Will the Courts Ever Get it Right?

After reading Professor Rau's article entitled "Evidence and Discovery in American Arbitration: The Problem of 'Third Parties'", I once again found myself angry at the weird arbitration restrictions that court's interpretations of the  FAA have set up. I hadn't really considered the issue of arbitral discovery involving information/testimony of third parties before I read the article. Professor Bayer mentioned fairly early in the semester that an arbitrator could definitely order the oral deposition of a third party, but that some jurisdictions feel that an arbitrator doesn’t have the power to demand document production from a third party. Frankly, that was the first and last time I thought about third-party discovery.

But, Professor Rau points out that it’s the courts that have created the issues with third-party discovery in arbitration. For example, there’s the issue of whether the third-party “consented” to be involved in the arbitration—since arbitration is by agreement, how can you force a party to appear when they didn’t initially agree? Theoretically speaking, that’s a good argument. Courts have responded to this argument in a myriad of ways, which Professor Rau calls mostly “flat and unnuanced”. This is because the general consensus has evolved into something pretty illogical—that arbitrators can “enlist” third parties to come to an arbitration “as a witness”, but can’t compel them to give depositions or bring documents with them. If documents are needed, they have to be accompanied by the third party personally, and the third party has to also be coming to the arbitration to give testimony.

Now, I’m sure there’s an excellent theoretical background that underlies this solution the courts have come up with. But, in the real world, does this make any sense at all? Reading through it, I got the general sense that “something just isn’t right here”. And that’s mostly because I see these rules creating an arbitration system that is crippled and ineffective. What if a third party has important documents, but isn’t needed to testify about them? What if not being able to get those documents completely changes how the arbitrator rules in the dispute? Wouldn’t that open the award up to a challenge in court? And then, wouldn’t that result in litigation that the arbitration process was supposed to avoid?

Professor Bayer told us that one criticism of arbitration is that the ability to order discovery has made arbitration too much like litigation. That certainly may be the case. But, I can visualize complex disputes (where, say, the parties chose arbitration for confidentiality purposes, not for cost efficiency) where the vital information may be scattered across many groups. Wouldn’t discovery be necessary in order to give the arbitrator the most comprehensive basis for his/her award? By limiting third-party discovery, I think the courts are making the problems that arbitration faces worse, not better.

New Reasons Stolt-Nielsen was Wrong (supplied by Professor Rau)

I actually enjoyed Professor Rau’s article a great deal, because I feel like he took the ideas that we’ve been bouncing around in class (especially regarding our negative feelings towards Stolt-Neilsen, Concepcion, and Rent-A-Center) and restated them in a more academic way, with more supporting documentation. It’s nice to know that the academic community at large agrees that the Supreme Court has dug itself into a confusing hole (or maybe found itself trapped in a maze) regarding arbitration precedent.

I think the most interesting argument that Professor Rau made was about the holding regarding “silence” in Stolt-Neilsen. I had never considered this decision from the perspective of general contract interpretation—and now that the article stated such an argument, I now feel even more strongly that this decision was a mistake. The argument is this: in contract disputes, judges often have to make determinations about contract construction in order to fill the “gaps” in the contract that led to the disagreement in the first place. In determining what the intentions of the parties were, or in trying to fill the gaps, however, the judges often end up interpreting the contract. And this is OK, because that’s how our system has always operated. The Court in Stolt-Neilsen, on the other hand, decided that an arbitration panel can only decide questions of construction, not interpretation, because to do the latter is to “impose its own conception of sound policy”. Professor Rau argues that this was an unnatural limit to place on arbitral power, because no contract reader only makes decisions on construction without any interpretation.

I know we’re supposed to be critical of this article, but I couldn’t find something that I really disagreed with (feel free to comment if you found something particularly terrible that I totally missed). I almost wish that we had read this article earlier in the semester, actually, because I think that it gave me a new way to look at cases that conceptually fits with what I’ve learned in other classes (coincidentally, that includes Contracts with Professor Rau). Professor Bayer told us to never forget that arbitration is a contractual agreement, but I definitely needed this article to remind me that basic contract principles apply to arbitration agreements, too.

The Supreme Court's Kind of a Control Freak

I thought the (barely) majority opinion in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. was really strange, and I wonder how it’s supposed to fit in with past judicial precedent on arbitration. The reason for my confusion is this: I can’t see how the generally pro-arbitration policy that the Supreme Court has adopted fits with the idea that “remaining silent” on the issue of contractually authorizing class arbitration means no agreement to arbitrate. I was surprised because I found that the dissenting opinion fit more within what I saw was the prevailing precedent of the Court. The four dissenting Justices pointed out that the issue at hand was whether the arbitrators “exceeded their powers”, and considering that both parties agreed to have the threshold issue examined by an arbitration panel, it seemed to me like the “correct” decision would have been for the Court to agree with the arbitrators, or at least remand the case back to the arbitration panel, as the dissent suggests.

            I think that there are two issues that underlie the Supreme Court’s surprising decision here. The first is that the majority seemed disturbed by the arbitrator’s reliance on the policy arguments advanced by AnimalFeeds. The Court said that, by doing this, “what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration” (1767). I don’t necessarily see anything wrong with that—since the arbitrators are experts in the subject matter of this dispute and since arbitration decisions can’t necessarily be used to form precedent of any kind. Perhaps the Justices feel that only the judiciary should be allowed to make decisions based on interests of public policy. Or, and maybe more importantly, the Justices feel that only the judiciary should be able to define what public policy in a certain subject area is.

            This leads to the second issue that I feel really swayed the Court to make this unusual decision: the problem of “class arbitration”. The lack of a majority decision in Green Tree Financial Corp. v. Bazzle has obviously left the Court scrambling to decide what to do with class arbitrations. And I think that the Court would like to create some firm guidelines through current cases—but it’s having some issues squaring class arbitration with its past decisions on the FAA. But it’s not like class arbitrations have stopped while the Supreme Court scrambles to clarify the “rules of engagement” for that process. I think that what the Court really didn’t want in this case was for the arbitrators to be the guiding voice on the public policy concerning class arbitration. The Court obviously wants to set the rules and interpretive guidelines for class arbitrations, just like they did in the earlier cases we’ve read (First Options, Prima Paint, etc.). Unfortunately, they’re a bit behind the curve at this moment, and this decision isn’t helping them make much progress.

            In conclusion, no matter what the actual issue in this case was, the Court was never going to uphold the arbitration panel’s decision. The Court wants to be the authors of public policy relating to class arbitrations, and they’re not going to let random arbitrators beat them to the punch. 

Bad Employment Arbitration Clauses

Now that we have (finally!) gotten to the section of the textbook where the courts aren’t upholding every single arbitration agreement for the purposes of furthering the judiciary’s pro-arbitration policy, I was curious to see what other employment arbitration agreements have been overturned by the courts based on the principles advanced in Hooters of America v. Phillips. In that case, the arbitration “agreement” promulgated by the company was found to violate Hooters’ duty towards its employees because of its completely unfair conditions that basically guaranteed that the company would win (or if it didn’t win, could easily get out of arbitration and go to the court, while the employee could not). Here are two of the other judicially-overturned arbitration clauses that I found:

• ·       In Penn v. Ryan’s Family Steakhouses, Inc. (95 F.Supp.2d 940), the arbitration clause provided three categories of individuals and stated that the panel would be comprised of one person from each of the categories, all of which were administered by Employment Dispute Services, Inc. The categories were:

(a) Supervisors or managers of an employer signatory to [EDS] Agreements;

(b) Non-exempt employees (non-exempt as defined by the Federal Wage and Hour law) who are signatory to [EDS] Agreements;

(c) Attorneys, retired judges, or other competent professional persons not associated with either party.

Because the employer was a “repeat player” in using EDS’ services, the court found that EDS had an incentive to load the lists with people who would side with Ryan’s. Such an incentive made this section of the agreement just as unfair as the one in Hooter’s.

• ·      In Murray v. United Food and Commercial Worker’s International Union (289 F.3d 297), once again, the Fourth Circuit Court of Appeals found that the method for choosing arbitrators as per the agreement signed by the plaintiff was unconscionable and made the clause unenforceable. Here, the clause stated:

“A single arbitrator shall be chosen by the alternate strike method from a list of arbitrators provided by the [Local 400] President's office. Such arbitrator shall not have the authority to alter[,] change or diminish any power, right or authority granted to the President or Acting President of Local 400 under the terms and conditions of the Bylaws of Local 400.”

Though there’s nothing wrong with the “alternate strike method” of selecting arbitrators, the court here took issue with the fact that the initial list of arbitrators was totally generated by the Union, making it impossible for Murray to have a fair outcome through the arbitration process

Out of brevity, I won’t post more cases, but it seems as though many employment contracts feature this one-sided arbitrator selection process, which the courts refuse to uphold in most cases. Reading all of these decisions closely, it’s interesting to see how the courts carefully skirt around the boundaries of precedent established by some of the earlier cases we’ve looked at. In the end, I find it kind of heartening to know that courts will still protect the “little guy” against really biased arbitration clauses.

Unequal Bargaining Power

In Gilmer v. Interstate/Johnson Lane Corp., the Supreme Court discussed unequal bargaining power between employers and employees, and how the existence of such unequal bargaining was not a sufficient reason to hold arbitration agreements unenforceable in an employment context. The Court cited two prior decisions, Rodriguez de Quijas and McMahon to back up their reasoning. While I agree with the Court’s decision overall, because it would have been entirely impractical to hold that employment disputes can never be arbitrated, I was intrigued as to what unequal bargaining arrangements were validated by the Court in the prior two decisions.  This is especially because, like several of my classmates, I have serious issues with people being forced into arbitration because they had to sign contracts of adhesion. As Justice Stevens pointed out in his dissent, you don’t really have a choice to reject the arbitration clause in your employment agreement unless you’d also like to reject the job you’re being offered. I got the impression from the reading that the Court is really looking to Congress to fix the unequal bargaining issue (and protect consumers and employees), and that’s the reason why they continue to make decisions in favor of employers.

Rodriguez de Quijas v. Shearson/American Express, Inc. (490 U.S. 477) was a case involving a customer agreement signed by the plaintiff (and others), who were securities investors. The plaintiffs alleged that the brokerage firm respondents had lost their money and had conducted fraudulent transactions in violation of the Securities Act of 1933. The lower courts had held that some language in the Securities Act precluded those claims from being sent to arbitration. Much like the decision in Gilmer, the Supreme Court held that the Securities Act did not, in fact, stop claims from being sent to arbitration. Interestingly, Justice Stevens also dissented on this case.

Shearson/American Express, Inc. v. McMahon (482 US 220) is, unsurprisingly, more of the same issue as the Rodriguez case. Here, the claims were under the Securities Exchange Act of 1934 and the RICO Act. And, once again, the Supreme Court found that claims under both acts were, in fact, arbitrable.

I was surprised to find that these cases were less about unequal bargaining power and more about statutory interpretation, considering the context in which they were discussed in Gilmer. It’s true that, as in Gilmer, the claimants in these cases argued that statutory language is what stopped a certain kind of case from going to arbitration, but the unequal bargaining power wasn’t really an issue that was heavily discussed in either. Maybe the Supreme Court didn’t have a wide body of arbitration cases to pick from?  Either way, their point is clear: claims under any statute can be sent to arbitration, because of the judicial system’s pro-arbitration stance. I don’t know how fair that is to consumers, but again, maybe the Court is looking to Congress to fix that issue.