Legislation Proposed to Ban Mandatory Arbitration Clauses

On April 29, 2015, Senator Al Franken (D-MN) and Representative Hank Johnson (D-GA) introduced the Arbitration Fairness Act of 2015 (AFA), which would amend the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (FAA), by invalidating pre-dispute agreements requiring arbitration of employment, consumer, antitrust, or civil rights disputes.

Under the proposed legislation, agreements to arbitrate those four categories of disputes could only be made after a dispute has arisen.  The AFA would continue to allow mandatory pre-dispute arbitration provisions in business-to-business agreements, and would not apply to collective bargaining agreements.  The proposed legislation would also empower federal courts, rather than arbitrators, to determine the validity and enforceability of arbitration agreements under federal law, regardless of whether the party resisting arbitration focuses its challenge specifically on the arbitration agreement, or instead offers a broader challenge to the enforceability of the parties’ contract.  A substantively identical bill was introduced in 2013 by Senator Franken but it died in the Judiciary Committee.

Potential Impact of the AFA.

The proposed AFA would undermine several key pillars of arbitration under the FAA:

• It would apply retroactively by invalidating existing pre-dispute arbitration clauses because the AFA would apply “with respect to any dispute or claim that arises on or after” the date the AFA is passed.
• It would strip arbitrators of their authority to rule on the validity and enforceability of an arbitration agreement. As it does not distinguish between domestic and international disputes, the proposed AFA may have the unintended consequence of severely reducing the efficacy of arbitration as a dispute resolution mechanism for cross-border disputes.
• As it requires both sides to agree to arbitration after the dispute arises, when parties are less likely to cooperate in negotiating an agreement to arbitrate, and where one party may see an advantage in litigation (including a threat of extensive and costly discovery), the proposed AFA will likely result in significantly fewer disputes being arbitrated.
• By invalidating certain arbitration clauses, the AFA may impose significant financial burdens upon the court system, consumers and other contract counter-parties. The court system is already overburdened, and an influx of litigation may result in higher filing fees and delayed adjudication of claims.

Growing Movement Against Pre-Dispute Arbitration.

The introduction of the AFA is part of a growing effort to reverse a series of Supreme Court cases applying the FAA to consumer disputes.  In March 2015, the Consumer Financial Protection Bureau issued a study criticizing the use of pre-dispute arbitration in connection with consumer financial products or services, which we analyzed in a previous post.  The Bureau’s study could serve as its justification for rules prohibiting or significantly restricting pre-dispute arbitration agreements in contracts for consumer financial products or services.

We will continue to monitor the status of the proposed AFA and report back on any significant developments related to the arbitration of consumer disputes.