Circuit Split Analysis: Involuntary Arbitration Agreements

• Publication year: 2022

Circuit Split Analysis: Involuntary Arbitration Agreements

Tyler Blackington

CIRCUIT SPLIT ANALYSIS: INVOLUNTARY ARBITRATION AGREEMENTS

Tyler Blackington^*

Table of Contents

Introduction................................................................................................91

I. Background .....................................................................................93

A. Catalysts for the Federal Arbitration Act................................... 93
B. The Federal Arbitration Act ....................................................... 96

II. Case Law.........................................................................................100

A. Kindred Nursing Centers Limited Partnership v. Clark ........... 100
B. Securities Industry Association v. Connolly ............................ 102
C. Saturn Distribution Corporation v. Williams............................ 105
D. Chamber of Commerce v. Bonta.............................................. 108

1. Background ........................................................................ 108
2. Chamber of Commerce v. Becerra ..................................... 109
3. Chamber of Commerce v. Bonta........................................ 111

III. Analysis..........................................................................................116

Conclusion.................................................................................................119

Introduction

The #MeToo movement of 2017 and various workers movements spurred an increased awareness of protectionist legal devices preventing victims from acquiring just relief through the legal system. Many viewed involuntary contractual arbitration clauses as a source of injustice. In response to these social movements and the Supreme Court's decision in Epic Systems v. Lewis, federal lawmakers reintroduced the Restoring Justice for Workers Act.¹ The Act aims to end involuntary arbitration clauses and protect employees' right to pursue claims in court.² Lawmakers sought to provide recourse unavailable through arbitration for victims of wage theft, discrimination, and harassment.³

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The usage of compulsory arbitration clauses proliferated in the mid-1990s. Only two percent of employees operating within the United States were subject to mandatory arbitration clauses in 1992.⁴ In 2017, fifty-five percent of these employees were subjected to mandatory arbitration clauses.⁵ Today, many nonunion American companies include involuntary arbitration clauses in their employment contracts. ⁶ Although 60 million working Americans are subject to mandatory arbitration clauses, only 1 in 10,400 of these employees file claims per year.⁷ In 2020, plaintiffs won a recovery in only 1.6 percent of cases arbitrated subject to a compulsory arbitration clause.⁸ This Comment argues that the laws surrounding "forced" mandatory arbitration clauses need significant reform. Specifically, this Comment focuses on a recently decided Ninth Circuit case, Chamber of Commerce v. Bonta, which created a circuit split among the First and Fourth Circuits' interpretations of the validity of nonconsensual arbitration clauses in the Federal Arbitration Act (FAA).

This Comment examines a circuit split regarding the application of Section (§) 2 of the FAA. This Comment features four parts. Part I provides background information on arbitration and the FAA. Part II introduces Kindred Nursing v. Clark, a landmark Supreme Court case discussing arbitration clauses. This part continues with a discussion on the First and Fourth Circuit cases discussing arbitration clauses, Securities Industry Association v. Connolly and Saturn Distribution Corporation v. Williams, and Chamber of Commerce v. Berecca and Chamber of Commerce v. Bonta, the cases creating a circuit split, respectively. Part III argues the Ninth Circuit improperly decided the issue before its Court and runs afoul of the FAA. This analysis includes an examination of the statute's language, congressional intent, and various theories proposed by legal researchers. Part IV concludes the Comment. The Part regards California's new bill unconstitutional as written but proper public policy. Thus, the Supreme Court should enjoin AB 51 as written. I argue Congress should enact a bill similar to AB 51 in the interest of public policy.

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I. Background

A. Catalysts for the Federal Arbitration Act

The necessity for a federal arbitration law stemmed from English Common Law tradition. Specifically, the common law doctrines of ouster and revocability allowed state and federal courts to invalidate any arbitration clause and compel parties to adjudication.⁹ As stated by the House of Representatives in 1924:

The need for the law arises from an anachronism of our American law. Some centuries ago, because of the jealousy of the English courts for their own jurisdiction, they refused to enforce specific agreements to arbitrate upon the ground that the courts were thereby ousted from their jurisdiction. This jealousy survived for so long a period that the principle became firmly embedded in the English common law and was adopted with it by the American courts. The courts have felt that the precedent was too strongly fixed to be overturned without legislative enactment, although they have frequently criticized the rule and recognized its illogical nature and the injustice which results from it.¹⁰

The federal government, commercial organizations, and the American Bar Association (ABA) cited three additional reasons for a national arbitration law. These bodies believed the public demanded a new system and the contemporary system operated too slowly for commercial organizations.¹¹ Lastly, arbitration proponents believed arbitration provides "more just conclusions."¹²

In Home Insurance Corporation of New York v. Morse, the United States Supreme Court considered the validity of a Wisconsin statute requiring a nonresident domestic company to file particular paperwork with Wisconsin's government to conduct intrastate business operations.¹³ The statute required the corporation to appoint an agent under a form containing the following: "[a]nd said company agrees that suits commenced in the State courts of Wisconsin shall not be removed by the acts of said company into the United States Circuit or

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Federal courts."¹⁴ The Plaintiff corporation sold an insurance policy to the Defendant, who subsequently sued Plaintiff for losses sustained under the policy.¹⁵ Upon the Plaintiff's petition to remove the case to a federal circuit court, Wisconsin's state court blocked removal and ordered the action to proceed in Wisconsin's courts.¹⁶

The Supreme Court discussed the state's power over corporations. When a state allows a corporation to conduct activities within its borders, it may impose any legitimate term or condition it sees fit.¹⁷ However, the state does not have absolute power to impose any term it sees fit. The Court held each United States citizen possesses an inherent right to "all the courts of the country" and to invoke the protections those courts allow.¹⁸ The Supreme Court underscored an important legal distinction regarding binding contracts that provide for court selection, including arbitration contracts. A citizen may waive his right to the courts under any valid agreement.¹⁹ However, he may not "bind himself in advance by an agreement, which may be specifically enforced, thus to forfeit his rights at all times and on all occasions, whenever the case may be presented."²⁰ A corporation has the same right to the protection of laws and the same right to appeal as a natural citizen.²¹ Therefore, the Court declared the agreement illegal and void for ousting the courts of their legal jurisdiction and allowed the corporation to remove the case to a federal court.²²

In McKenna v. Lyle, the Supreme Court of Pennsylvania assessed an arbitration clause created after a partnership dissolution.²³ On February 15, 1890, partners filed a bill to dissolve their partnership and settle partnership accounts.²⁴ The partners later agreed to refer all matters under dispute to binding arbitration. ²⁵ After months, the arbitrators notified the partners of their final

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decision before their official declaration shortly thereafter.²⁶ The Defendant notified the arbitrators of his revocation of their authority and of his intention to contest their decision.²⁷ The Plaintiff's executrix filed a complaint with the Pennsylvania courts.

The Court invalidated the arbitrator's award because it found the Defendant successfully revoked the arbitration clause before the arbitrator officially declared the award.²⁸ The Court held the arbitration agreement valid because it appeared in a properly executed contract.²⁹ However, the common law doctrine of revocability permitted a party to revoke the clause by refusing to proceed or by the vacancy of an arbitrator.³⁰ The doctrine allowed a party to revoke at any time before the arbitrator enters his final decision.³¹ Notably, this Court determined that the defendant properly revoked although he collected and deposited proceeds from the arbitrator's decision into his bank account before revoking the arbitrator's decision.³² After allowing the revocation of the arbitration clause, the Court charted the proper channel to hear a dispute after arbitration terminates. The Court held it was the court's duty to decide the controversy on the merits upon the revocation of an arbitration clause.³³

Lastly, another major impetus to the enactment of a federal arbitration law stemmed from businesses' hopes for quicker resolutions to corporate controversies. At the Fourth Annual Meeting of the ABA, corporations lobbied the ABA to write a uniform arbitration law.³⁴ A member discussed his locality's cotton market. Cotton producers and buyers created a "Cotton Exchange" for the purpose of quickly resolving disputes via arbitration among its members.³⁵ Before the Exchange, cotton...