To fight arbitration abuse, the devil is in the details.

Lawyers handling arbitration clause cases must look at the specific facts of their clients' contracts to plot persuasive strategies.

With alarming frequency, lawyers representing individuals with complaints against corporations are told that their clients--usually consumers or employees--cannot sue the corporation in court because of an arbitration clause in the corporation's standard form contract.

A lawyer faced with this situation will often wonder, "Are arbitration clauses enforceable for this type of case?" That is a little like asking, "My client was in a car crash. Can he recover damages from anyone?" In either case, the lawyer simply cannot answer the question without a lot more information.

The enforceability of a specific clause, as opposed to arbitration clauses in general, depends on a host of facts that differ from one case to the next. If an individual resists having his or her claims forced into arbitration by relying on generalities, the person will lose. The Federal Arbitration Act (FAA),(1) and decisions from the U.S. Supreme Court on down provide that written, binding predispute mandatory arbitration clauses generally are not only enforceable, they are favored by public policy under federal and most state laws.(2)

Notwithstanding this general policy, in the past several years dozens of appellate courts have refused to enforce clauses when individuals were able to demonstrate, in powerful factual showings, that they had not agreed to arbitrate their claims or that the clause was particularly unfair for a specific reason.

This article describes a few of the most persuasive arguments that can keep plaintiff lawyers and their clients from being trapped in the net of forced arbitration.(3)

The Supreme Court repeatedly has stressed that arbitration may be compelled only if both parties have consented to it.(4) The legal question that sharply divides the courts is, "What constitutes consent?" A number of courts have adhered to a formalistic notion of consent, enforcing clauses in a way that suggests that if there is any language about arbitration buried in the fine print of a consumer's or employee's contract, that language will be conclusive evidence of consent even if the individual never read it, did not know it was there, and never understood it.(5)

Other courts, however, have held that arbitration may not be compelled unless the individual voluntarily, knowingly, and intelligently agreed to arbitrate her or his claims.(6) Obviously, it matters enormously which standard is applied.

Defendant arguments

Corporate defendants attempting to enforce arbitration clauses usually argue that the voluntary, knowing, and intelligent standard is excessive and barred by the FAA. These defendants point out that the act provides that arbitration clauses be enforced just as other contractual provisions are. Accordingly, they reason, it violates the FAA to hold an arbitration provision within an agreement to a stricter level of consent than other provisions--such as those relating to the delivery or warranty of a product, for example--that unquestionably may be included in fine print.

These defendants are wrong on this point. Under the FAA, arbitration clauses may not be singled out for distinctive treatment or enforced differently than other types of contract provisions. Consistent with the FAA, they are subject to generally applicable state law contract doctrines. As contracts that ask one party to waive a constitutional right, these clauses are subject to the generally applicable contract law doctrine that they may not be enforced unless the party waiving the right does so in a voluntary, knowing, and intelligent way.

The easiest way to explain this is through an example. Suppose the fine print of an amendment to a credit card agreement sent to cardholders as an insert to their monthly bill included a provision prohibiting the cardholder from ever speaking negatively about any legislation that the credit card company supports.

Would such a term be enforceable? Obviously not. We all know that no court would enforce it. But why not? The answer goes to a long-standing doctrine of contract and constitutional law that applies to all contracts: A person will not be found to have waived a constitutional right unless he or she has done so in a voluntary, knowing, and intelligent manner.(7) This rule is pronounced in cases involving contracts of adhesion, or those that are presented to a party on a take-it-or-leave-it basis.(8)

It is possible to waive free speech rights. People frequently agree not to publicly criticize another party in settlement agreements, for example. A provision that appears in many settlements of employment disputes bars former employees from publicly criticizing their former employers. But such waivers will only be enforced when a party actually knew what he or she was giving up. No one would seriously suggest that free speech rights may be waived merely because of an unread provision in the fine print of a contract of adhesion.

This general principle should be applied to arbitration clauses as well. Under the Seventh Amendment to the U.S. Constitution and most state constitutions, Americans have a right to trial by jury. Under broad principles of contract law, this right should not be found to be waived unless a person meaningfully consented to a waiver. Accordingly, it should not be surprising that many courts have refused to compel arbitration where genuine--as opposed to merely formal or constructive--consent was absent.

There is one last important point to note about the consent issue. It is true that many courts have recognized a public policy in favor of arbitration under the FAA. But the act only applies to cases where a valid, written arbitration clause is present. Accordingly, a number of courts have found that the policy in favor of arbitration cannot be used to bootstrap into existence an agreement to arbitrate. The policy is to give force to agreements, not to invent them.(9)

Is the arbitration clause unfair?

While these clauses are generally favored, a rapidly growing number of courts have refused to enforce clauses that are one-sided, overreaching, or unfair. The most common basis for this refusal is that the clause is unconscionable. While the U.S. Supreme Court has held that arbitration clauses are generally enforceable, it has also noted that the FAA provides that the clauses are subject to the same generally applicable defenses against enforcement as other contractual clauses. The most important of these doctrines is the old common law doctrine that unconscionable contracts will not be enforced.

While the law differs markedly from state to state, most jurisdictions will not find a contract to be unenforceable unless they find that it is both procedurally and substantively unconscionable.

In most, but not all, states it is fairly easy to establish that an arbitration clause is procedurally unconscionable. If a company with great economic power insists on an arbitration clause in a standard form contract that is presented to an individual on a take-it-or-leave-it basis, most states will consider the clause to be a contract of adhesion, and therefore procedurally unconscionable.

Courts may also find procedural unconscionability when a party was rushed into signing an agreement without being given an opportunity to read it or when one party was unsophisticated and lacking in business experience.

Most consumer and employment contracts are contracts of adhesion. Yet they are still enforceable. Accordingly, trial lawyers resisting arbitration clauses on the grounds of unconscionability have to turn most of their attention to the more difficult and the more important issue of what makes an arbitration clause substantively unconscionable.

One factor some courts have focused on is whether the clause operates in a "one way" or "nonmutual" manner. These clauses provide that the company has the option to arbitrate or go to court, but the individual may only resolve a dispute through arbitration. A number of courts have refused to enforce these clauses, either finding them to be so one-sided that they are unconscionable or finding that they violate a state's contract doctrine of "mutuality of remedies.(10)

Other courts have focused on whether the arbitration clause somehow tilts the playing field in such a way as to effectively deny individuals meaningful relief. The Supreme Court has conditioned its preference for arbitration on the requirement that the process offer remedies equal to those available in court.(11)

In many cases, courts have found that specific arbitration regimes were too unfair to be deemed just another forum for dispute resolution. Where a clause fails to meet the Supreme Court's equal remedy condition, courts have refused to enforce it. Following are four examples of clauses that courts have found to be unfair for this reason.

Forum fails to provide relief available in court. In some cases, corporations have drafted clauses that not only require individuals to bring their claims to arbitration instead of court but also require individuals to forgo many of their rights under the law. Some clauses substantively rewrite statutory schemes by stripping individuals of remedies, such as the availability of punitive damages, while others have shortened limitations periods.

In these cases, arbitration can hardly be considered "just another forum." The leading case on this point is Graham Oil Co. v. ARCO Products Co.(12)

Forum is excessively costly. A common problem encountered by individuals is an arbitral scheme requiring that they pay high filing, administrative, or other fees. Arbitration fees that exceed the amount of money at issue in a case are common. Building on the notion that arbitration cannot deny relief to individuals, a number of courts have refused to enforce clauses that would require people to pay such large fees that they would be deterred from pursuing their claims.(13)

Forum is biased. In general, the Supreme Court has indicated that courts should assume that arbitrators are neutral and fair. But when case facts establish that a specific arbitrator or an arbitration service provider is likely to be biased in favor of one party, the clause may be held unconscionable and unenforceable.(14) When evidence of bias is particularly strong, some courts have held that such a system does not even qualify as arbitration and cannot be imposed.(15) Still other courts have refused to compel arbitration in settings suggestive of bias on the part of an arbitrator, without articulating either an unconscionability or a "not even arbitration" rationale.(16)

Forum cannot accommodate class actions. Just two years ago, no court had ever reached the conclusion that an arbitration clause might not be enforced at least in part because it would bar parties from going forward on a class action basis. Increasingly, however, courts have recognized that in some cases individuals with small claims will have no realistic remedy unless they are allowed to aggregate their individual claims and bring them as a class action.

Where that is true, and where arbitration does not permit individuals to proceed as a class, arbitration is no longer just another forum. It is effectively no forum at all. Now, no fewer than five courts have refused to enforce arbitration clauses that barred claimants from pursuing claims as a class action.(17)

In a large number of cases, corporate defendants have drafted clauses that are one-sided or otherwise unfair. In the words of one court, these clauses are the sort of contract one might expect to see between a fox and a rabbit.(18)

When one looks past the boilerplate to the true meaning of all too many of these clauses, it is plain that they effectively amount to this: "You, the consumer, agree that we, the company, can cheat you or break the law." When courts have been confronted with facts establishing that an arbitration clause falls into this category, a great many have had no trouble refusing to enforce them.

A lawyer's careful presentation of the relevant facts is key to keeping the case before a judge and preserving the client's right to a trial by jury.

Notes

(1.) 9 U.S.C. [sections] 1 (2000).

(2.) See, e.g., Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).

(3.) Most courts have held that almost any type of claim--common law or statutory, products liability or medical malpractice, consumer or civil rights--may be forced into arbitration. There are a few categories of claims that are excepted from this treatment, however. Claims for breach of an express warranty under the Magnuson-Moss Warranty--Federal Trade Commission Improvement Act (15 U.S.C. [subsections] 2301-2312), for example, may not be the subject of binding arbitration clauses. (See Wilson v. Waverlee Homes, Inc., 954 F. Supp. 1530, 1538 (M.D. Ala. 1997), aff'd, 127 F.3d 40 (11th Cir. 1997); Southern Energy Homes, Inc. v. Lee, 732 So. 2d 994, 999 (Ala. 1999).) Similarly, claims for broad public injunctive relief under the California Consumer Legal Remedies Act may not be compelled into arbitration. (See Broughton v. CIGNA HealthPlans, 988 P.2d 67 (Cal. 1999).)

While it is beyond the scope of this article to fully address this issue, lively controversies are also raging as to whether certain other statutory claims may be forced into arbitration, including claims under state insurance laws that fall within the McCarren-Ferguson Act; claims for employment discrimination under Title VII; and claims for class-wide relief under the Truth in Lending Act.

(4.) See, e.g., AT&T Tech., Inc. v. Communications Workers, 475 U.S. 643, 648-49 (1986); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995).

(5.) See, e.g., Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997); Harris v. Green Tree Fin. Corp., 183 F.3d 173, 182 (3d Cir. 1999).

(6.) See, e.g., Badie v. Bank of Am., 79 Cal. Rptr. 2d 273 (Ct. App. 1998), rev. denied, 1999 Cal. LEXIS 1198 (Feb. 24, 1999); Hooters of Am., Inc. v. Phillips, 39 F. Supp. 2d 582 (D.S.C. 1998), aff'd on other grounds, 173 F.3d 933 (4th Cir. 1999); Broemmer v. Abortion Servs. of Phoenix, 840 P.2d 1013, 1017 (Ariz. 1992).

(7.) See, e.g., Western Nat'l Mut. Ins. Co. v. Lennes, 46 F.3d 813, 819 (8th Cir. 1995) ("Contractual clauses purporting to waive constitutional rights must be clear and unambiguous."); Erie Telecomm., Inc. v. City of Erie, 853 F.2d 1084,1096 (3d Cir. 1988).

(8.) See D.H. Overmyer Co. v. Frick Co., 405 U.S. 174, 188 (1972).

(9.) See First Options of Chicago, Inc., 514 U.S. 938, 943; AT&T Tech., Inc., 475 U.S. 643, 648-49.

(10.) See, e.g., Gonzalez v. Hughes Aircraft Employees Fed. Credit Union, 82 Cal. Rptr. 2d 526 (1999); Worldwide Ins. Group v. Klopp, 603 A.2d 788 (Del. 1992); Iwen v. U.S.W. Direct, 977 P.2d 989 (Mont. 1999); Arnold v. United Cos. Lending Corp., 511 S.E.2d 854 (W. Va. 1998).

(11.) See Gilmer, 500 U.S. 20, 26 ("By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.").

(12.) 43 F.3d 1244, 1247-48 (9th Cir. 1994), cert. denied, 516 U.S. 907 (1995). See also Parrett v. City of Connersville, Ind., 737 F.2d 690, 697 (7th Cir. 1984) (holding that arbitration offended due process where arbitrator could not award full common law damages nor prevent harm to constructively discharged plaintiff before it occurred), cert. dismissed, 469 U.S. 1145 (1985); Martens v. Smith Barney, Inc., 181 F.R.D. 243, 256 (S.D.N.Y. 1998).

(13.) See, e.g., Randolph v. Green Tree Fin. Corp., 178 F.3d 1149 (11th Cir. 1999); Shankle v. B-G Maintenance Management of Colorado, 163 F.3d 1230, 1235 (10th Cir. 1999); Patterson v. ITT Consumer Fin. Corp., 18 Cal. Rptr. 2d 563 (Ct. App. 1993), rev. denied, 1993 Cal. LEXIS 4322 (Aug. 12, 1993), cert. denied, 510 U.S. 1176 (1994).

(14.) See Graham v. Scissor Tail, Inc., 623 P.2d 165 (Cal. 1990).

(15.) See Hooters of Am., Inc., 173 F.3d 933, 940; Cheng-Canindin v. Renaissance Hotel Assocs., 57 Cal. Rptr. 2d 867 (Ct. App. 1996), rev. denied, 1997 Cal. LEXIS 817 (Feb. 19, 1997).

(16.) See, e.g., Hudson v. Chicago Teachers Union Local No. 1,743 F.2d 1187 (7th Cir. 1984), aff'd, 475 U.S. 292 (1986).

(17.) See In re Knepp, Bankr. No. 98-40276, 229 B.R. 821 (Bankr. N.D. Ala. 1999); Johnson v. TeleCash, Inc., 82 F. Supp. 2d 264 (D. Del. 1999); Lozada v. Dale Baker Oldsmobile, Inc., No. 1:99-CV-620, 2000 WL 381836 (W.D. Mich. Mar. 27, 2000); Powertel, Inc. v. Bexley, 743 So. 2d 570 (Fla. Dist. Ct. App. 1999); Ramirez v. Circuit City Stores, Inc., 995 P.2d 137 (Cal. Ct. App. 1999), rev. granted (Mar. 24, 2000).

(18.) Arnold, 511 S.E.2d 854, 861.

F. Paul Bland Jr., chair of the ATLA Mandatory Arbitration Litigation Group, heads the Mandatory Arbitration Abuse Prevention Project at Trial Lawyers for Public Justice in Washington, D.C.