the drafting of partnership articles or in the drawing of great contracts[,] . . . the arbitration agreement will be more carefully drawn by the lawyers for the parties." ^[33] This suggests that...