The Federal Arbitration Act Needs an Overhaul
Arbitration is an excellent way to efficiently resolve business disputes. In its current form, it doesn't belong in consumer contracts
One of the constant critiques of lefty identity politics, which those who endorse such politics are tired of, is that not enough attention is paid to class. I think class is super important and, in general, think that its rather cynical that a primarily middle- and upper-class movement centered in rich cities and college towns wants us to ignore social class. But the lack of priority reforming the Federal Arbitration Act gets among left-wing causes is an almost perfect example of this.
The FAA provides that arbitration clauses in contracts that relate to interstate commerce (under the broad definition of interstate commerce that is used in federal law, which basically reaches every form of commercial activity in the country) cannot be invalidated, except on such state law grounds that exist for the invalidation of any contract. What this means in plain English is that a court can’t usually strike down an arbitration clause for being unfair, or oppressing consumers, or preventing them from recovering for their injuries, or providing insufficient incentive for corporations to take reasonable precautions for consumers’ safety. Only those things that could result in the invalidation of a contract for non-arbitration related reasons are permissible- so, for instance, if no money ever exchanged hands, or the contract was procured by fraud, the contract (and its arbitration clause) could be declared invalid.
The FAA was passed in the 1920’s to solve an actual problem- the courts, not wanting the private sector to move into their turf, were hostile to arbitration agreements. So, if you, for instance, owned a record store and wanted to enter into agreements with the record companies and distributors that supplied your product that if there were any disputes about sales revenue or returns, you would have a private arbitrator quickly and efficiently decide them, it was difficult to do this. As you can see from my example, not all private arbitration is bad- indeed, as a litigation lawyer, private arbitration clauses sometimes or often end up in settlement agreements between parties to lawsuits. The parties anticipate that there are going to be a pretty narrow range of disputes, and you can hire an expert to resolve them without a lot of discovery and the mess of public litigation. It works fine.
The problem is, the FAA is an overbroad, poorly written statute, whose scope also expanded when the courts started expanding the definition of “interstate commerce” in the 1930’s in response to the Great Depression and the New Deal. (You rarely hear about this in the morality tales that academics tell about the right wing pre-New Deal courts. Yes, the definition of “interstate commerce” had to expand. But with it came expanded reach for statutes, whether they be federal criminal laws or the FAA, that were tied to the definition of “interstate commerce”.)
So we have this statute that says that if you throw an arbitration clause in your contract, states basically can’t invalidate it even if it is unfair. Eventually, big corporations figured out the implications of this, and arbitration clauses became ubiquitous in consumer contracts.
Conservative Supreme Courts are a part of this story too. The Rehnquist and Roberts courts have been overly friendly to arbitration, for instance, by allowing arbitration clauses to trump the right to file a class action. That was not required by the text of the FAA and is extremely harmful to the rights of consumers.
But the basic problem is created by a statute. You purchase a product or service from a major corporation, and are required to agree to an arbitration clause buried in the terms and conditions of the sale. Now you are injured, and you have to go to arbitration, where the tribunal is dependent on the business of the big corporation and can’t afford to make too many rulings against it, where your discovery is limited, and where the arbitration costs are immense. And if you do win, you will tend to win less than what an outraged jury would have given you. (You also have no real right to appeal if the Arbitrator ignores the law to rule against you.) So you don’t bother. It’s not worth it. Where’s the deterrence of corporate misconduct in that scenario?
And that last question is the real point here. If Congress had directly passed a law that simply made it impossible to recover damages when a corporation injured you, the outrage would be immense. But because it takes the form of this weird quasi-judicial procedure that few Americans talk about, nobody says a word.
Democrats have discussed, in the past, revising the FAA and taking more arbitration contracts out of its scope. There have been bills written up. But they haven’t gone anywhere, and despite all this talk about President Biden as the next FDR, neither him nor Obama or Clinton ever really made this a big issue or a priority. It’s easy to see why. The corporations who save billions of dollars using these arbitration clauses have no interest in this changing, especially given there is little public outcry. And there’s little incentive for President Biden to push the issue when his party’s activist base includes a lot of people who want to see identity issues prioritized and class issues (at least other than tax increases on the rich) deprioritized.
But we need to do this. The right to sue when a corporation injures you is a basic consumer right. The FAA needs to be changed.