The Arbitration Clause in Context: How Contract Terms Do (and Do Not) Define the Process

• Publication year: 2022

40 Creighton L. Rev. 655. THE ARBITRATION CLAUSE IN CONTEXT: HOW CONTRACT TERMS DO (AND DO NOT) DEFINE THE PROCESS

Creighton Law Review

Vol. 40

W. MARK C. WEIDEMAIER(fn*)

INTRODUCTION

Consider the following arbitration clause, which might be found in a contract of employment or a standard-form consumer contract:

Any claim, controversy, or dispute of any kind between us will be resolved by binding arbitration, to be conducted in Philadelphia, PA under the then-applicable rules of American Arbitration Association or JAMS. The arbitrator may not award punitive or exemplary damages.

Arbitration clauses like these have engendered a significant amount of debate, much of which focuses on the proper response the law should make to "one-sided" clauses - i.e., those that limit the procedures and remedies available to individuals in arbitration.(fn1) Because my example clause appears to prohibit awards of punitive damages and to require significant travel for individuals who live far from Philadelphia, it might fairly be termed "one-sided."

But the clause may not be as one-sided as it seems. In fact, the drafter of this "one-sided" clause may have anticipated that it would yield, in at least some disputes, a more "even-handed" process in which punitive damages are available and arbitration hearings take place in a location convenient for the individual disputant. Conversely, drafters of apparently "even-handed" clauses may sometimes expect them to yield a "one-sided" disputing process.

This Essay explores these possibilities. It begins by asking an apparently simple, but foundational question: Why would the business produce a contract like this one? Part I explores the potentially complex interaction between the "one-sided" terms in my example clause - the punitive damages bar and the centralized hearing location - and the "due process" protocols adopted by many arbitration service providers. As I will explain, although my example clause appears straightforward, it may be complex in operation. In particular, the clause incorporates rules that may constrain the business's apparent preference to avoid punitive damages and to conduct hearings in a centralized location.

By and large, the business could structure the arbitration process however it wanted.(fn2) So what explains its decision to include these conflicting provisions in the clause? Part I briefly suggests a number of possibilities before identifying and exploring an alternative. I argue that the clause as written creates post-dispute strategic opportunities for both parties and that these opportunities may shape the arbitration in significant ways. Part I suggests that the business grants these opportunities to the individuals with whom it contracts as the "price" for the legitimacy conferred by the due process protocols. In some cases, the result may be an arbitration process that is less "one-sided" than the clause itself would suggest. The protocols, however, do not render "one-sided" terms meaningless or ineffective; the business sometimes may exploit such terms to its advantage. Indeed, we might view the one-sided terms as options that the business may or may not exercise in the context of a particular dispute.

If the selection of a particular provider or set of rules may sometimes render apparently one-sided arbitration clauses more evenhanded than they seem, the opposite dynamic may also exist. Part II explains how explicit provider rules and evolved practices among arbitrators may, in effect, supply "one-sided" terms that cannot be detected from a review of the arbitration clause itself.

Together, Parts I and II yield two related and important insights. First, arbitration clauses may paint an incomplete or even misleading picture of actual arbitration procedures and remedies. Second, understanding arbitration as a legal, social, and contracting phenomenon may require sustained inquiry into the relationship between arbitration contracts and the rules and practices of arbitrators and arbitration providers.

I. WHAT PRICE LEGITIMACY?

The following sections examine the potential dynamic created by the inclusion of apparently one-sided terms in a contract governed by arbitration due process rules. I do not purport to offer a systematic description of the actual operation of these rules on the ground. That is an empirical question, and we do not have enough information to offer meaningful answers. Instead, my goal is to generate hypotheses worthy of further exploration. Nevertheless, the following discussion draws in part on informal conversations with a variety of repeat players in the arbitration process, including lawyers, arbitrators, and arbitration provider employees and executives.

A. AGREEMENTS THAT INCORPORATE, YET VIOLATE, THE DUE PROCESS PROTOCOLS

As an example of this potential dynamic, return to my example arbitration clause (reproduced below) and its one-sided terms: the limitation on remedies and the centralized hearing location. For simplicity, I will assume that this clause is contained in an employment contract and that at least some employees live a significant distance from Philadelphia:

Any claim, controversy, or dispute of any kind between us will be resolved by binding arbitration, to be conducted in Philadelphia, PA under the then-applicable rules of American Arbitration Association or JAMS. The arbitrator may not award punitive or exemplary damages.

Depending on one's beliefs about arbitration and the civil justice system, this clause might seem an objectionable attempt to self-deregulate - by channeling disputes into a forum that denies employees any meaningful remedy - or an attempt to rationalize a flawed process of resolving employment disputes.(fn3) But however we view it, the clause seems straightforward. It appears to reveal clear employer preferences for (i) arbitration (ii) in a centralized hearing location (iii) without the prospect of punitive damages. Beyond that, the employer may have no interest in specifying the minutiae of the arbitration process, so it incorporates off-the-rack procedures promulgated by its chosen arbitration providers.(fn4)

Yet the clause is actually quite puzzling. A number of arbitration providers, including AAA and JAMS, have adopted "due process" protocols designed to ensure minimally fair procedures in consumer and employment disputes.(fn5) As I will explain, the protocols purport to screen out contract terms that are incompatible with providers' views of basic adjudicatory fairness. Providers claim to refuse their services when the arbitration clause contains terms that conflict with the governing protocol.(fn6) In my example clause, the punitive damages bar and centralized hearing location appear to violate one or both sets of provider rules implementing these protocols.(fn7)

What might explain the decision to include both the one-sided terms and the (conflicting) provider rules? A party might agree to onerous terms in order to signal its commitment to a transaction.(fn8) Perhaps employees signal something of value to the employer (nonlitigiousness?) by signing my example contract. But this seems implausible; it may be that few employees are even aware of the clause. Of course, the signaling might run in the other direction. The inclusion of one-sided terms might be a communication from the business to plaintiffs' lawyers, signaling that disputes under the agreement will be expensive to litigate or will yield a lower payout.(fn9) But then why weaken that signal by selecting a provider with conflicting rules?

Another possibility is that the company knows that JAMS and AAA often do not enforce their rules. This cannot be ruled out, in part because providers are reluctant to provide the data needed to evaluate this possibility. There have been allegations that actual practices sometimes conflict with providers' public stances.(fn10) Providers, however, are under no small amount of scrutiny, and I am not aware of supported allegations of under- or non-enforcement of these providers' due process rules.(fn11)

Perhaps the employer intends to waive the one-sided terms if challenged and includes them primarily for their potential in terrorem effect: the clause may deter employees from bringing claims.(fn12) This is indeed a possible explanation, but it seems at least incomplete. Even after a dispute arises, many employees will be unaware of the terms, and it seems implausible to suggest that many of those who know about the terms will refrain from filing a claim, or contacting a lawyer, because of them.(fn13) Whether the terms would deter many lawyers is an open question.

Inadvertence might also explain the inclusion of these conflicting terms. The lawyers for the business may not have known about the AAA and JAMS rules. My example arbitration agreement, however, likely governs many employees, and a lawyer drafting such an agreement would surely become familiar with the designated providers' rules. A related possibility is that arbitration contracts are "sticky." An employer is unlikely to change its contracting practices unless it perceives a flaw, and even then there are costs involved in changing contract terms.(fn14) Maybe there have been no disputes under the agreement, so the employer has not identified the conflict with provider rules, or perhaps it has identified the conflict but does not wish to incur the...