SCOTUS Sustains Assault on Contractual Freedom

The Supreme Court continues to reject freedom of contract and the power of contracting and state contract law in favor of its national policy favoring arbitration.  Most recently, in a per curium opinion in Nitro-Lift v. Howard, it said Oklahoma is not allowed to apply its own contract law to evaluate the validity of classic contract terms (here covenants not to compete). Instead, due to SCOTUS takes on a federal law and the presence of an arbitration clause in the contract, arbitrators make that decision.

The Court’s opinion stresses its conception of a national policy favoring arbitration, which it has found in recent decades in a century-old statute, the Federal Arbitration Act.  That emphasis on this “national policy” marks a retreat from the false pretenses that infect the Court’s precedents on the subject, which pretend to be engaged in the application of contract law.

Despite that improvement in the Court’s honesty, it remains the case that the Court’s approach to this subject diminishes traditional principles of contract laws and the value of contracts.  People are held to bargains they did not make or that are recognized by contract law as illegal.  But the Court insists that no court is allowed to consider these questions, thanks to its statement of national policy.

In numerous past SCOTUS cases, dissenting opinions were routinely filed exposing the flaws in the Court’s jurisprudence. The recent per curium opinion may signal capitulation, indicating that there are no longer any Justices prepared to object to these mistakes. That defeat means it is clearly time for Congress to rein the Court in. It should make it clear that state courts are responsible for developing and applying state contract law, not SCOTUS, federal courts or private arbitrators.

* For a complete analysis, and a possible explanation for the Court’s more honest approach in the Oklahoma case, see Lawrence A. Cunningham, Rhetoric versus Reality in Arbitration Jurisprudence: How the Supreme Court Flaunts and Flunks Contracts, Law & Contemporary Problems (2011) (available here), whose abstract states:

Supreme Court rhetoric about the role of contracts and contract law in arbitration jurisprudence differs sharply from the reality of its applications. In the name of contracts, the Court administers a self-declared national policy favoring arbitration, a policy directly benefiting the judicial branch of government. This often puts the Court’s preferences ahead of those of contracting parties while declaring its mission as solely to enforce contracts in accordance with contract law. The Court thus cloaks in the rhetoric of volition a policy in tension with constitutionally-pedigreed access to justice and venerable principles of federalism.

This Article documents the rhetoric-reality gap and explores why it exists and why it matters. The rhetoric-reality gap is attributable in part to a dilemma the Court created for itself: its national policy favoring arbitration is constitutionally-suspect unless people assent, yet letting people make what contracts they wish would prevent implementing the national policy. The jurisprudence diminishes the Court’s legitimacy, tempts defiance, creates doctrinal incoherence, and poses other costs. This Article calls for reconciling these conflicting positions rather than sustaining the status quo: the Court should either give up its national policy favoring arbitration and truly respect freedom of contract or come clean about its national policy’s real implications and acknowledge its narrow conception of contract and contract law.

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16 Responses

  1. Brett Bellmore says:

    This application of the term, “contractual freedom” seems a bit odd to me; Isn’t the term normally used to refer to the freedom to enter into the contracts one chooses? Which, of course, implies that, if there are contract terms, (Like an arbitration clause!) they get enforced?

    It just seems a bit inverted to describe not letting a state over-ride the terms of a contract as an attack on “contractual freedom”. If the parties enter into a contract with an arbitration clause, it must be presumed their preference is for arbitration.

  2. mls says:

    I was going to make the same comment as Brett. Is the Court refusing to allow private parties to place limitations or exceptions on the arbitration clauses they enter into (or forcing them into arbitration when there was no arbitration clause in the first place)? Or is it merely preventing states from enforcing anti-arbitration public policy in contravention of pro-arbitration federal policy?

    The latter may be wrong on federalism grounds, but it is hard to see how it is an attack on “contractual freedom.” If you are worried about assaults on “contractual freedom,” I think we could turn to any day’s copy of the Federal Register and find a few thousand more pertinent examples.

  3. Jennifer Taub says:

    Brett, I believe that deeming this an assault on freedom of contract is an intended reversal, but also is more than a rhetorical device.

    If one looks at cases like Rent-a-Center v. Jackson, for example, it seems clear that the Court goes out of its way to impose arbitration even if it was not bargained for. There are other examples, such as the Comp-u=Credit decision. I have not read LC’s article to which he links (through the word “continues” above), but there are more examples there.

    In the Jackson decision, as I wrote in the blog below last year “The majority held that an employee who believed that the arbitration agreement he signed was unenforceable, could only challenge its enforceability through arbitration.” and part 2, here

  4. Lawrence Cunningham says:

    #1&2: You can expand “freedom of contract” to include “freedom from contract” if you want, which is commonly done but obviously clunky, especially for the title of a blog post. Contract law promotes and protects volition, the formation of intended bargains, and opposes and rejects coercion, duress, undue influence and unconscionability. Read my referenced article for the complete picture backing up this post, as to what the Court has done and what it may now be up to in this latest emphasis on national policy rather than contract law.

    #3 is correct.

  5. Shag from Brookline says:

    Of course, the 13th Amendment imposes limitations on what once were protected by freedom of contract. We also have the common law developments both before and after the Civil War Amendments on what LC refers to as “freedom from contract,” and does it briefly and well in #4. Let’s be thankful to the UCC and other uniform laws developed from experience and enacted by most states to avoid federalism issues. [Note: I believe the First Amendment’s freedom of religion includes freedom from religion.] Coercion on labor, especially during difficult economic times, can be quite forceful. Can you imagine a prospective employee being offered a contract without an arbitration clause insisting that such a clause be inserted because he believes it is beneficial to his interests?

  6. Brett Bellmore says:

    It seems somewhat unlikely Shag, though unlikely things do happen. But why focus on just the employee’s end of the contract? Both parties to a contract are entitled to freedom of contract, employee and employer.

    Rendering clauses of contracts unenforceable does not, whatever you may think of the virtues of those clauses, advance the cause of contractual freedom. Maybe some other cause, perhaps even a worthwhile one, but not THAT cause.

  7. Shag from Brookline says:

    Brett may not understand the “Golden Rule” that he who has the gold rules. That’s usually not the employee. While Brett’s an engineer, perhaps he can understand the UCC and other uniform laws adopted by most states that impose limits on freedom of contract: public policy, unconscionability. Check it out, Brett, although it is unlikely he will, with his pre-Civil War Amendments mentality.

  8. Brett Bellmore says:

    Shag, I think you’re finally getting it, in your usual twisted way: “Limits on freedom of contract”.

    Exactly. “limits” on freedom of contract are not protections of freedom of contract. Invalidating limits on freedom of contract is not an attack on freedom of contract.

    You may think such limits justified. You may even be right. That doesn’t make the limits a defense of the freedom, or striking them down an attack on the freedom.

    Don’t use Orwell as a style manual, IOW.

  9. Shag from Brookline says:

    Who, pray tell, is “invalidating limits on freedom of contract”? Not I. I accept the UCC and other uniform laws adopted by many states that validate designated limits on freedom of contract, e.g., involving public policy, unconscionability, etc. These limits came about via common law in various states. In addition, some states, e.g., CA, have made certain decisions on public policy regarding this issue on federalism grounds. Perhaps Brett would urge his suffering from chronic “Wickburn” to justify SCOTUS’ stepping on CA’s public policy determination. Of course, then Congress might step in per Section 2 of the 13th Amendment. Public policy is not the exclusive province of the central government: see the 10th Amendment.

    Orwell is a reach.

  10. Brett Bellmore says:

    “Who, pray tell, is “invalidating limits on freedom of contract”?”

    That would be the Supreme court, in the case Lawrence Cunningham complains of above. My point is simply that, while there may be valid reasons for limiting the terms people may negotiate in contracts, striking down such limits is not an attack on “freedom of contract” if words are to mean anything at all.

    And I take it back. It might actually be something of an improvement if you started using 1984 as a style manual; Your always rather affected style of writing has become so convoluted and larded down with what you imagine to be clever catch-phrases, as to become practically incoherent. Even the worst style manual could hardly make you *less* readable.

  11. Lawrence Cunningham says:

    Dear Brent and Shag:

    Love your smart and lively contributions to the commentary here, but please do take it easy on each other.


  12. Brett Bellmore says:

    Fair enough.

  13. Shag from Brookline says:

    The subject of Freedom of Contract is broader than this post focusing on federal arbitration. For a concise (8 pages, double spacing+) survey consider David Bernstein’s 2009 paper “Freedom of Contract” available at SSRN”

    The paper starts with Art. I, Sec. 10 of the Constitution, segues to the 14th Amendments due process clause, then travels through the Gilded Age (which is not specified) as extended by the Lochner Era, with some interjections from the intervening, overlapping Progressive Era, through the Roaring Twenties, with cleansing during the New Deal, to the present, closing with this:

    “In general, however, freedom of contract is almost entirely unprotected under modern constitutional law.”

    Bernstein does not address federal arbitration cases in his paper. Based upon his other writings, one can imagine an appropriate subtitle for his paper: “libertarian Lament.” Perhaps in the near future we may expect a new book “Rehabilitating Freedom of Contract.”

    Warning: Readers of this paper suffering from chronic “Wickburn” may suffer further from certain side effects, e.g., baldness, ?wry” mouth, etc.

    [Note: I’ve started on LC’s lengthier paper and hope to finish it soon as my eyesight continues to improve. I’m curious whether – and how – LC’s paper may address” Wickburn” with respect to the “commerce” provision in FAA.]

  14. Shag from Brookline says:

    Daniel Akst’s op-ed in today’s Sunday NYTimes “These Crazy Indemnity Forms We All Sign” may be relevant to “Freedom from Contract.”

  15. Shag from Brookline says:

    I finally finished LC’s paper. While it was a difficult read, it was well worthwhile. The difficulty for me was beyond my (improving, slowly) eye problem. Rather the paper led me into a twilight zone (black hole?) of federal jurisprudence, to wit the national policy favoring arbitration and the Supreme Court’s “Rhetoric-Reality Gap” well described by LC. He makes clear that this “twilight zone” does not result from the usual liberal/conservative ideologies of the Justices but with much unanimity (excepting Justice Thomas, but only somewhat) in this national policy favoring arbitration. (See in particular, Part II. C. Institutional Stories.) The statute involved, the Federal Arbitration Act, is based upon Congress’ commerce clause authority. Yet the Court’s decisions that LC critiques do not seem to dwell on the commerce clause. Apparently federalism issues are avoided for the most part. LC advances possible reasons for the Court’s ignoring of contract law as developed by states (common law and statutory). LC reveals in his Conclusion what led him into this twilight zone; perhaps that revelation might better have been presented at the beginning of the paper. LC’s many years teaching contract law were apparently at odds with the Court’s national policy favoring arbitration. I can understand and appreciate this, as he discussed the Rhetoric-Reality Gap of the Court with this policy. Perhaps we need to hear from conlaw scholars to explain or justify this Gap, addressing the commerce clause and federalism in connection therewith. Well done, LC.

  16. Lawrence Cunningham says:

    Shag 15: Thanks for the kind review!