Cause for Pause

The Supreme Court has opened the door for more restrictive arbitration agreements, making them a more powerful way for your company to avoid the following: expensive and high-exposure court litigation, including class and collective actions; costly and unwieldy class arbitration, particularly in the context of consumer and employment claims; and—potentially—even claims by individuals who recognize that the damages they stand to recover through a mandatory bilateral arbitration may not exceed the fees and expenses they will have to incur just to prove their claims when their option of joining a class or collective arbitration has been eliminated.

It now is worth evaluating whether including or revising an existing arbitration clause could help your company not only eliminate certain forms of litigation but also potentially deter claimants’ formal litigation or arbitration of claims altogether, thereby forcing potential claimants to consider an earlier and even more efficient resolution of their disputes. And isn’t early and efficient resolution of claims and disputes one of the main goals of litigation management?

U.S. Supreme Court Decisions

It seems that the Supreme Court is issuing significant decisions touching on arbitration at each session. Its most recent decisions have addressed the important topic of class arbitration waivers.

In 2011, the court decided AT&T Mobility v. Concepcion, wherein it held that the Federal Arbitration Act (FAA) preempted a state law that barred class arbitration waivers. That paved the way for two decisions in June 2013 that clarify and expand Concepcion.

 In American Express Co. v. Italian Colors Restaurant, the court held that the FAA permits arbitration agreements requiring waiver of class arbitration of federal claims. The American Express plaintiffs challenged a class arbitration waiver in their arbitration agreements with American Express. They argued that class arbitration was the only way their federal antitrust claims could proceed because the expenses for an individual to pursue claims (specifically, expenses for an expert economist to support their claims) exceeded an individual’s recoverable damages. Plaintiffs further argued that this made bilateral arbitration economically impossible, all to American Express’ benefit.

The Supreme Court rejected the plaintiffs’ argument, finding that the individuals still had the right to pursue federal statutory remedies under the arbitration agreement, which is all the FAA and related case law requires—even if it may not be financially worthwhile for an individual to attempt to prove entitlement to the remedies. The court provided hypothetical examples of provisions that would impermissibly affect an individual’s right to pursue a remedy, such as a provision requiring complete waiver of certain statutory rights or a provision requiring arbitration in a forum with filing and administrative fees so high that individuals’ access to the forum is impracticable.

The court then decided Oxford Health Plans LLC v. Sutter, in which it upheld an arbitrator’s ruling permitting class arbitration. Oxford Health is not inconsistent with American Express, however. It is instructive because the provision at issue in Oxford Health—unlike the provision examined in American Express—failed to expressly prohibit class arbitration. And that is what led to an arbitrator’s decision allowing class arbitration to go forward. As the Supreme Court noted, the FAA significantly limits a court’s power to review arbitral decisions, as a way to promote finality in arbitral proceedings. Thus, the Supreme Court’s hands were tied, even if it disagreed with the arbitrator’s interpretation of the provision at issue.

Now, when reading Concepcion, American Express, and Oxford Health together, one can conclude that, if the FAA preempts states’ attempts to prohibit class arbitration waivers (Concepcion) and permits express waivers of class arbitration of federal claims (American Express and Oxford Health), then there is little standing in the way of arbitration provisions requiring waiver of class arbitration of comparable state law claims.

Critics’ Views on the Impact of American Express

Critics of the American Express decision, in particular, are plenty. They include the three dissenting justices in the case, who aptly described critics’ concerns as follows: “The FAA conceived of arbitration as a ‘method of resolving disputes’—a way of using tailored and streamlined procedures to facilitate redress of injuries. In the hands of today’s majority, arbitration threatens to become more nearly the opposite—a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability.”

This criticism is extreme, but it highlights a main takeaway from these recent decisions. The Supreme Court has approved of contractual provisions by which companies can (1) expressly limit their exposure to court litigation, especially class and collective actions, and (2) funnel the remaining individual claims into a mandatory bilateral arbitration process. The question for consideration now is should your company take advantage of this development?

Pros and Cons of Arbitration

Use of any arbitration agreement requires a commitment to arbitration as the means of dispute resolution. That may cause general concerns for some; it is particularly easy to find anti-arbitration sentiment among defense lawyers. But that may be for good reason.

In recent years, arbitration through familiar venues seems to have taken on many characteristics of traditional litigation, and traditional litigation is what arbitration was not supposed to be. But now, characteristics common to both traditional litigation and arbitration include procedures such as expansive discovery and motion practice. This has caused some to question if arbitration remains the speedy and efficient dispute resolution method originally envisioned. It is the speedy and efficient version of arbitration that the Supreme Court clearly had in mind in the pro-arbitration decisions discussed above, which is another common criticism: Does the Supreme Court have an accurate view of the current state of arbitration?

Arbitration detractors also typically point to increasing costs and fees associated with arbitration through institutional alternative dispute resolution providers.

These concerns notwithstanding, arbitration does continue to serve as a valuable means of dispute resolution for many types of claims. Generally, arbitration typically offers the following advantages over traditional litigation: In many instances, arbitration remains quicker due to process control and efficiency, particularly as compared to litigation in many federal courts; arbitration offers privacy and confidentiality very rarely, if ever, present in traditional litigation, including today’s world of online, publicly accessible court filings; arbitration permits control over results through neutral expertise and clause drafting; and binding arbitration can present an element of finality often missing from traditional litigation.

But the question of whether to adopt arbitration provisions is not just a question of whether your company’s commitment would be “worth it” under some cost versus benefit analysis similar to that described above. The more interesting (and potentially rewarding) question is whether your company may have the opportunity to actually deter claims and litigation by adopting arbitration and employing a revamped and permissibly restrictive arbitration provision into its contracts.

Arbitration as Litigation Deterrent

As indicated, a main criticism of American Express is that the arbitration provision at issue did, in fact, appear to deter individual claimants from pursuing relief via the only avenue available to them—mandatory bilateral arbitration. At this time, that criticism is at odds with the law.

Supreme Court precedent now provides that, as long as an arbitration provision does not require waiver of (or effectively eliminate through exorbitant filing and administrative fees) the right of individual claimants to pursue their claims, it probably should be upheld. The choice between (a) not pursuing claims on one hand and (b) pursuing claims but likely not recovering damages sufficient to cover expenses on the other hand is a choice that can be lawfully imposed upon individual claimants. Perhaps even the most anti-arbitration defense lawyers can appreciate the nature of this predicament for potential claimants. And if the Supreme Court intends to express a preference in favor of arbitration, there has to be some appreciation that the court is doing so with an apparent slant toward businesses. The next question to answer then is whether your company is willing to make the commitment to arbitration.

As your company weighs its options, there are a few additional points to keep in mind.

American Express did involve federal antitrust claims, so it remains to be seen how plaintiff’s lawyers may try to distinguish it from arbitration of federal claims in other areas, such as employment. Their basis for doing so could be an argument that some federal statutes applicable to employment claims may contain “contrary congressional commands” that override the FAA’s pro-arbitration mandates. For example, the impact of American Express on union employees is up for debate in light of an ongoing appeal of a 2012 decision by the National Labor Relations Board providing that the National Labor Relations Act actually prohibits class waivers in employment agreements. Moreover, congressional legislation to cut away at Supreme Court precedent from these cases remains a possibility, and such legislation would serve as a specific “contrary congressional command” to override the FAA and the court’s case law enforcing its mandates.

Additionally, Supreme Court precedent notwithstanding, arbitration through the American Arbitration Association and other institutional ADR providers requires adherence to due process protocols to ensure fairness to both parties. The protocols are enforced and must be followed. And at this time, it still is not permissible under consumer or employment arbitration due process protocols for an arbitration provision to limit substantive rights or remedies.

Another point to reiterate is that adopting arbitration provisions means that it becomes the sole procedural mechanism through which claimants may pursue remedies available against your company. Your company can have significant input on what that process will look like, however. For example, to counterbalance some of the perceived negatives associated with arbitration in its current form, the arbitration process can be made more conducive to early and efficient dispute resolution by incorporating a mediation step into the process. If arbitration is incorporated into your company’s overall dispute resolution process and proves to be effective for all parties, arbitration may even be presented to individuals as a positive benefit of a relationship with your company instead of a restriction.

So the choice is yours. The Supreme Court has provided businesses with a tool to attempt to curtail traditional litigation—class and collective actions, in particular. Is it a tool your company considers worth using?