In the last decade we have seen a large number of cases removed from the arena of the courts to arbitration forums. This has in large part occurred not as part of a negotiated process between contracting parties who have mutually decided that it is in their best interests to resolve their disputes in an arbitration forum instead of the courts, rather it has repeatedly occurred as a result of boilerplate that has been inserted into one-sided, take-it-or-leave-it contracts. These contracts involve many ordinary day-to-day type transactions.
Arbitration clauses have been used in lease contracts,1 credit card contracts,2 warranty contracts,3 motor vehicle financing agreements,4 home remodeling contracts,5 mortgage loan agreements,6 rebate offers,7 satellite television service agreements,8 video rental agreements,9 real estate purchase agreements,10 wireless telephone service agreements,11 long-distance telephone service agreements,12 employment contracts,13 computer purchase agreements,14 software license agreements,15 and the list goes on and on. Any contractual transaction can be the subject of mandatory arbitration. It has become commonplace in consumer goods and service transactions to include mandatory arbitration clauses coupled with waivers of class action relief.
The Federal Arbitration Act
The Federal Arbitration Act (FAA) applies to contracts affecting interstate commerce.16 “Congress enacted the FAA to replace judicial indisposition to arbitration with a ‘national policy favoring [it] and plac[ing] arbitration agreements on equal footing with all other contracts.’”17
To accomplish this purpose, the FAA states that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”18 Additionally, a court is required stay its suit or proceedings upon being satisfied that the issue before it is arbitrable under the agreement.19 The court must enter an order directing the parties to proceed to arbitration in accordance with the terms of the agreement if there has been a “failure, neglect, or refusal” to comply with the arbitration agreement.20 Furthermore, under the FAA a court may vacate an arbitration award only if (1) “procured by corruption, fraud, or undue means;” (2) “evident partiality” is present in one or more of the arbitrators; (3) “the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced”; or (4) “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”21 It should be noted that the Uniform Arbitration Act as adopted in Illinois adds an additional and fifth ground: “[t]here was no arbitration agreement and the issue was not adversely determined in proceedings [in the Circuit Court to compel or stay arbitration] and the party did not participate in the arbitration hearing without raising the objection.”22
Correspondingly, an arbitration award may be modified only (1) where there is an “evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award”; (2) “[w]here the arbitrators have awarded upon a matter not submitted to them”; or (3) “the award is imperfect in [a] . . . form not affecting the merits,”23 and then, the court may only modify or correct the award “so as to effect the intent thereof and promote justice between the parties.”24 The FAA limits the scope of judicial review to those specific categories of extreme arbitral conduct and does not “authorize contracting parties to supplement review for specific instances of outrageous conduct with review for just any legal error.”25 The Court of Appeals for the Seventh Circuit has said that if the parties desire more scrutiny than the Federal Arbitration Act, 9 U.S.C. §§ 10-11 (1994), authorizes courts to apply, “they can contract for an appellate arbitration panel to review the arbitrator’s award[;] they cannot contract for judicial review of that award.”26 The Court of Appeals for the Fifth Circuit made it clear that state standards of review only apply where the parties expressly state in their contract that such rules apply.27 Illinois courts have taken a different view on this subject holding that a general choice of law provision requiring Illinois law to be applied to the contract is sufficient to invoke the Illinois Arbitration Act thereby supplanting the FAA.28
Under section 2 of the FAA, a written agreement to submit an issue to arbitration is “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Where a contract affecting interstate commerce contains an arbitration provision and does not provide otherwise, the FAA requires the question of the contract’s validity as a whole to be submitted to arbitration.29 Under the FAA, issues relating only to the validity of the arbitration provision are generally subject to a judicial determination.30 Where one party challenges the validity of the contract as a whole but does not expressly dispute the validity of an arbitration clause within it, that clause is severed and generally serves as clear, unmistakable evidence that the parties intended to arbitrate any dispute over the contract’s validity.31 Suits brought upon issues falling within section 2 must be stayed until after “arbitration has been had in accordance with the terms of the agreement.”32
Abuses Attendant to Boilerplate Arbitration & Forum Selection Clauses
Given the power of the dominant parties to impose, in many of these contracts, arbitration in a forum of their choice, coupled with the extreme deference given to arbitration decisions, the circumstances lend themselves to abuse as can be seen by the recent allegations involving the National Arbitration Forum (NAF).33 A press release regarding the recent case filed by the Minnesota Attorney General states:
The company tells consumers, the public, courts, and the government that it is independent and operates like an impartial court system. In fact, it has extensive ties to the collection industry--ties that it hides from the public.
The lawsuit alleges that the National Arbitration Forum, while holding itself out as impartial, works behind the scenes-alongside creditors and against the interests of ordinary consumers to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appoint the Forum to decide the disputes. The lawsuit alleges that the Forum pays commissions to executives whose job it is to convince creditors to put mandatory arbitration clauses in their customer agreements. The suit alleges that the Forum does this to generate arbitration filings in the Forum and hence revenue for itself.34
On July 19, 2009, only several days after suit was filed by the State of Minnesota, the National Arbitration Forum (FORUM)35 voluntarily ceased administering consumer arbitration disputes as part of a settlement agreement with the Minnesota Attorney General.36 The Minnesota suit alleged that JP Morgan Chase, Citigroup, Bank of America, American Express and Discover Card used NAF.37 In an interview with BusinessWeek, Swanson [Minnesota Attorney General] says that showing the alleged cross ownership between the collection law firms, the NAF, and Accretive gave her the leverage to force NAF out of consumer arbitration.”38 The American Arbitration Association has placed a moratorium on the administration of any new consumer debt collection arbitration programs where the claims are initiated by creditors until it has completed a review of its consumer due process protocols and made any necessary revisions.39
Arbitration clauses are frequently coupled with forum selection, choice of law, and waivers of rights to pursue actions as class actions. Where this happens in a consumer contract, the terms of resolving disputes have almost always been stacked in favor of the seller or service provider. By setting the forum in which the disputes are to take place while eliminating class relief, the drafter of the contract attempts to insulate himself from consumer lawsuits.40 The overwhelming majority of such contracts are boilerplate prepared by the seller or service provider on a bulk basis over which there is no real opportunity to negotiate. Such contracts are “contracts of adhesion.”41 Venue and arbitration are frequently the subject of claims of unconscionability as well as clauses that expressly prohibit (waive) class action arbitration.
Clauses that establish venue for consumer suits in locales or venues other than that of the consumer are attempts to circumvent the Fair Debt Collection Practices Act,42 the Federal Trade Commission Act,43 Constitutional Due Process Clauses, and consumer expectations. Often times they are designed so as to preclude actions by consumers44 by eliminating possible remedies45
Long ago the Federal Trade Commission found that the use of long arm jurisdiction to sue distant mail order customers on delinquent credit accounts violated public policy and was injurious to consumers and hence constituted an unfair trade practice, where frequently the suits involved relatively small amounts and the choice of retaining local counsel or traveling to the forum was virtually foreclosed by economic considerations. “There the Commission was persuaded by an analogy to the due-process clause that it was unfair for the firm to bring collection suits in a forum that was unreasonably difficult for the defendants to reach.”46 The American Arbitration Association has recognized this due process issue and has incorporated a rule in its Consumer Due Process Protocol (“Consumer Protocol”) requiring the locale of any hearing to be held in a reasonably convenient location.47 The AAA will not administer an arbitration that does not materially comply with the provisions of the Consumer Protocol.48 The AAA reviews all arbitration clauses contained in consumer contracts to determine if they meet the AAA’s requirements for due process.49 The author knows of several cases in which the AAA has refused to arbitrate consumer claims where the clause fixes the location of the arbitration in a distant forum. Under the Fair Debt Collection Practices Act, one federal court certified a class composed of defendants subject to distant forum abuse.50
[F]orum selection clauses are valid and should be given effect unless enforcement of the clause would be unreasonable.51 Numerous cases have considered forum selection clauses valid in click-wrap and shrink-wrap contracts for software license purchase contracts.52 Given the obvious problems that can arise due to the repeat business that many large sellers of goods and services can have with a specific forum or arbitrator, it is very important that the consumer carefully examine the possibility of challenging the forum selected by the company who drafted the boilerplate agreement.
Many consumer actions lend themselves to class action counterclaims due to the business practices, products or services of the party who prepared the boilerplate agreement requiring arbitration. In Green Tree Financial Corp v. Bazzle, 539 US 444, 123 S Ct 2402 (2003), the United States Supreme Court held that joinder of multiple parties in a single arbitration proceeding as a class is a decision an arbitrator—not the courts—should make when no provision expressly prohibits class action in arbitration.53 The United States Supreme Court “granted certiorari to determine whether this holding is consistent with the FAA.54 The Supreme Court held that limited “gateway” issues, e.g., whether the parties have an arbitration agreement or whether the agreement even applies, are for the courts. On the other hand, the question of whether class arbitration is permitted relates to “the kind of arbitration proceeding” the parties agreed to and is a matter of contract interpretation for the arbitrator.55 Significantly, the Supreme Court ruled this latter question is “a matter of state law.”56
Most importantly the Supreme Court’s decision undercuts any notion that class-wide arbitration is inconsistent with and barred by the FAA unless explicitly allowed in the parties’ agreement. For if class-wide arbitration were inconsistent and barred, it would not matter who decides the issue of contract construction. One would simply never get to that question. One must first conclude that the class-wide arbitration is permissible under the FAA before one gets to the questions of (a) whether the specific arbitration clause in issue permits it, and (b) who decides that issue as a matter of contract construction. In response to Green Tree, the American Arbitration Association prepared Supplementary Rules For Class Arbitration.57
In a case currently pending before the Supreme Court,58 a case involving international maritime contracts calling for arbitration which were silent on the issue of whether class arbitration may proceed in a maritime contract, a panel of arbitrators, charged with deciding whether that silence permitted or precluded class arbitration, issued an award finding that the contracts permit class arbitration. Stolt-Nielsen filed a petition with the United States District Court seeking to vacate the award, which the District court granted finding that the award was made in manifest disregard of the law. The Appellate Court for the Second Circuit reversed the District Court reinstating and affirming the finding that the matter could go forward on a class-wide basis.59 Oral Arguments took place on December 9, 2009, and a decision is expected this court term.
The Illinois Supreme Court has held that a clause prohibiting class action arbitration was unenforceable based on the cumulative effect of both procedural unconscionability and substantive unconscionability.60 Our courts have held that an arbitrator must determine whether the arbitration clause permits class arbitration where the clause is otherwise silent on the subject.61 In a second view of the same case the court held that where the arbitration clause was silent, neither expressly permitting nor expressly denying arbitration on a class-wide basis the clause is not unconscionable where the company, DirecTV, who drafted the contract pays all of the fees and costs of arbitration in the AAA.62 The court ordered the case to proceed in arbitration on a class-wide basis.63 If there is a severability clause in the contract and it bars the consumer from effectively pursuing a statutory right provided by the public policy64 of the State of Illinois, such as the “Consumer Fraud and Deceptive Business Practices Act”65 the court will likely sever the unconscionable provision barring class proceedings and order arbitration on a class-wide basis.66 If the expenses of the class arbitration can be placed upon the company and not the consumers, there are many advantages to proceeding with class actions in arbitration. ■