February 4, 2016, a Senate bill was introduced by Senator Al Franken and Patrick Leahy that proposes to limit arbitration clauses and how they control the legal rights of consumers to jury trials. The bill seeks to restrict the power of these clauses to strip legal rights of parties in employment and civil rights settings. The proposed legislation raises interesting questions about arbitration clauses in contracts more generally, as these legal devices have been en vogue for quite some time as a means of limiting the rights of litigants.
These days, arbitration clauses are found in contracts in all walks of business and life. Chances are, if you have gone to a doctor, bought a house, signed up for a cell phone contract, or downloaded software, whether you know it or not, there is a very good chance you agreed to an arbitration—and probably waived your constitutional rights to a trial by jury. You may have also agreed to have the arbitration in a city remote from where you live.
Among sophisticated parties in business, an arbitration clause may often make sense. For example, in a complicated patent license negotiation, all parties will have attorneys and will be able to weigh the pros and cons of having such a clause that controls the venue for disputes. With complex technology, or branding negotiations, it is often preferable to make sure that the judges deciding disputes will have a certain range of expertise. If those contracting parties and their lawyers want to waive the right to a jury trial in a public court for disputes about the agreement, it may make perfect sense. But, does it make sense that somebody would waive all those rights if there was no negotiation? Does the average consumer really have an opportunity to negotiate the choice of law and venue clauses with their cable provider? What about when they buy a car? Or when they get a cell phone? Credit card? Does anyone read the fine print when they click to “agree” to a software download? Or even with a major purchase like a house? Do consumers make an informed negotiation about the arbitration clause in a mortgage?
The current state of the law is very much in favor of compelling parties into arbitration—like it or not. Under the current Federal Arbitration Act, most arbitration agreements are enforced, unless they can be proven fraudulent or unconscionable—which is difficult. Consequently, consumers and businesses often find themselves having to litigate cases in arbitration when they often had no idea they had signed such a contract, much less given away constitutional rights to a trial by jury. Assuming the arbitration is even in a city where the litigant resides, they may then be surprised to find out that all decisions will be made by a single “judge” who is actually a private attorney who may have never even worked as a judge. Because decisions in arbitration are confidential, it can be hard for attorneys to assess possible sources of bias of the “judges” by reading their prior opinions. The cherry on top is that the arbitrator will then bill the litigants for all of his or her decisions relating to the case. Actual judges in government courts are paid by taxes, but in arbitration, they are paid handsomely by the litigants—assuming they have any money. Otherwise, there is no real access to justice. And that may work out just fine…. for certain interests who deal with the consuming public and would rather never deal with juries. Also, whether you’re the plaintiff or defendant, don’t expect rigorous application of any rules of evidence at most arbitrations. The arbitrator is the judge, jury, and… final decider. And final usually means really final. As for appeals—don’t count on it. These are all important concerns for individual consumers, legislators, and businesses alike when assessing arbitration clauses.
However it may be as a nation that we got to the current state of affairs with arbitrations, it apparently has little to do with the Bill of Rights or principles on which the Country was founded.
The Seventh Amendment of the Constitution guaranteed United States citizens the right to trials by jury in civil matters. This amendment was part of the Bill of Rights. It stated simply:
“In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any court of the United States, than according to the rules of the common law.”
This Amendment was part of the Bill of Rights because many Americans in revolutionary times were concerned that a strong national government could be a threat to individual rights, or worse, that the president might even become a king. “Anti-Federalists” like Sam Adams, John Hancock, Patrick Henry and Thomas Jefferson favored a Bill of Rights that would include protections of citizens, and they would not ratify a U.S. Constitution that omitted these important rights. The founding fathers had profound concerns about the use of arbitrary courts that were subject to the whims of a moneyed few—and by hostile governments. Under colonial rule, many American merchants and traders had engaged in struggles with Courts created by the British Crown, and so they saw the jury system as a mechanism to insulate themselves from undue influence by the British Crown and decisions lacking in fairness or due process.
So, quite simply, the jury system evolved in America to protect American citizens from unfairness—and some British imperialists. Thomas Jefferson and the other patriots insisted on the Bill of Rights which protected the Civil Jury System. Then, a hundred plus years later, the Federalists had their apparent posthumous revenge in 1925 when the Federal Arbitration Act and Supreme Court cases like Southland Corp. v. Keating¸ 465 U.S 1 (1984) made it possible to strip away those jury rights with ease. The internet made it possible to do so with the click of a mouse.
Interestingly and ironically enough, in Great Britain today, pre-dispute arbitration agreements are completely unenforceable unless they are individually negotiated by the businesses subject to them, made in good faith, and if they are not one-sided against the consumer. See Consumer Rights Act 2015 (UK); The Unfair Terms in Consumer Contracts Regulations 1999. http://www.legislation.gov.uk/uksi/1999/2083/contents/made
For consumers, and sophisticated businesses alike, greater attention should be given to the now ubiquitous arbitration clauses. Just because they have become common fare in American life, this does not mean they are always a good idea. As consumers, or as attorneys representing consumers, they should concern us greatly. And even with sophisticated negotiations among experienced businesses, in negotiating contracts, it is important to consider the ramifications of having disputes decided by private parties, with limitations on subpoena powers, and limits on rights of appeal. Arbitration clauses, venue clauses and mediation clauses need to be carefully considered and balanced.
©2016. Buche & Associates, P.C. John Buche is an attorney practicing in San Diego and Texas. He is an intellectual property specialist and trial attorney. He has represented individual consumers and businesses throughout his career. www.buchelaw.com.