Karon Law Blog

Next Supreme Court Appointment Will Have Major Impact on Forced Arbitration

By Jonathan Karon

Whoever Donald Trump appoints to the Supreme Court will likely cast the deciding vote in many significant cases.  During the Presidential campaign there was much discussion about how the candidates’ different judicial picks would affect the Court.  One issue which flew under the radar was the effect of the next justice on whether one-sided contracts can unfairly impose mandatory arbitration on consumers.  Prior to his death, Justice Antonin Scalia authored a number of decisions that held that mandatory arbitration clauses in contracts can be imposed on consumers and small business owners, even when they are obtained by the unequal bargaining power of large corporations and even where, as a practical matter, it prevents a meaningful opportunity to hold those corporations accountable for illegal conduct.  The New York Times and other media outlets have reported how the use of mandatory arbitration clauses in a wide variety of contracts including credit cards, cell phones, employment and nursing home admissions can forced wronged individuals to have their claims heard by arbitrators picked by the corporate defendants in proceedings governed by one-sided rules favoring the defendants.  The Obama Administration recently drafted rules limiting the use of mandatory arbitration agreements for certain consumer transactions like student loans and nursing home admissions.  But these rules could be repealed by the in-coming Trump administration.  So far, the ability of corporations to impose these one-sided clauses has been supported by a number of 5-4 U.S. Supreme Court decisions written by Justice Scalia.

The first of these decisions was AT& T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). It held that the Federal Arbitration Act, a law enacted in 1925 to allow businesses to voluntarily resolve disputes by binding arbitration, gave AT & T the right to require its customers to agree to binding arbitration as a condition of getting cell phone service. Moreover, even though California, the state in which the plaintiffs lived, prohibited the enforcement of any contracts that barred consumers from bringing a class action lawsuit, AT & T could require consumers to also waive those rights in binding arbitration.

Justice Scalia was unmoved the argument that it was unfair or unconscionable to allow a large corporation to unilaterally impose these types of provisions on consumers on a take it or leave it basis. He wrote that “the times when consumer contracts were anything [else] are long past.” Contrary to the legislative history, Justice Scalia then asserted that the 1925 law reflected a federal policy favoring arbitration over court proceedings. He also ignored the practical realities that by barring class resolution of low dollar claims, either in court or in arbitration, he was rendering these claims uneconomical to bring. Plaintiffs had alleged that AT& T engaged in fraud and false advertising by charging sales tax on phones it advertised were “free”. As noted by Justice Breyer in dissent, as each plaintiffs’ potential recovery was $30.22, requiring each potential plaintiff to bring their claims individually essentially immunized A.T. & T. for its conduct as no rational attorney would pursue that case.

The Concepcion case was followed by American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013). In that case, Justice Scalia, again writing for the five Republican appointees, decided that American Express could force a group of small restaurant owners into binding arbitration, even where the plaintiffs had alleged that American Express forced them into signing their arbitration agreement, by illegally using its monopoly power in violation of the Sherman Anti-Trust Act. To make matters worse, Justice Scalia stated that it simply did not matter whether enforcement of the arbitration provision made it not feasible to pursue the claims. According to him, “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”

In dissent, Justice Kagan pointed out the real world implications of Justice Scalia’s opinion:

“The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract’s arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool’s errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability – – even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.

And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.”

There was nothing in the language or history of the Federal Arbitration Act that required these results.  Presently, the Court is split 4-4 on whether these clauses can be unilaterally imposed in virtually all circumstances.   Since the 7th  Amendment to the Constitution provides a right to jury trials in civil cases, one might think that Justices claiming to be strict constructionists would be reluctant to impose mandatory arbitration based on the Federal Arbitration Act.  So far, this has not proved to be the case.  When a formal nomination is made, it will be interesting to see if the nominee’s prior decisions afford a clue into their thinking on this important issue.