Your (Vanishing) “Day in Court”

If you think you’ll have your day in court when disgruntled by employer mistreatment, think instead that you’re likely to be headed for dispute resolution by a professional arbitrator, not a jury or judge. Ditto consumers of cell phone service and credit card users.

Standard form agreements in these settings contain dense boilerplate no one reads and no one could negotiate if they did. Common clauses say all employee or consumer disputes must be submitted solely to binding arbitration, barring access to the courthouse. They often spell out how the arbitration will work, usually putting limits on how much information you can discover during the process and splitting the costs evenly at 50-50, despite resources usually of uneven proportions.

Another frequently appearing clause caps the amount of damages you may get in the proceeding, invariably much lower than might be obtained in traditional court proceedings. For instance, a cell phone contract may say any damages can’t exceed $500 or some amount related to annual billings. Yet a claim for breach of the confidentiality provisions of such a contract, whether they are express or implied terms, can result in damages vastly exceeding that.

You may be tempted to think you’d at least have a day in court to consider the validity of the contract dictating mandatory arbitration on lopsided terms and capping damages at nominal levels, but you’d be wrong about that too. Most such agreements also have a capstone clause saying questions like that are also for the arbitrator to decide. You might then think at least that kind of clause could first be tested for validity in a court, and though you’d be right, that means precious little.

Law so favors arbitration of disputes these days that federal statutes and the Supreme Court have gone to the ultimate extreme in channeling essentially every dispute consumers or employees may have into that route, with essentially no chance for a judicial look. That’s because of a legal notion called severability, which enables isolating particular clauses in contracts and classifying them as valid even if other parts or the rest of the contract as a whole are patently invalid. So long as there is a single clause saying the issue is for an arbitrator, and that clause is not patently obnoxious, you get no day in court, with everything decided by an arbitrator.

The only way you can get a day in court is to challenge as invalid the particular clause saying disputes, including disputes about that particular clause, are delegated to an arbitrator. There are not many ways to win that challenge, once you sever that clause from everything else. The rest of the contract can be outrageous—saying the company owes zero damages even for illegal behavior. So long as there is nothing obnoxious about the narrow line directing disputes to arbitration, that’s where you have to fight your claim.

That, at least, is what the Supreme Court, in a 5-4 split vote, said earlier this week, in Rent-A-Center v. Jackson. An employee signed a stand-alone document when starting work saying that any claims he may ever make against the company are delegated to an arbitrator, using limited discovery and splitting fees, even claims that the delegation clause is invalid.

Seeking a preliminary day in court challenging both that clause and the whole contract as invalid, the Ninth Circuit and the Court’s dissenting judges saw merit. They thought that before an arbitration provision in such a stand-alone arbitration contract can be enforced, a claim that the bargain is invalid should be for a court to decide. In Jackson, that would mean a traditional day in court to test the validity of the lopsided terms, in light of the take-it-or-leave feature of the employment form.

The Court majority held otherwise. It says the only way to give a court a chance to look at the case is for the employee to pinpoint as invalid the particular clause delegating disputes to the arbitrator, as opposed to a challenge to the entire contract as a whole. In dicta, the Court signaled doubt this employee could have succeeded on that claim, considering a fight over that issue wouldn’t require much discovery or involve much cost, so those rules in the agreement wouldn’t be all that obnoxious. The employee made the mistake of objecting to the entire contract, said the majority, and that objection is for arbitration, not for a day in court.

There’s more to come. On the Supreme Court calendar is AT&T v. Concepcion, about standard form cell service contracts channeling all disputes to arbitration, preventing customers from forming groups to pursue class actions for breaches of contract, privacy and other alleged wrongs. Most commentators on this week’s Jackson opinion see it as a harbinger for the AT&T case, showing a pro-arbitration stance likely to be extended there.

Meanwhile, bills pending in Congress would change some of these results. A draft Arbitration Fairness Act would amend the existing federal statute, on which the Court has based such decisions as Jackson, to make such arbitration agreements between employees and consumers invalid and unenforceable. It would also vest exclusive jurisdiction in courts, not arbitrators, to determine an arbitration agreement’s validity, regardless of whether the party challenged the clause specifically or the entire contract generally.

Of course, there can be much to value about arbitration, especially to resolve disputes between businesses in ways more expeditious and less expensive than traditional litigation. There is also nothing inherently bad about arbitration of consumer and employee disputes, though critics say the route tends to disfavor the little guy in favor of employers and enterprises.

Even so, receptions to Jackson have been interesting. A few offer a simple sober report, but many criticize it as ho-hum nit-picking while others rebuke it in alarmist terms. All agree, on the other hand, that media coverage was surprisingly sparse, for a case that means much to many ordinary people.

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3 Responses

  1. A.J. Sutter says:

    Thanks for the post. I’m more with the alarmists, and had been wondering why it was taking so long for this blog to notice this decision.

    I’m not sure your statement about there being nothing inherently bad about arbitration of employee or consumer disputes really captures what’s at stake. One issue is uneven bargaining power. Here, the result is to deprive consumers, employees, medical patients and others of due process in a very literal sense. Another issue is the disconnect from the democratic process. In a court, laws matter, and laws (in theory, at any rate) are made by democratically-elected representatives, and construed by judges who are either elected directly or who are appointed by the political branches of government. In arbitration, on the other hand, the law is not necessarily controlling.

    The fact that you highlight the efficiency of arbitration in terms of time and money makes the point well: economic values have displaced political ones. I hope Congress acts swiftly to negate the effects of the Rent-A-Center decision.

  2. Jim Maloney says:

    I don’t know think I’d consider myself an alarmist; perhaps more of an “alarmed analyst.” My analysis goes something like this: recognizing the existence an overwhelmed federal docket, the Court engages in palliative measures, such as forum-shifting decisions like Jackson, which follows a long line of cases “favoring” arbitration, and, as an alternate “remedy,” cases like Twombly and Iqbal, which overturned the long-accepted liberal pleading standards articulated in Conley, allowing federal district judges to clear their dockets of many cases in which the pleadings were not as well drafted as they might have been. The problem with these “remedies” is that, by and large, they simply don’t serve justice, but rather do a disservice to that ideal, although they probably do succeed in stemming the tide of docket flooding a bit. As for some of the lower courts’ decisions approving arbitration in disservice of justice, this recent case from the Second Circuit, a 2-1 decision with a welcome dissent by Guido Calabresi, ought to give pause to all but the most callous.

  3. ParatrooperJJ says:

    Sounds like basic contract law to me. If you don’t like the terms, don’t sign the contract.