How Chapter 93A consumers lost their day in court: one legislative option to level the playing field.

• Author: Furman, Matthew S.

1. INTRODUCTION

   The Zeitgeist of 1960s Massachusetts produced broad and powerful consumer protection legislation known as the Massachusetts Consumer and Business Protection Act (Chapter 93A). (1) Inspired by federal law, Massachusetts became the first state to pass such far-reaching consumer protection legislation. (2) Chapter 93A provides consumers with a cause of action when businesses engage in "unfair or deceptive acts or practices." (3) That phrase is now "heavy artillery" in Massachusetts and is the most widely used statute in the Commonwealth's civil litigation. (4) The statute aims to put consumers on a more level playing field with businesses who supply needed goods and services. (5)

   The Federal Arbitration Act of 1925 (FAA) (6) is now a means for large businesses to avoid facing consumers in the courtroom under statutes like Chapter 93A. (7) Congress passed this legislation to overcome judicial hostility towards arbitration agreements. (8) The FAA declares arbitration clauses "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9) This language requires any court to stay judicial proceedings in favor of a valid arbitration clause. (10) Unbeknownst to its drafters, the subsequent expansion of the FAA's reach into state courts transformed it into a means to preempt conflicting state laws providing for judicial or administrative remedies. (11) The FAA's preemptive power is in tension with Chapter 93A and other consumer protection statutes designed to provide a day in open, public court. (12)

   Where defendant businesses often pay for the arbitration of consumer disputes, some believe that the arbitrators are more concerned with maintaining their clients than reaching fair results. (13) Members of Congress wish to address this concern by passing the Arbitration Fairness Act of 2009. (14) This bill would render pre-dispute arbitration agreements unenforceable in consumer, employment, franchise and civil rights disputes. (15) This revision would prevent businesses from utilizing arbitration clauses buried in sales agreements to insulate themselves from litigating statutory consumer claims in open court. (16) Consumers would have a meaningful choice and could still agree to use cost-effective, efficient arbitration to resolve their disputes after they arose. (17) This legislation would protect consumers from binding boilerplate arbitration clauses that were not the product of fair and equal bargains. (18)

2. LEGISLATION TO HELP BUSINESSES AND CONSUMERS

   1. The Federal Arbitration Act of 1925

      Common law hostility towards arbitration was no secret. (19) Courts considered it a threat to their dispute-resolving authority, especially predispute agreements that promised to cut courts out from the beginning. (20) Some common law jurisdictions considered such agreements revocable by either party up until an award. (21) Arguing for freedom to contract, disaffected business interests sought to resolve commercial disputes privately. (22) They lobbied Congress to help assure them that they would be able to arbitrate disputes by agreeing to do so ahead of time. (23)

      Congress adopted the FAA in 1925 as a nod to these concerns. (24) In declaring arbitration agreements "valid, enforceable, and irrevocable," Congress lifted Section Two's language from a 1920 New York statute designed to enforce pre-dispute arbitration agreements between merchants. (25) However, Congress drafted the FAA to apply in any dispute "involving commerce." (26) Section Three required a court to stay any judicial proceeding upon either party presenting a valid arbitration clause. (27) Enforcing contracts to resolve disputes quickly and privately outside of the courtroom became a clear federal policy. (28)

      The FAA's language was ambiguous as to whether it applied to both diversity and federal question jurisdiction and whether it applied in state courts at all. (29) Legal scholars of the 1920s believed that the FAA applied to both types of subject matter jurisdiction, but only in federal courts. (30) Swift v. Tyson, (31) then-existing Supreme Court precedent giving federal courts the power to develop federal common law, undoubtedly shaped their thinking. (32) These legal minds viewed the FAA as part of federal contract law, but subject matter jurisdiction needed reexamination after Erie Railroad Co. v. Tompkins. (33) That decision ended the era of federal common law and vitiated the rationale for applying the FAA in diversity cases. (34) Continued inapplicability in state courts would leave the FAA only enforcing agreements in federal question disputes. (35)

      In Bernhardt v. Polygraphic Company of America, Inc., (36) the Supreme Court first addressed the FAA's post-Erie diversity question. (37) In this 1956 case, a federal district court and the Second Circuit Court of Appeals disagreed over whether an arbitrator could interpret a pre-dispute arbitration clause in an employment contract based on Vermont law. (38) The Supreme Court held that Section Two of the FAA did not apply because the employment contract did not "[involve] commerce." (39) The Court was able to avoid deciding whether the FAA applied in diversity cases after Erie because only Section Two agreements required Section Three stays. (40) Justice Frankfurter's concurrence speculated on the potential trouble that lay ahead when he wrote, "avoidance of the constitutional question [of preemption] is for me sufficiently compelling to lead to a construction of the [FAA] as not applicable to diversity cases." (41)

      Eleven years later, in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., (42) the Supreme Court again considered the FAA in a diversity case; however, unlike in Bernhardt, the Court could not avoid the constitutional question that worried Justice Frankfurter in 1956. (43) The Prima Paint dispute arose out of a contract for the sale of paint, unquestionably "involving commerce," and the Court invoked the FAA to affirm a stay for arbitration under New York contract law. (44) Justice Fortas defended the decision as not making federal substantive contract law in a diversity case, which would have violated Erie. (45) Instead, the FAA was a regulation of interstate commerce, applying to diversity cases through the Commerce Clause. (46)

      Prima Paint meant that the FAA applied in all federal cases, regardless of how they got into federal court. (47) Still, Erie required arbitration agreement interpretation under state law. (48) The combination of Prima Paint and Erie could mean that the FAA was enforceable in state courts, which would allow it to preempt state law. (49) Justice Black's Prima Paint dissent echoed Justice Frankfurter's concerns in 1956, as he lamented that holding the FAA to be a regulation of interstate commerce would require application in state courts and preemption of state law. (50) After the decision came down, various state courts cited Prima Paint and started applying the FAA. (51) The 1967 Prima Paint decision coincided with Massachusetts' enactment of Chapter 93A, which made it the first state to give aggrieved consumers a statutory right to go to court. (52)

   2. The Massachusetts Consumer and Business Protection Act of 1967

      At common law, proving elements such as intent, reliance and privity often stood in the way of recovery for aggrieved consumers. (53) The law paid no attention to their disparate bargaining power because the prevailing "laissez-faire" economic theory suggested that market forces would determine the optimal level of respect for them. (54) Massachusetts was especially severe because the Commonwealth is a non-punitive damages jurisdiction, making even the most egregious examples of tortious consumer exploitation result in an award of no more than actual economic loss. (55) Additionally, successful consumer plaintiffs would still have to pay for their own attorney, fees and costs. (56)

      As the United States industrialized and suburbanized, consumers became a powerful voice for reforming an out-of-touch "laissez-faire" approach. (57) As early as the turn of the twentieth century, courts outside Massachusetts started awarding punitive damages to consumers for intentional torts. (58) On the legislative side, Congress passed the Federal Trade Commission Act in 1914 (FTC Act).59 The statute made "unfair or deceptive acts or practices in or affecting commerce" unlawful, and it gave the Federal Trade Commission authority to independently police the marketplace. (60) The consumer class continued to expand in the post-World War II economic boom, and states considered passing their own consumer protection legislation. (61) States referred to these analogous statutes as "little FTC" acts. (62)

      In 1967, Massachusetts became the first state to pass such legislation and codified its "little FTC" under Chapter 93A of the Massachusetts General Laws. (63) Chapter 93A created a statutory cause of action for consumers, which ended their reliance on difficult to prove tort and contract theories. (64) The focus shifted from discerning a defendant's bad motives or the nature of the relationship to protecting consumers by "attack[ing] marketplace abuses." (65) Following the Commonwealth's lead, all other states passed "little FTC" acts to protect consumers. (66)

      Chapter 93A became "potent weaponry" in Massachusetts. (67) Just like the FTC Act, Chapter 93A made "unfair or deceptive acts or practices" unlawful. (68) The initial version authorized only the Attorney General to sue on behalf of consumers, which paralleled the authority of the Federal Trade Commission. (69) The drastic increase in litigation quickly overwhelmed the Attorney General's office, and the state legislature amended Chapter 93A in 1969 to give consumers a private cause of action under Section Nine. (70) Shortly after, the Massachusetts legislature granted businesses a cause of action against other businesses, when it...