It Is Time the Law Begins to Protect Consumers from Significantly Onesided Arbitration Clauses Within Contracts of Adhesion

Publication year2021

91 Nebraska L. Rev. 666. It Is Time the Law Begins to Protect Consumers from Significantly OneSided Arbitration Clauses Within Contracts of Adhesion

It Is Time the Law Begins to Protect Consumers from Significantly OneSided Arbitration Clauses Within Contracts of Adhesion

Anjanette H. Raymond(fn*)


I. Introduction..........................................666

II. Background...........................................667
A. Expanding Beyond the Original Scope of the FAA..667
B. The FAA as Creating a Federal Preemption........671
C. The Potential Limits Within Section 2 of the FAA Should Be Rejected................................681
D. The Arbitration Fairness Act of 2011 Is Not the Answer...........................................683
E. What Is Being Done?..............................692

III. Solutions............................................. 695
A. Are All Parties Facing Arbitration Clauses in Contracts of Adhesion Created Equal? .............697
B. What Protections Are Really Necessary and for Whom?............................................699
C. How Should Those Protections Be Accomplished? . .701

IV. Conclusion ............................................705


To pretend that arbitration has not evolved into different animals of the same species is to not fully appreciate the nuances that exist within the system. To date, most U.S. cases surrounding arbitration agreements and enforcement are resolved within and under the Federal Arbitration Act (FAA). While this makes sense in many instances, arbitration has grown-with the support of the courts-into areas of law and life never intended by the drafters of the FAA. Pre


tending that the FAA provides adequate protections for parties in a significantly weaker bargaining position when faced with a contract of adhesion that contains a mandatory arbitration clause is to demonstrate a lack of understanding of the realities these situations present. Businesses are accused of using arbitration as a private dispute resolution system that shields their transgressions from public scrutiny, uses arbitrators and institutions that are perceived as biased, and prevents any real means of justice to the consumer. Something must be done to ensure that consumers facing mandatory arbitration clauses within contracts of adhesion are protected from businesses that seek to use arbitration as an advantageous means to resolve disputes. The American public, a section of Congress, and the arbitration community are all responding, but out-of-date law and recent decisions are thwarting their efforts. It is time for Congress to act, but in doing so it must recognize that old biases toward the use of arbitration will not move the discussion forward. Congress must seek to address the use of arbitration in consumer contracts without creating new issues by prohibiting the use of arbitration in its entirety and/or by attempting to protect consumers from contract clauses that do not seek to enhance the power imbalance that is inherent within contracts of adhesion. Recognition of these needs will allow Congress to draft a narrowly focused, minimally regulatory law that cuts to the heart of the issue: the protection of a specific group of weaker parties entering into contracts of adhesion that contain significantly one-sided arbitration clauses.

This Article will seek to address these issues by first identifying the issues relating to the FAA, the surrounding case law, and the alternative readings of section 2 of the FAA. The Article will then examine and reject some of the early attempts at addressing those issues while considering current attempts by both academics and industry to address the issue of contracts of adhesion and arbitration clauses. The Article will conclude, in Part III, by considering who should be protected, identifying what they should be protected from and how those protections can be accomplished. Finally, the Article will claim that Congress must seek to protect a narrow class of individuals from significantly disadvantageous arbitration clauses within contracts of adhesion.


A. Expanding Beyond the Original Scope of the FAA

When the issue first arose in 1980, the commercial arbitration community approved of the U.S. Supreme Court's expansion of the scope of the FAA to cover all commercial law disputes where the parties had agreed to arbitration. But at the time, "commerce" was a


term not yet fully explored and defined within the context of the FAA,(fn1) and the widespread use of arbitration was decades away.

The FAA was enacted in 1925 in response to widespread judicial hostility to arbitration agreements.(fn2) Today, some authorities argue that the judicial attitude toward arbitration agreements has shifted into a substantially pro-arbitration attitude.(fn3) While this is not necessarily a problem, one must appreciate that this attitude arises from a federal act that is significantly out of date and was never designed to be applicable in a pro-arbitration world. In the most general sense, if a contract dealing with interstate commerce contains an agreement to arbitrate, the FAA requires that the arbitration agreement be en-forced,(fn4) unless generally applicable contract principles render the agreement unenforceable.(fn5) The FAA thus forbids courts called upon to enforce agreements to arbitrate from imposing special burdens on arbitration agreements, but permits courts to hold those agreements to the same standards that all contracts must meet.

But this understanding of the enforceability of arbitration clauses was a hard-fought battle. At the time of adoption, the FAA and the language embodied within the Act was far from clear. In fact, even the simplest of terms had to undergo court definitional developments while the scope of the statute was defined.(fn6) In many ways, these definitions represent one of the many methods of expansions of the scope of the FAA.

As Margaret Moses writes:

The Federal Arbitration Act (FAA) that Congress adopted in 1925 bears little resemblance to the Act as the Supreme Court of the United States has construed it. The original Act was intended to provide federal courts with procedural law that would permit the enforcement of arbitration agreements between merchants in diversity cases.(fn7) The Supreme Court's construction of the statute, especially in the last twenty-five years, amounts to a judicially created legislative program, imposed without congressional input, that has vastly expanded the reach and focus of the original statute.(fn8)

It is important to note, as Professor Moses highlights, challenges to the scope of application of the FAA have continued into the modern era. By 1985, some sixty years after the adoption of the FAA, many state courts continued to remain hostile toward the use of arbitration(fn9)or became hostile toward the FAA itself. This hostility resulted in a hodge-podge of state cases and legislative enactments that seemed to defy or at least push the grey area of the enforcement of arbitration agreements. In response to the growing lack of consistency, the U.S. Supreme Court, in Southland Corp. v. Keating,(fn10) held that the FAA's mandates apply not only to federal courts but also to state courts.(fn11)The Southland Corp. decision was not the end of the debate, however, as many state courts and legislatures remained hostile to the use of arbitration and sought to find more creative means to get around the Supreme Court's determination. The resistance to the application of the FAA in state courts came to a head in 1994, when the attorneys general of twenty states(fn12) filed amicus briefs in the case of Allied-Bruce Terminix Cos. v. Dobson,(fn13) asking the Supreme Court to over


turn its decision in Southland Corp.(fn14) and to permit the States to enforce state (anti) arbitration statutes.(fn15) The Supreme Court declined to reverse its ruling in Southland Corp.(fn16) and instead took the opportunity to reaffirm its determination by clearly specifying the obligations of the states with regard to arbitration clauses:

States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause "upon such grounds as exist at law or in equity for the revocation of any contract." What states may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit) but not fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal "footing," directly contrary to the Act's language and Congress' intent.(fn17)

In case there remained any doubters, the Supreme Court proclaimed the following year that state rules that "undermine the goals and policies of the FAA" are preempted by the FAA.(fn18) The die had been cast; arbitration agreements were to be treated on equal footing as other contracts, even by the states, despite judicial or legislative attempts to the contrary. Of course, this is only the beginning of the story. This series of cases,(fn19) and the more recent case of ATandT Mobility LLC v. Concepcion,(fn20) has caught the legal and academic worlds in


a federal preemption argument based on Congress's intent and expansive definitional arguments under the FAA. The outcome of...

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