« Private Equity Works on Its Image Problem | Main | The Permanent Foreclosure Crisis and Obama's Refinancing Obsession »

Arbitration Double Standards

posted by Bob Lawless

A case out of the Third Circuit demonstrates the frustration that many of us have with the current state of consumer arbitration law. The consumer had purchased a Dell computer that he alleged had design flaws leading to repeated failure of his motherboard. After Dell refused to fix the computer a third time, he brought a class action against Dell for the alleged design defects.

Dell invoked an arbitration clause which read that any dispute "SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF)." This clause was found in "clickware," that is an agreement to which the consumer agreed by checking a box on Dell's web site when he purchased the computer. The capital letters were in the original agreement, presumably to make this language stand out due to its importance. As many readers of this blog will quickly pick up, there is a problem with this language -- because of abuses the National Arbitration Forum agreed to a consent judgment where it would no longer administer consumer arbitrations.

This case should have been easy. Dell offered its customer a "take it or leave it" form contract that Dell drafted. In that contract, Dell specified an arbitral forum that had to stop doing consumer arbitrations because of its abusive practices toward consumers. In its own contract language, Dell made clear that any dispute had to be resolved "exclusively" by the National Arbitration Forum. Because Dell's own contractual language fails to bind the consumer given the unavailability of the National Arbitration Forum, the consumer is not required to bring his claim in arbitration. In dissent, Judge Sloviter makes similar points. The lower court in this case also came to this conclusion.

The majority of the appellate court, however, sets up an outcome where Dell wins where the coin comes up heads and where the consumer loses when the coin comes up tails. The court notes that the word "exclusively" in the arbitration clause could be read to modify "binding arbitration" rather than the forum where the arbitration occurs. Well, I suppose that language could be read that way, but we normally do not go out of our way to construe an ambiguity in favor of the drafter, especially in a consumer form contract.

The majority also makes much of section 5 of the Federal Arbitration Act, but it makes the same mistake that many of my students make coming out of a first-year law school curriculum that is heavy in case analysis. The majority spends a lot of time talking about what courts say about section 5, literally relegating the actual language of section 5 to a footnote (the underlining is mine):

If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator, or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator.

Section 5 could be read to allow the court to name an arbitrator on these sorts of facts which, in fairness to the court majority, some courts have done. But, there are at least two questions raised by such an interpretation. On the facts of this case, is there a "lapse in the naming of an arbitrator?" Second, is the National Arbitration Forum even an "arbitrator" within the meaning of the statute. The NAF is an arbitral forum, and the language of the statute as a whole suggests that, where it says "arbitrator," it means the actual human being who will conduct the arbitration. Here, the problem was not a lapse in naming an "arbitrator" but the unavailability of the organization designated to administer the arbitration as chosen by the parties to the contract.

Fair-minded people might see contractual and statutory arguments going both ways, and the majority admits as much. Thus, the majority rests heavily on what we might call a "tie breaker," and it is here where my frustration lies. In reaching its decision, the majority makes six references to the "federal policy favoring arbitration." This seemingly high-minded policy is not exactly a neutral principle. A policy "favoring arbitration" necessarily favors big corporate interests over consumers. It is a policy that is hostile to consumer claims and to class actions. Maybe the court wants to be hostile to such claims, but it is dishonest to dress it up as a neutral appeal to preferring arbitration. One also might wonder where this "policy" comes from such that the court would not be wiser sticking to the "policy" articulated by Congress in the words of the statute.

The application of this so-called policy becomes a "heads I win, tails you lose" rule. When companies get the arbitration clause correct, they can ask the courts to enforce the clause as written. When companies overreach and offer arbitration clauses with enforceabillity issues, they can ask the courts to fix their mistake, construing the clause or law to require arbitration nonetheless. In their extreme application, these principles can undermine public confidence in the courts to treat all parties equally.

Comments

It sounds to me like the Third Circuit is reading the arbitration agreement exactly the way the Supreme Court would, if it took cert. Bob is complaining that the court looks at other courts, and refuses to look at the words of the statute. He's right. But that's how courts are supposed to treat this statute. This is what the Supreme Court tells us.

Look at 9 USC 1, for example. It says that "nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." But the Supreme Court has told us that employment arbitration contracts are binding.

The problem is that federal courts, and many state courts, are rapidly reading the adhesion doctrine out of the law. Lochner lives.

A thorny issue from a policy standpoint, freedom of contract v. adhesion.

I wouldn't call this Lochner-esque; Lochner was speaking to actual and knowing agreements between parties. These adhesion "contracts" will keep getting longer and more ridiculous if courts continue to enforce them.

our courts are widely porceived as in the thrall of big money. decisions like this demonstrate an ennui on the part of our judiciary, indifference to the inevitable undermining of our jurisprudence by a widespread disbelief in its fundamental fairness.

as #OWS grows expoentially in the coming year, one may witness in action the inevitable results of a dearth of true justice.

Remember, also, that the federal poicy in favor of arbitration was created by the Court, not by Congress. Congress created a policy in favor of specific enforcement of arbitration agreements, with the emphasis on the availability of the particular remedy. In Concepcion Scalia wrote that there is a “liberal federal policy favoring arbitration,” quoting Moses H. Cone. That is not precisely the proposition that Moses H. Cone endorsed. Moses H. Cone announced a “federal policy favoring arbitration agreements.” The one word the Concepcion opinion omits is important.

I petitioned and provided a ton of information to both AG's in Minnesota with the unlawful acts of the NAF. I finally won. I fought the fight in courts with attorneys around the country. I would bet that this Consumer never signed this agreement and thus could not be enforced. It is an unconscionable act to attempt to defraud someone of their due process rights. The power of these Arbitration contracts come by a consumer signing them. Simply do not sign them and of course Dell's signature is never on the contract....so they did not agree to arbitrate either.

If you don't know what your rights are, you have no rights....

@oyez: You think the bakers in Lochner were actually aware of the terms of their "contracts" with their employers. An adhesion contract is a "take it or leave" thrown on the table with the party with power. The only difference is that in Lochner, the legislative branch acted, and the courts overruled. Here, the legislative branch has not acted, but the courts are pretending it has and are using that "action" to negate adhesion doctrine.

The comments to this entry are closed.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF