Pre-dispute Arbitration Research Articles

Committee Opinion No. 583

: Arbitration is a form of dispute resolution that is an alternative to 'taking a case to court.' Weighing the potential advantages and disadvantages, predispute arbitration may represent a valid alternative dispute resolution strategy for physicians and patients. When correctly prepared, contractual agreements between patients and physicians for predispute, voluntary, binding arbitration can satisfy both individual and societal needs and, at the same time, meet relevant ethical principles.

Substantive Unfairness of Pre-Dispute Arbitration Clauses in Consumer Contracts: The Argument for the Unconscionability Doctrine

Development of the doctrine of unconscionability in Canadian common law provinces would serve as an effective mechanism to render pre-dispute arbitration clauses unenforceable in the context of consumer contracts. While laws which facilitate the commercial arbitration process are generally seen as a favourable development, the negative backlash to arbitration occurs because it is often used a means to gain an advantage against unsuspecting consumers. The author asserts that the law should facilitate the use of arbitration in the commercial context between parties of roughly equal bargaining power, while simultaneously curbing enforceability of mandatory pre-dispute arbitration clauses in consumer contracts. In the past three decades, provincial legislators have devised statutes in order to facilitate the process of commercial arbitration. During the same time period, legislators have also created numerous mechanisms to protect the substantive rights of consumers, with notable examples being the development of laws enabling class action proceedings as well as consumer protection laws. When these policy objectives appear to conflict, it is up to the courts to strike the appropriate balance in order to ensure the intent of the legislature is carried out. The current balance struck by the Supreme Court of Canada patently places too much emphasis on the promotion of arbitration while ignoring the genuine desire of legislators to protect the interests of consumers. The purpose of this paper is to explore and critique the law in Canadian common law provinces regarding unconscionability in the context of pre-dispute arbitration clauses in consumer contracts. The author reviews the theoretical and practical underpinnings as to why mandatory pre-dispute arbitration clauses unfairly disadvantage consumers, while at the same time offering a doctrinal analysis of how a claim of unconscionability could be successfully argued. As unconscionability is a more developed doctrine in the United States, a brief comparative analysis is undertaken in order to highlight the potential lessons for Canadian jurists. In addition, as this area of law is not currently settled in Canada, the author aims to make policy-based arguments as to why a reassessment of the current jurisprudence is necessary in order to influence future developments in the common law.

Boilerplate: A Threat to the Rule of Law?

In today’s US, transactions between firms and consumers (including businesses in the position of consumers) routinely contain fine-print terms deleting rights to legal remedies against the firm, such as exculpatory clauses, waivers of consequential damages, and mandatory pre-dispute arbitration clauses. This chapter argues that such remedial rights should not be treated as mere default rules routinely waivable by recipients of fine-print contracts (‘boilerplate’), because such rights deletions threaten the rule of law by undermining rights structures that are central to the state’s obligations toward the public. When remedial rights are subject to easy waiver by boilerplate, they place recipients into a situation that might be called quasi-anarchy; that is, a one-sided situation resembling the anarchy that the state is supposed to supplant. Moreover, they underwrite a scheme of privatization that amounts to exercise of arbitrary power over recipients; and they transgress the principle of equality before the law by separating people that retain legal rights from people that do not. Such rights should remain situated in the public realm, and subject to a species of market-inalienability. This chapter thus argues for a modified version of the public/private distinction, related to maintaining the rule of law.

B-2-C Pre-Dispute Arbitration Clauses, E-Commerce Trust Construction and Jenga: 'Keeping Every Cog and Wheel'

In its pro-consumer stance the EU has reaffirmed its commitment to ban pre-dispute arbitration clauses in its new Proposals for a Directive on ADR, and a Regulation on a Common European Sales Law. This course of direction has begun despite the fact that cross border B-2-C e-commerce sales are below expectations. The EU does not need reminding building trust in e-commerce is essential. However, trust construction needs to be re-examined from the perspective of ODR if a genuine concern exists to build the right form of trust.This article adopts a inter-disciplinary approach to re-assess the legitimacy of pre-dispute arbitration clauses in the e-B-2-C low-value/high-volume Clip-Wrap context. What is proposed is to view them from an interest-based system trust approach. Under this reframing they are regarded as strategic “imperative cogs”, which are essential in building system trust. These need to work with crowdsourced consumer-centric business models to produce sustainable system trust and predictability via perceived fairness.

Mandatory Predispute Consumer Arbitration, Structural Bias, and Incentivizing Procedural Safeguards

Within the past several decades, there has been an explosion in the creation, institutionalization and use of “alternative” dispute resolution procedures. Mandatory predispute arbitration has generated the most controversy because it appears beset with structural bias. The recent cases of AT&T Mobility LLC v. Concepcion and Compucredit Corp. v. Greenwood have raised additional concerns as the Supreme Court has announced that corporations can force consumers to arbitrate their private and statutory claims and give up their rights to pursue class relief. This Article begins by arguing that the Supreme Court’s enthusiastic embrace of mandatory predispute arbitration should be understood primarily as institutional self-help, as an opportunistic search for the funding and personnel that courts need to conduct fact-finding and decision-making in cases that the courts perceive as routine. By permitting corporations to impose class waivers on consumers, the Supreme Court is incentivizing the corporations to provide and fund a national private small claims court. If the Court is incentivizing in this way, however, this Article urges that it should demand more in return for class waiver. Specifically, it should demand evidence that the arbitration procedure is sufficiently attractive to consumers so that they will pursue their claims, as well as evidence that the procedure is sufficiently fair. One difficulty in making these demands, however, is that courts are obligated to use very limited grounds and a deferential standard of review for arbitral awards. Second, therefore, this Article urges courts to mine past experience in other legal contexts that involve privatized judicial functions, a deferential standard of judicial review, and the incentivizing of procedural safeguards. For guidance, this Article examines MetLife v. Glenn and the evolution of the deferential standards of review that courts apply to ERISA plan benefit denials by private claims administrators, particularly when such administrators operate in a conflicted decision-making context. In this context, the Supreme Court has managed to acknowledge the existence of structural bias and make it a relevant and important factor to be considered as part of deferential judicial review. Further, the Supreme Court has provided guidance to lower courts regarding the weight to be given to structural bias and has provided examples of the information required to assess such weight. Structural bias has been given the stature of tiebreaker in close cases. Finally and most important for the purposes of this Article, the Supreme Court has also incentivized the provision of structural and procedural safeguards (as well as discovery into the existence and operation of such safeguards) in order to reduce the potency of the structural incentives that encourage biased decision-making. In other words, the Supreme Court has incentivized the provision of safeguards that will enhance the likelihood of accurate decision-making -- all while maintaining a deferential standard of review. Glenn and its progeny thus offer procedural safeguards that the Supreme Court could -- and should -- import into its arbitration jurisprudence. These, at the very least, are the sorts of safeguards that the valuable bargaining chip of class waiver should be able to buy.

Mandatory Consumer Arbitration

Arbitration clauses in consumer contracts are ubiquitous. Typically, it is the party selling the good or providing the service that will present a contract to the prospective buyer as part of a printed form which is pre-drafted by the seller and used by it in numerous transactions. The buyer or the ultimate consumer rarely has the ability to negotiate substantive terms present in these contracts and will either have to take it or leave it, as the terms exist. One of the several clauses in the form will be a provision for the resolution of dispute exclusively through arbitration and the waiver of the right to litigate by the consumer. This paper proposes that it is required to be recognized that mandatory arbitration provisions in consumer contracts are inherently unfair, and are distinct from agreements made by parties of equal bargaining power with a free will to pursue alternate dispute resolution. Pre-dispute arbitration clauses in consumer contracts, need to be placed under a separate legal category and should not be given the same deference as other agreements to arbitrate. The first section of the paper will look at the position in United States and the grounds that exist to challenge pre-dispute clauses. The subsequent section will discuss how the problem of mandatory arbitration is dealt with in the European Union.

The Death of Class Arbitration After Concepcion?

Is the “death knell” of class arbitration found in the fine print? In AT&T Mobility LLC v. Concepcion, the Supreme Court potentially allowed for the evisceration of class arbitration, and indeed most class actions, in consumer and employment settings where contracts contain a pre-dispute arbitration provision that only authorizes claims brought in an individual capacity or that expressly bans representative class actions in arbitration or court (“class action waivers”). The Court indirectly addressed the issue of class arbitration in prior cases where it had seemed to validate the concept of arbitral class actions. Southland v. Keating, for example, held that the Federal Arbitration Act (FAA) preempted a state law that required judicial recourse for franchise claims, although the Court acknowledged that

Opening the Door to Justice: Amending the Federal Arbitration Act to Remedy the Unjust Use of Predispute Arbitration Agreements

Opening the Door to Justice: Amending the Federal Arbitration Act to Remedy the Unjust Use of Predispute Arbitration Agreements

Arbitration in Nursing Home Cases: An Empirical Study and Critique of AT&T Mobility v. Concepcion

The use of pre-dispute binding arbitration agreements has been commonplace in variety of commercial contexts, such as brokerage agreements, insurance contracts and credit card contracts for many years. Health care had historically been one of the fields that had not embraced pre-dispute binding arbitration agreements. The reluctance to use pre-dispute binding arbitration agreements appears to be changing in at least one sector of the health care field. An examination of admission contracts used by North Carolina nursing homes and telephone survey of North Carolina nursing homes revealed that 43 percent of nursing homes now incorporate pre-dispute binding arbitration provisions into their admission contracts. All of the major nursing home chains operating in North Carolina use pre-dispute binding arbitration agreements in at least some of their facilities, while smaller operators use them sporadically.The terms of these agreements vary considerably. The large chains tend to incorporate some of the provisions in the model arbitration agreement drafted by the American Health Care Association (AHCA), the nursing home industry trade organization. AHCA’s model language includes a 30-day rescission period and language that acceptance of the arbitration provision is not a precondition to admission. Some of the large chain facilities also include a provision that the arbitration will be conducted at the facility if the parties can’t agree on another location. Some of the smaller operators include provisions that limit damages and discovery, prohibit punitive damages, and expressly condition entry to the facility on signing the pre-dispute arbitration agreement. The implications of the rising use of pre-dispute binding arbitration clauses may be significant. There are many counties in North Carolina where 50-100 percent of all of the nursing home operators use these agreements. With so many operators selecting pre-dispute binding arbitration, this may have the effect of forcing some vulnerable elders out of the public court system with all of its safeguards, and into private arbitration without those protections.Although some of these agreements contain language stating that the agreement is voluntary or may rescinded, this language, by itself, provides no guaranteed protection that facilities are enforcing the contracts as written. This study found incidents where nursing homes were requiring new residents to sign pre-dispute binding arbitration agreements as a condition of admission, even though the language in those facilities’ agreements stated that signing the agreement was voluntary. This study also found evidence of a significant amount of confusion among staff of nursing homes using these agreements about whether their facilities were using them at all and what arbitration agreements really meant.This paper also includes an analysis of AT&T Mobility v. Concepcion and concludes that Justice Thomas's concurrence is so contrary to the putative majority opinion that Concepcion may be viewed as a plurality decision without any binding precedential effect concerning the law of unconscionability outside the Discover Bank/class action context.

Engineer’s Study Notes for Understanding the Arbitration Process

Using arbitration to resolve commercial disputes has many advantages over court-based litigation. These include the use of “judges” who understand the relevant technical issues and industry practices and thus reduce the probability of unpredictable results can significantly reduce the cost and delay associated with document exchange and depositions and can reduce the amount of time spent on evidence presentation in hearings. Engineers can play an important role when determining whether their organizations and their clients arbitrate or litigate. The use of arbitration requires contractual agreement. Without the inclusion of predispute arbitration procedures in the project’s contracts, it is likely that disputes will be resolved through litigation and not arbitration. Engineers can influence the inclusion of arbitration because they often suggest the forms of project contracts as representatives of engineering, contracting, or owner organizations. Engineers may also find themselves in management roles where they will be involved in a dispute that will be resolved via arbitration. As a party to the arbitration, it is important for the engineer to understand what influence he or she has in making decisions regarding the arbitration process. This paper provides guidance to engineers who are in a position to influence the inclusion of arbitration in the project contracts. This paper also provides suggestions about how the engineer can work with the attorneys to influence the best and most cost- and time-efficient result in the event an arbitration has been commenced. This paper is not a theoretical research paper but rather is a practical guideline based on the experience of the writers, who are engineers and who have been in the arbitration field, both domestically and internationally for over 30 years, seeing the good, the bad, and the ugly. Together, they share their insights on why the arbitration process can be the better choice for dispute resolution.

The End of Mandatory Securities Arbitration?

In this essay, I examine recent Congressional efforts to ban pre-dispute arbitration clauses in securities brokerage account agreements and thus eliminate mandatory arbitration of customer-broker disputes. In the proposed Arbitration Fairness Act, Congress would ban such clauses in all consumer contracts, including in the securities industry. However, securities arbitration - whose fairness is regulated with substantial oversight by the Securities and Exchange Commission - does not suffer from the same features and flaws that critics of arbitration in other forums have excoriated as oppressively unfair. In the recently-enacted Dodd-Frank Act, Congress delegated to the SEC the authority to prohibit arbitration clauses in customer agreements through admininstrative rule-making. After examining these regulatory efforts, I argue that neither Congress nor the SEC should prohibit mandatory securities arbitration because it would have significant adverse consequences for investors and for the vitality of the dispute resolution mechanism. The essay concludes by asserting that regulators should not enact arbitration reform that needlessly and without foundation brands securities arbitration as the evil twin of adhesive consumer arbitration.

How to Improve Retail Investor Protection After the Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Securities and Exchange Commission the authority to deal with two issues especially important to retail investors. First, section 913 requires the SEC to conduct a six-month study on the effectiveness of existing standards of care for broker-dealers and investment advisers and specifically authorizes the SEC to establish a fiduciary duty for brokers and dealers. Second, section 921 grants the SEC the authority to prohibit the use of predispute arbitration agreements that would require investors to arbitrate future disputes arising under the federal securities laws and regulations or the rules of a self-regulatory organization. What has been overlooked in the debate over retail investor protection is the interconnectedness of these two provisions. Debate over retail investor protection after Dodd-Frank must consider these two issues together in order to achieve the goal of better retail investor protection. I make three principal arguments: First, I argue that broker-dealers and investment advisers should be held to standards of care and competence based on professionalism, rather than fiduciary duty. Second, I propose, for adoption by the SEC, federal professional standards of competence and care for broker-dealers and investment advisers. Third, I argue that SEC adoption of standards of care will not create any additional federal remedies for investors because it is unlikely that the U.S. Supreme Court will create a private damages remedy for their breach. If the SEC prohibits mandatory securities arbitration of claims based on federal securities law and SEC and SRO rules, the ability of retail investors, particularly those with small claims, to recover damages for careless and incompetent investment advice may be substantially reduced.

Section 37h of the German Securities Trading Act and its Non–compliance with European Law

German law pertaining to arbitration agreements with consumers, in particular in securities/futures transactions, has changed its approach several times over the last twenty years. Until a reform of the law in 1989, private investors could not participate at all in futures transactions. Following this law reform, German case law slowly accepted arbitration as an alternate method of dispute settlement in such transactions. However, in 2002, the German law on securities transactions was amended again and the legislature decided to restrain securities arbitration heavily by introducing section 37h of the Securities Trading Act which makes pre–dispute arbitration clauses with consumers in the area of securities trading de facto impossible. This article considers this provision and comes to the conclusion that this provision violates European law as there is no justification for the restraint of the freedom to deliver services within the EU.

The Debate Over Arbitration Agreements

The Debate Over Arbitration Agreements

Arbitration Costs and Forum Accessibility: Empirical Evidence

In this Article, written for this symposium issue on "Empirical Studies of Mandatory Arbitration," I examine the available empirical evidence on these two questions. I take "mandatory arbitration" to refer to pre-dispute arbitration clauses in consumer and employment (and maybe franchise) contracts. Accordingly, I limit my consideration of the empirical evidence to those types of contracts. I do not discuss empirical studies of international arbitrations, which almost always arise out of agreements between commercial entities. Nor do I discuss empirical studies of court-annexed arbitrations, which may not derive from party agreement and do not ordinarily proceed to a binding award.

The Jury Is Out: Pre-Dispute Binding Arbitration Agreements for Medical Malpractice Claims: Law, Ethics, and Prudence

An increasing number of physicians, hospitals, health plans, and their insurers are advocating the use of pre-dispute binding arbitration as an alternative to litigation in the resolution of medica...

Judicial Policing in Consumer Contracting after Buckeye Check Cashing

The Supreme Court's 2005 decision in Buckeye Check Cashing v. Cardegna explicitly extended the Court's separability doctrine from commercial contracting to consumer contracting. This Article will discuss the conflicts between the traditional judicial role in policing the bargaining process and the imposition of mandatory arbitration through separability. The Article further discusses questions left open after Buckeye regarding the appropriate scope of the Court's embrace of mandatory arbitration in the consumer context. While this Article does not argue, as some have done, for abolition of binding pre-dispute arbitration clauses in the consumer context, it does argue that common-law doctrines designed to ensure fairness and freedom of assent in consumer contracting should be entrusted to those best able to apply them and implement their underlying policies - the courts.

Party Autonomy and Private-Law Making in Private International Law: The Lex Mercatoria that Isn't

This essay discusses from the perspective of American conflicts law. Commonly referred to as the new lex mercatoria, these norms are drafted by various international or intra-national non-governmental organizations and are proposed for incorporation by contracting parties or for application by arbitrators, with or without the parties' prior consent. Understandably, these norms are popular among many arbitrators who tend to place them on the same footing as law. Current U.S. arbitration law uncritically permits this treatment to the extent it does not allow judicial review of an arbitrator's choice of law (or non-law). The fact that, unlike the law of most countries, American law generally enforces pre-dispute arbitration clauses in consumer contracts and most employment contracts can further exacerbate the situation. In contrast, in contracts that are not subject to arbitration, American courts apply non-state norms only to the extent they have been expressly incorporated into the contract and only if their application would not displace non-waivable rules of the law that would otherwise govern the contract. This essay applauds the latter position of American conflicts law but suggests that U.S. arbitration law should be reformed so as to provide needed protection to consumers, employees, and other presumptively weak parties.

Ex Ante Selection of Disputes for Litigation

While effects have important implications for empirical studies of the litigation process, existing theories of case are incomplete. Existing theories focus on post selection - resulting from choices made by parties after a dispute arises, such as by settlement or jury trial demands. But parties also engage in ante selection - resulting from choices made before a dispute arises. A common form of ex ante occurs when parties include a pre-dispute arbitration clause in their contract, agreeing to have future disputes resolved in arbitration rather than in court. This paper develops a theory of ex ante of disputes for litigation, and examines implications of the theory for empirical studies of litigation. Studies comparing outcomes in arbitration and litigation provide evidence that ex ante occurs. This paper argues that the effects of ex ante are not limited to such studies, but also may affect studies that examine only the litigation process. The central intuition is that the disputes for which litigation is most likely to be problematic (and thus of interest to researchers) are the very disputes most likely to end up in arbitration. When parties expect litigation to be costly or damage awards excessive, they have an incentive to provide for arbitration to resolve future disputes. Such ex ante may mask characteristics of the litigation process that empirical studies are seeking to examine.

Timing of Institutional Bias Challenges to Arbitration

Private, voluntary arbitration is employed widely in the United States.' Arbitration occurs when parties agree adjudicate a dispute before a neutral decisionmaker who is neither a judge nor an administrative official. Parties a dispute can enter into an ad hoc agreement arbitrate once a dispute has arisen, or they can enter into a pre-dispute arbitration agreement in which they agree in advance submit arbitration disputes that may subsequently arise.3 In either case, arbitration agreements are contracts,4 and parties are free agree on whatever procedural and substantive rules they wish have applied toward the resolution of their dispute. This means that parties can either create their own arbitration rules and select their own arbitrators or agree submit their disputes an arbitration organization that has existing procedures and panels of arbitrators. Regardless of the system which parties ultimately agree, they will be bound by the arbitrator's decision.7 Historically, courts were hostile arbitration agreements and often refused enforce them. In 1925, however, Congress enacted the Federal Arbitration Act (FAA)9 to reverse the longstanding judicial hostility arbitration agreements that had existed at English common law and had been adopted by American courts. The FAA treats arbitration agreements as being as enforceable as any other