New Law And Circuit Court Decisions Narrow The Enforceability of Arbitration Agreements Under The FAA
Arbitration has the potential to make dispute resolution easier for parties, but especially where parties have unequal bargaining power, information, or resources, the weaker party may ultimately question the enforceability of the arbitration agreement. Now, a new federal law signed by the President along with several recent circuit court decisions have narrowed the enforceability of some arbitration provisions, going against a long-term legal trend towards the broadening enforcement of arbitration agreements.
The Federal Arbitration Act (FAA) was enacted in 1925 to facilitate judicial resolution of private disputes through the medium of arbitration. Under the Act, parties may agree to present disputes over a contract under state or federal law to an arbitrator. Courts are obligated by the Act to enforce arbitration clauses by staying judicial proceedings and ordering arbitration when a litigant shows that their opponent agreed to arbitrate. By agreeing to arbitrate, parties waive their ability to appeal substantive issues to a court, and they can agree to abide by procedural rules which facilitate speedier resolution and increased confidentiality without subjecting their case to the public record and without the extensive due process available to court proceedings.
SCOTUS And The FAA's Enforceability
Over time, SCOTUS has developed pro-arbitration caselaw relating to the FAA. In cases where there are ambiguities present as to whether the claims in dispute fall within the parties' arbitration agreement, this caselaw creates a strong presumption in favor of compelling arbitration. The court has also established precedent related to federal preemption under the Interstate Commerce Clause of the Constitution. It held in 2017 that state law limitations on arbitration are preempted by the federal legislation in certain circumstances, such as when a state law "discriminates on its face" against arbitration as well as in the case of a state law that "covertly accomplishes the same objective" by disfavoring contracts that have the defining features of arbitration agreements."
Further, SCOTUS ruled in 2018 in Epic Systems Corp. v. Lewis that arbitration agreements governed by the FAA can force employees to pursue claims against employers on an individual rather than class basis (in other words, preventing class actions to be brought against companies). This is so despite the fact that the FAA has a "saving clause" which allows courts to refuse to enforce arbitration agreements upon certain grounds, and even if the disputed arbitration agreement violates some other federal law such as the National Labor Relations Act. One result is that the individual plaintiff who proceeds through arbitration in this scenario would not benefit by sharing resources and evidence with other class members. Another is that since arbitrations are off the public record, the plaintiff would likely neither have the benefit of examining previous similar cases brought against the employer if those cases were arbitrated, nor be able to provide a useful record for future plaintiffs. The result in Epic Systems ultimately reduces the financial and legal incentives for any one individual bound by such agreements to bring suit alleging unlawful employer practices, which could include sexual harassment and sexual assault claims.
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But more recent decisions in the Eleventh and Fifth Circuits have now disallowed certain other broad applications of arbitration clauses. On top of that, just earlier this month, President Biden signed a new law abrogating the enforceability of arbitration agreements for sexual harassment and sexual assault claims.
Eleventh Circuit Restricts Broad Arbitration Agreements in Calderon
Though arbitration provisions were traditionally meant to govern only disputes that were somehow connected to the contract between parties and sufficiently specific situations, companies have increasingly gotten away with throwing arbitration agreements in place to cover a broad range of situations and involving a broad range of stakeholders who never signed the contract. This expansion of arbitration was often condoned by courts including SCOTUS, but a July 14, 2021 decision in the Eleventh Circuit Court of Appeals finally checked the trend.
Calderon v. Sixt Rent a Car held that arbitration agreements govern only the contract in which they arise. So broad provisions that put disputes in any situation to arbitration are invalidated when parties attempt to apply them to situations "beyond the four corners of the contract." (State laws create similar exceptions, but again, they are often preempted by the federal law.)
The plaintiff in Calderon rented a car from defendant, the Sixt Rent a Car company, with whom he had not signed an arbitration agreement. However, a third-party web platform, Orbitz.com, operated as a middleman between the plaintiff and the car rental agency. Orbitz had required the plaintiff to assent to a digital agreement containing an arbitration provision which called for arbitration in the case of any dispute. When the plaintiff disputed a $700 charge for incurred damages from Sixt following the use of a vehicle, the rental company sought to force arbitration of the dispute under third party Orbitz's arbitration agreement with the plaintiff.
To decide the case, the Eleventh Circuit turned to the language of the contract between the plaintiff and Orbitz. The court interpreted the contract's language as indicating that arbitration was called for in any dispute over a product and service provided by Orbitz, which would exclude products or services provided by Sixt. Sixt argued that the contractual language was uncertain, and that according to SCOTUS FAA precedent Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., ambiguities should be decided in favor of arbitration.
However, the court ruled that this dispute was beyond the scope of the FAA, because the FAA governs arbitration in disputes which "arise out of" a contract between parties, while the the dispute between the plaintiff and Sixt was separate from the plaintiff's arbitration contract with Orbitz. Whether a dispute "arises out of" a contract between parties previously depended on caselaw that looked to whether such a dispute was reasonably foreseeable before the contract was signed. The court held that Calderon's dispute with Sixt failed this "reasonable foreseeability" test for the purposes of his contract with Orbitz.
Narrowing of Arbitration Applicability
While broad arbitration clauses are becoming increasingly common in boilerplate agreements that companies produce for both employees and consumers, the Calderon decision may give companies pause, especially if other circuits follow suit. For a contract to fall under the FAA, there must be a "nexus" between the contract and the dispute, which the plaintiff in Calderon successfully showed was lacking. Parties may, of course, still agree to arbitrate under the FAA independently of their original contractual arrangements. But in considering the enforceability of broad arbitration clauses on future disputes, parties should be wary about disputes that do not arise out of the contractual language of the original agreement.
Further, state laws govern arbitration as well, and may be relevant to disputes over broad arbitration clauses like that of Calderon. In AT&T Mobility v. Concepcion, SCOTUSheld that the FAA preempts state law exclusions applying to arbitration agreements. However, Calderon was ultimately not governed by the FAA, so applicable state law that would be otherwise preempted would instead apply. In New York, for example, General Business Law §399-c states that mandatory arbitration clauses are null and void in contracts for the sale or purchase of consumer goods.
Other federal appellate courts have also recently narrowed the applicability of arbitration provisions. In 2019, the Fifth Circuit held in Henry Schein Inc. v. Archer and White Sales Inc. that arbitration was not compelled by an agreement which did not clearly demonstrate the intent that the applicable claims be arbitrated. (On appeal, SCOTUS dismissed the writ as "improvidently granted," meaning that the court should never have accepted the case, and effectively upholding the circuit court's ruling.) In the 2020 Fifth Circuit case, Robertson v. Intratek Comput. Inc., a whistleblower dispute was governed by an arbitration agreement under the FAA, but one of the parties to the dispute had not signed the agreement. The court found that the broad agreement did not compel arbitration for claims relating to that party.
New Law: Ending Forced Arbitration of Sexual Harassment and Sexual Assault Act
On March 3, President Biden signed an act amending the FAA as relates to sexual harassment and sexual assault claims, the Ending Forced Arbitration of Sexual Harassment and Sexual Assault Act of 2021. This act effectively supersedes the FAA, amending it such that arbitration agreements are unenforceable as applied to sexual harassment and sexual assault claims which arise prior to the dispute. Agreements compelling arbitration of class action disputes over such claims are likewise unenforceable.
But what happens when a plaintiff brings claims which include sexual harassment or sexual assault claims among other claims not related to sexual harassment or assault? The new law states that the former will proceed in court unless the parties agreed to arbitration after the dispute arose, whereas the latter will proceed concurrently in arbitration if a prior arbitration agreement governs those claims and the defendant does not agree to move those claims to court. As court proceedings are more costly and more transparent than arbitration, the choice between splitting up the claims or agreeing to pursue all of them in one venue can be an additional point of leverage in settlement negotiations.
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