Defeating Mandatory
Arbitration Clauses:
What's a lawyer to do when boilerplate arbitration clauses bar the
courthouse door?
by
John Vail
Boilerplate mandatory
arbitration clauses are showing up everywhere. According to an article in
a recent issue of The Brief, published by the Torts and Insurance
Practice Section of the American Bar Association, "in a further
effort to limit litigation exposure in general, and exposure to class
actions in particular," Alabama insurance companies are scrambling to
use the clauses.1 Banks are quietly imposing them through amendments in
depositor agreements.2
American Express is imposing
mandatory arbitration clauses on cardholders.3 Health insurers contend
that the clauses preempt litigation of claims ranging from medical
malpractice to unfair trade practices.4 Consumers who buy a Gateway
computer over the phone unknowingly agree to arbitration. The agreement
arrives in the box with the computer.5
What's wrong with that?
Plenty. Arbitration clauses can put unwitting consumers at the mercy of a
biased decision maker who is not bound to follow the law and who is often
in an inconvenient place. A purchase of XYZ electronic equipment can mean
submitting disputes to XYZ's affiliated arbitrator in Jefferson,
Wyoming—surely a tactic meant to discourage consumers from filing
grievances. Moreover, consumers may forfeit discovery, have limited
remedies, and pay handsomely for the privilege of engaging this forum.6
Mandatory arbitration clauses
take dispute resolution away from the judgment of jurors and the scrutiny
of the public. They exact waivers of fundamental constitutional rights
without meeting the generally required standard for informed
consent—that the waivers be knowing, intelligent, and voluntary.7
The most prestigious
professional groups in America that are interested in arbitration of
health care claims—the American Bar Association, the American Medical
Association, and the American Arbitration Association—have found that
the waivers of rights in mandatory arbitration agreements can never be
knowing and voluntary.8
Especially offensive is the
federal policy, embodied in a long line of Supreme Court cases
interpreting the Federal Arbitration Act (FAA), that immunizes many
clauses from state regulation and guarantees their enforcement. In the
last Supreme Court case dealing directly with the act, Doctor's
Associates Inc. v Casarotto, the Court found the act preempted a
Montana statute that required a simple disclosure notice in boilerplate
agreements containing arbitration clauses.9
Clearly the FAA needs to be
amended and restored to its original purpose10: to regulate agreements
between large commercial entities, not between large commercial
enterprises and consumers. ATLA and other groups are working in Congress
to that end. In the meantime, consumers will turn to lawyers to wrest
claims from arbitrators and give them back to judges and juries.
There are ways for lawyers to
do this, but they'll need a sound legal theory and a factual record to
support it.
"Boilerplate arbitration
clauses" refers to clauses in adhesion contracts that, before any
dispute has arisen, bind consumers to arbitrate disputes. "Mandatory
arbitration" is distinct from voluntary arbitration, in which parties
have the right to go to trial but agree instead to arbitrate their claims.
Voluntary arbitration waives rights only after a dispute has occurred and
serves as a substitute for settlement. Mandatory arbitration waives
consumers' rights before a dispute has occurred and serves as a substitute
for trial.
The Federal Arbitration Act
was intended to require federal courts to enforce arbitration agreements
between large commercial entities; it was not intended to apply to state
courts at all.11 The act has been misinterpreted to prohibit
discrimination against arbitration clauses and to preempt state laws that
do. According to the Supreme Court, it prohibits "threshold
limitations placed specifically and solely on arbitration provisions"
and says that "courts may not, however, invalidate arbitration
provisions under state laws applicable only to arbitration
provisions."12 The Court observed that arbitration clauses may be
invalidated directly without running afoul of the FAA when the
invalidation is unrelated to the subject of arbitration; generally
applicable defenses to contract actions "may be applied to invalidate
arbitration agreements without contravening" the FAA.13
The key point to remember is
that to survive preemption, state law must be generally applicable to all
contracts. It must not focus on arbitration as evil or even unfair.
Let us illustrate by changing
the facts in Casarotto. Instead of a court reviewing a statute that
requires contracts containing an arbitration clause to give prominent
notice of the clause, let's say a court is considering a statute saying
that any contract waiving any constitutional right is void unless the
waiver is shown to be knowing and intelligent.14 This statute is, on its
face, applicable to all contracts, not just contracts containing
arbitration clauses.
When confronted with a
boilerplate arbitration agreement, the trial court finds that the
agreement waives the constitutional right to jury trial. Therefore, it is
void under the statute unless there is a showing that the waiver was
knowing and intelligent. Finding no such waiver, the court finds that the
arbitration agreement is unenforceable. The defendant then argues that the
statute is preempted by the FAA. But this time, the defendant loses
because the state law applies to all contract provisions that waive
constitutional rights, not just mandatory arbitration provisions.
Social impact
There is plenty to study about
mandatory arbitration, but available social science is distressingly thin.
Key points of interest to litigators are that claimants appear to suffer
significant economic loss when their fundamental constitutional right to
jury trial is waived and that claimed social benefits of mandatory
arbitration are illusory.
Any discussion of the utility
of mandatory arbitration must acknowledge the difficulty of saying
anything with certainty. The results of studies of court-ordered
(post-dispute) arbitration have "limited applicability in predicting
the effects of predispute arbitration agreements," as court-ordered
arbitration serves as a substitute for settlement, not as a substitute for
trial.
Data available to evaluate
predispute schemes "are widely dispersed, private, and often well
guarded."15 Empirical research on the effect of arbitration on
medical malpractice cases shows that information specific to these cases
is "sparse" and that there is not "compelling empirical
information from other contexts to contribute much to the inquiry."16
Still, what empirical work has
been published regarding predispute arbitral schemes indicates severe
disparities between arbitral and jury awards. A 1997 law review article
compared the results of more than 1,000 employment disputes decided by
juries in California courts with results of 62 arbitration awards issued
by National Association of Securities Dealers and New York Stock Exchange
arbitrators over a comparable period.
Overall, employees in both
forums won a little over half the cases.17 Arbitrators were much less
sympathetic than juries, however, toward discrimination claims (finding
liability less than half as often as juries) and tort claims (finding
liability less than 40 percent as often as juries). In damage awards,
arbitrators proved penurious, their mean and median awards being less than
20 percent of awards made by juries.18 These data suggest that plaintiffs,
if they are forced to try their cases to arbitrators instead of juries,
are less likely to establish liability and, even if they do, are likely to
receive less compensation for damages.
No social benefit outweighs
this loss. Arbitration in theory reduces litigation costs19 but doesn't
necessarily do so in fact.20 Arbitration fees can be high, especially as a
percentage of the amount involved in relatively small disputes. For lower
fees, little justice is secured.
Under the Commercial Dispute
Resolution Procedures of the American Arbitration Association, consumer
cases where less than $10,000 is in dispute can be brought for a filing
fee of $125, but the proceedings are limited to the submission of a letter
briefly explaining the dispute. In disputes valued at between $10,000 and
$100,000, a consumer will face a filing fee of $500 to $1,250; a daily
hearing fee of $150; a daily room rental fee of $150; and a portion of the
arbitrator's fee of $100 to $350 per hour. A number of courts have refused
to enforce arbitration agreements because the costs were unconscionable.21
Mandatory arbitration is also
plagued by the well-documented phenomenon of "repeater bias."22
In arbitration, a consumer typically faces a large corporation that is
involved in many cases. The consumer is likely to be involved in just one.
Arbitrators' livelihood depends on their attracting business from
corporations with many cases and, therefore, arbitrators are likely to be
biased in favor of these "repeat players."
Mandatory arbitration, by
nature, waives a fundamental right secured by federal and state
constitutions: the right to trial by jury. The importance of this right is
sometimes overlooked in modern discourse, but even minimal reflection
reminds us that it was a core concern of framers of constitutions,23 as
important as the rights of habeas corpus and freedom of religion.24 Trial
by jury was designed to be, and remains, an instrument of popular control
over private, as well as government, power. This, of course, is one of the
reasons business interests seek to avoid it.
Mandatory arbitration
generally requires confidential resolution of disputes, taking them out of
the public realm and effectively denying the public its right to know what
disputes are occurring and how they are resolved.25 For example, the
Loewen Group, a Canadian funeral home company, was involved in a
commercial dispute in Mississippi.
In 1995, a jury found for the
plaintiff and the Loewen Group was required to pay a substantial amount in
punitive damages. That part of the story was widely reported in the press.
Of lesser note, however, was the claim Loewen filed in 1998 under the
North American Free Trade Agreement (NAFTA). The claim alleges that the
award resulted from anti-Canadian bias and seeks reimbursement from the
United States for the amount Loewen paid to settle the claim. Why has this
postscript to the case gone largely unnoticed? Because the claim is being
heard by an arbitral tribunal, an arm of the World Bank, whose rules call
for secrecy.26
Another example: Shahzad
Khaligh, an Iranian aerospace engineer at NASA's Jet Propulsion
Laboratory, alleged that she was denied advancement because of gender and
religious bias.27 An arbitration clause will prevent the public from
learning whether the allegations are substantiated.
Arbitration also can be
foisted on persons who don't have choices. In Broughton v. CIGNA
Healthplans, the plaintiff, a recipient of Medicaid benefits in
California, had no choice but to accept an arbitration clause in her
health insurance policy because the state had agreed on her behalf to
waive her constitutional right to a jury trial.28 But federal and state
constitutional doctrines prohibit the state from conditioning the receipt
of a public benefit on the waiver of a constitutional right.29 Otherwise,
nothing would prohibit the state from, for example, granting welfare
benefits only on the condition that recipients campaign for incumbents.
The California Supreme Court is now considering whether the arbitration
agreement constituted an unconstitutional condition.
Constitutional concerns
Because of the preemptive
reach of the Federal Arbitration Act, challenges to arbitration clauses
often do not succeed. Expanding notions of when courts should apply
constitutional analysis to these challenges could be key to defeating
efforts to enforce mandatory arbitration.
Every day, courts enforce
private employment contracts that call for confidentiality, arguably a
waiver of free speech rights, without even considering whether
constitutional standards for waiver of constitutional rights should come
into play. Generally, the standards for waiver of a constitutional right
are high. Waiver must be knowing, intelligent, and voluntary.30
Yet, many arbitration
agreements in the health care context result not from the direct agreement
of the principal, but from the agreement of an agent acting on behalf of
the principal, that is, a union negotiating a health care plan. As a
matter of generally applicable agency law, does the general authority of
an agent allow the agent to waive a constitutional right, or must there be
specific authority?
In Broughton, ATLA
submitted an amicus brief that argued that specific authority is
necessary, a view supported by the most recent pronouncement of the
Supreme Court regarding arbitration, Wright v. Universal Maritime
Service Corp.31 Wright involved the question of "whether a
general arbitration clause in a collective bargaining agreement (CBA)
requires employees to use the arbitration procedure for an alleged
violation of the Americans with Disabilities Act."
Affirming precedent, the Court
said that in a collective bargaining agreement any waiver of the right to
a judicial forum must be "'clear and unmistakable.'"32 Refusing
to decide whether precedent required a finding that such a right could
never be waived, the Court noted that precedent required at least that the
right to a federal judicial forum "is of sufficient importance to be
protected against less-than-explicit union waiver in a CBA."33
Under this approach, the
Constitution is not a direct barrier to arbitration. Rather, it informs a
more general inquiry into whether an agent had authority.34
Establishing that an
arbitration clause violates a state constitution will not necessarily
invalidate the clause. The FAA preempts not just state statutes and state
common law, but state constitutions as well. State constitutional
doctrine, however, can be used to guide interpretation of generally
applicable law, and can lead to interpretations that will invalidate
arbitration clauses in a way that escapes preemption. It is important to
remember that state constitutions are different from the federal
constitution, that jurisprudence under them is still developing, and that
the absence of a federal constitutional claim does not mean that no state
constitutional claim is viable.35 Lawyers can assert that certain
constitutional rights, such as the right to trial by jury or the right to
privacy, directly involve private parties and can be asserted directly
against them.36 They can also invoke precedent to demonstrate that the use
of courts to enforce private agreements—or at least certain
agreements—is state action.37 And they can insist that waivers of rights
such as free speech or jury trial should be subject to the same scrutiny
they would receive if the state were involved.38 Such contentions would
promote the constitutional value of checking arbitrary power, be it
exercised by the state or by a corporation that effectively has statelike
powers over individuals.39
A road map
One of the most important
victories in the fight against mandatory arbitration, Engalla v.
Permanente Medical Group, Inc., provides excellent guidance for
attacking arbitration clauses.40 In March 1986, a radiologist working with
Kaiser noted an abnormality on Wilfredo Engalla's lung and recommended a
follow-up medical examination. For five years, Engalla was denied
permission to see a doctor about the abnormality. In 1991, he was
diagnosed with advanced lung cancer, which, by then, was inoperable.
Engalla's attorney dogged a
foot-dragging opponent to appoint arbitrators and to have the case heard
before Engalla died. It took 144 days to schedule the arbitration hearing.
The day after it was scheduled, Engalla passed away.
His survivors shifted the
claim to court and were initially given 90 days to conduct discovery on
issues related to arbitration and to try to defeat the arbitration clause.
That time eventually stretched to five months, during which 13 motions
were filed and a dozen depositions were taken.
During this time, the
plaintiffs' counsel garnered facts that allowed the court to find that
only 1 percent of Kaiser's cases had a neutral arbitrator appointed within
the contractually required 60 days and that only 3 percent had one
appointed within 180 days. On average, it took 674 days to appoint an
arbitrator and 863 days to go to hearing. Going to trial in the court in
which the case was filed took, on average, only about half to two-thirds
as long.
Plaintiffs' counsel provided
evidence of delay in scheduling the arbitration, and Kaiser's former
general counsel admitted during his deposition that Kaiser was
responsible. The lawyers presented evidence that Kaiser kept extensive
records about arbitrators it had used, indicating that the health plan
might have delayed the process to seek a favorable decision maker.
In fashioning this case,
counsel in Engalla gave the court the theoretical basis for a decision and
the facts that supported the theory. This proved critical in moving the
court, which had been in favor of arbitration, to re-evaluate its
assumptions that arbitration is a quick, inexpensive, and unbiased way to
resolve disputes. High-quality lawyering like that in Engalla can help
keep the boilerplate from blocking the courthouse door.
Notes
1. Michael R. Pennington, Every
Health Insurer's Litigation Nightmare, THE BRIEF, Summer 1999, at 47,
52.
2. See Southtrust Bank
v. Williams, No. 1980706 (Ala. Sup. Ct. 1999); Badie v. Bank of Am., 79
Cal. Rptr. 2d 273 (Ct. App. 1998), review denied, 1999 Cal. LEXIS
1198 (Cal. Feb. 24, 1999).
3. Caroline E. Mayer, Hidden
in Fine Print: 'You Can't Sue Us': Arbitration Clauses Block Consumers
from Taking Companies to Court, WASH. POST, May 22, 1999, at A1.
4. See, e.g., Broughton
v. CIGNA Healthplans, 76 Cal. Rptr. 2d 431 (Ct. App. 1998).
5. Hill v. Gateway 2000, Inc.,
105 F.3d 1147 (7th Cir.), cert. denied, 118 S. Ct. 47 (1997).
6. See generally David
S. Schwartz, Enforcing Small Print to Protect Big Business: Employee
and Consumer Rights Claims in an Age of Compelled Arbitration, 1997
WIS. L. REV. 33 (1997); Jean R. Sternlight, Panacea or Corporate Tool?
Debunking the Supreme Court's Preference for Binding Arbitration, 74
WASH. U. L. Q. 637 (1996).
7. See, e.g., Miranda
v. Arizona, 384 U.S. 436, 444 (1966); Hittle v. Santa Barbara County
Employees Retirement Ass'n, 703 P.2d 73, 82 (Cal. 1985).
8. AMERICAN ARBITRATION ASS'N
ET AL., COMM'N ON HEALTH CARE DISPUTE RESOLUTION, DRAFT FINAL REPORT 4
(Dec. 17, 1998) (on file with author).
9. 116 S. Ct. 1652 (1996).
10. See Southland Corp.
v. Keating, 465 U.S. 1, 22-35 (1984) (O'Connor, J., dissenting).
11. Id. at 26 n.10
(O'Connor, J., dissenting).
12. Casarotto, 116 S.
Ct. 1652, 1656, 1657.
13. Id. at 1656.
14. We will assume
additionally that, under the law of this state, it is established that
certain constitutional rights, such as privacy rights and the right to
jury trial, can be asserted against private parties.
15. Elizabeth Rolph et al., Arbitration
Agreements in Health Care: Myths and Reality, LAW & CONTEMP.
PROBS., Winter 1997, at 153, 180.
16. Thomas B. Metzloff, The
Unrealized Potential of Malpractice Arbitration, 31 WAKE FOREST L.
REV. 203, 213-14 (1996); see also Barry R. Furrow, Managed Care
Organizations and Patient Injury: Rethinking Liability, 31 GA. L. REV.
419, 490 (1997); Schwartz, supra note 6, at 104-05.
17. Schwartz, supra
note 6.
18. See also GENERAL
ACCOUNTING OFFICE, HOW REGISTERED REPRESENTATIVES FARE IN DISCRIMINATION
DISPUTES, GAO/HEHS-94-17 (Mar. 30, 1994) (expressing concern about bias
among arbitrators); see also Sternlight, supra note 6, at
684 n.273.
19. Metzloff, supra
note 16, at 208.
20. Sternlight, supra
note 6, at 694, n.318.
21. See, e.g., Shankle
v. B-G Maintenance Management, Inc., 163 F.3d 1230, 1234-35 (10th Cir.
1999); Randolph v. Green Tree Fin. Corp., 178 F.3d 1149, 1157-58 (11th
Cir. 1999); Cole v. Burns Int'l Sec. Serv., 105 F.3d 1465, 1483-89 (D.C.
Cir. 1997).
22. See Lisa B.
Bingham, Employment Arbitration: The Repeat Player Effect, 1
EMPLOYMENT RTS. & EMPLOYMENT POL'Y J. 189 (1997); Schwartz, supra
note 6, at 60-61 (1997); Furrow, supra note 16, at 493 (citing
authorities); Sternlight, supra note 6, at 684-85.
23. See, e.g., Stephan
Landsman, The Civil Jury in America: Scenes from an Unappreciated
History, 44 HASTINGS L. J. 579 (1993).
24. See, e.g., Reed v.
Wright, 2 Iowa 15, 22 (1849).
25. The First Amendment
"protects the public's interest in receiving information." See
Pacific Gas & Elec. v. Public Util. Comm'n, 475 U.S. 1, 8 (1986).
26. All references to the Loewen
litigation are taken from the "Notice of Claim" prepared by the
Loewen Group in the arbitration case and released to the author under the
Freedom of Information Act.
27. Sex Bias Suit Ordered
Settled, WASH. POST, Aug. 25, 1999, at A7.
28. Broughton, No.
S072583.
29. See, e.g., Sherbert
v. Verner, 374 U.S. 398 (1963); Committee to Defend Reproductive Rights v.
Myers, 625 P.2d 779, 781 (Cal. 1981).
30. See, e.g., Miranda,
384 U.S. 436, 444; Hittle, 703 P.2d 73, 82.
31. 119 S. Ct. 391 (1998).
32. Id. at 396 (citing
Metropolitan Edison Co. v. National Labor Relations Bd., 460 U.S. 693, 708
(1983)).
33. Id.
34. California decided this
question unfavorably in Madden v. Kaiser Found. Hosps., 552 P.2d
1178 (Cal. 1976), which arguably was overruled sub nom. by Blanton
v. Womancare, Inc., 696 P.2d 645 (Cal. 1985). California clearly
recognizes that an arbitration agreement entered into by an agent without
authority to agree to it is not enforceable. El Camino Community
College Dist. v. Superior Court, 219 Cal. Rptr. 236, 239 (Ct. App.
1985).
35. See, e.g., State v.
Jewett, 500 A.2d 233 (Vt. 1985).
36. See Erwin
Chemerinsky, Rethinking State Action, 80 NW. U. L. REV. 503 (1985).
37. Shelley v. Kraemer,
334 U.S. 1 (1948). The holding has been much criticized, primarily because
it potentially makes all claims constitutional.
38. See, e.g., Jewett,
500 A.2d 233.
39. See David Ling,
Case Comment, Preserving Fairness in Arbitration Agreements: States'
Opinions After Casarotto, 2 HARV. NEGOTIATION L. REV. 193 (1997). But
see Rollings v. Thermodyne Indus., 910 P.2d 1030 (Okla. 1996), in
which the Oklahoma Supreme Court went through contortions to uphold an
arbitration clause in the face of a unique constitutional provision. The
decision collects then-extant state court constitutional decisions on
arbitration clauses. Be cautioned that the preemption issue is not
necessarily addressed in otherwise favorable decisions.
40. 938 P.2d 903 (Cal. 1997).
John Vail is assistant counsel
for constitutional litigation in ATLA's Legal Affairs Department.
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