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Defeating Mandatory Arbitration Clauses:

What's a lawyer to do when boilerplate arbitration clauses bar the courthouse door?

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.  


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).


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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