THE BLOG
07/29/2015 01:12 pm ET Updated Jul 29, 2016

Fundamental Fairness Reform of Arbitration Agreements Is Essential

Prior to 1900, English and U.S. legal traditions tended not to favor or enforce pre-dispute arbitration agreements. Attempts to "oust the jurisdiction of the court" were frequently considered contrary to public policy. In 1925 the Federal Arbitration Act was enacted to standardize developing state arbitration rules (New York was among the first) and provide needed enforceability. In recent decades, under the legal leadership of federal and state supreme courts, the utilization of pre-dispute arbitration agreements has greatly expanded, especially in consumer matters and employment. Many commentators question whether such agreements are truly voluntary or understood by individuals. This comment briefly suggests some parameters of any fundamental fairness reform of arbitration agreements.

Proposed federal legislation, the "Arbitration Fairness Act of 2015," in an incomplete overview, would amend the Federal Arbitration Act to invalidate and make unenforceable pre-dispute arbitration agreements of employment disputes, consumer disputes, antitrust disputes, or civil rights disputes. Parties could agree to arbitrate after a dispute has arisen. Collective bargaining union arbitration agreements would generally be allowed.

In my opinion, a pre-dispute arbitration agreement would be fair and acceptable if clearly written in its own separate agreement with unique and special benefits (consideration) flowing to the individual who agreed in advance of a dispute to arbitration.

Currently, many arbitration clauses are part of the "fine print" of a larger agreement such as a service contract. Additionally, in many situations, a failure to agree to pre-dispute arbitration means that an individual will be unable to obtain the service or employment in question, something for which there may be no meaningful alternative. Arbitration of "all disputes" may be presented as a "take it or leave it" option, for example, in an employment situation.

There is tension, difficult to resolve, between necessary freedom of contract with the ability to insist upon one's mandatory terms for reaching an agreement and, on the other hand, the potential overreaching by a dominate party. True freedom of contract implies, at a minimum, equality of bargaining power, information, and meaningful alternatives. Frequently these prerequisites for exercising freedom of contract are not present when an individual attempts to negotiate with a multinational corporation.

So what might fundamental fairness in arbitration agreements involve?

The following are a few suggestions for reform in the interest of triggering discussion and refinement:

1. A service, consumer, or employment arbitration agreement should be a separate stand-alone document containing meaningful captions to indicate its contents and not a part of another document, such as a lengthy terms-of-service agreement or employee handbook.

2. As much as possible, a consumer or employee arbitration agreement should be written in plain English, as, for example, documents issued by federal executive agencies are required to be prepared under the Plain Writing Act of 2010.

3. Arbitration agreements should not be judicially interpreted to include topics and disputes not clearly and specifically identified or enumerated within the arbitration agreement. In my opinion, general language, such as "all disputes" in an employment arbitration agreement, for example, fails to provide appropriate notice to an employee that she or he may be giving up the right to litigate an employment discrimination claim.

4. An arbitration agreement should provide and be enforced so that all parties have equal obligations (mutuality of obligation).

5. An arbitration agreement should provide and be enforced so that all parties have equal rights and remedies.

6. Arbitration expenses should be carefully addressed in any fundamental fairness reform movement. As a matter of general principle, an individual should not be faced with prohibitively excessive expenses or expenses that exceed the potential financial recovery in the event of success on the merits of a claim. Should an individual be forced to abandon a $100 meritorious claim, for example, because mandatory arbitration will cost $2,000, for example, a sum far in excess of a Small Claims Court fee? On the other hand, there must be penalties for frivolously invoking arbitration.

7. The location of the arbitration (venue) should not be unreasonably distant. In the case of an individual, for example, an arbitration location that is no more than 300 miles from her or his residential address might be required.

8. Class wide arbitration of small claims from numerous affected individuals or businesses should be allowed. For example, a wrongful charge of $25 assessed against one million individuals adds up to $25 million wrongfully charged, but no one person may be able to efficiently pursue a $25 claim. Enforceability of class wide arbitration might require overturning both a 2011 U.S. Supreme Court decision (AT&T Mobility v. Concepcion) and a 2013 decision (American Express Company v. Italian Colors Restaurant). These decisions involved both individuals and small businesses. Class wide arbitration would seem to be both efficient and cost effective.

9. The individual agreeing to pre-dispute arbitration should receive a meaningful benefit (consideration, in contract legal jargon) beyond simply being allowed to purchase the service in question or having the employment being offered. Since arbitration is advocated as saving the expense and time of litigation, should not the individual share in that saving?

10. Arbitration agreements should not override (preempt) state and federal consumer protection legislation or individual employee rights guaranteed by state and federal law. A proposed Model State Consumer and Employee Justice Enforcement Act (with commentary) addresses some of these concerns.

11. In some fashion, fundamental fairness reform must prevent grossly and harshly one-sided (unconscionable) provisions in arbitration agreements. Since there are numerous ways to circumvent or "game" what is mandated as "fair," this is an especially legally difficult task that today simply relies upon the judgment of the particular court hearing a given case. This issue may ultimately need to be addressed through recognized ethical guidelines and standards.

12. Related to point 11 above, given the ever expanding forms of social media communications and the lingering long-term and continuing impact in cyberspace of wrongs, highly one-sided arbitration clauses in social media service agreements that, for example, cap damages at nominal sums, limit remedies, require the payment of excessive fees, or in other manner prevent true recovery for proven injuries, must be addressed. Difficult issues of existing legislation and First Amendment rights are involved.

13. The credentials and experience of an arbitrator should be appropriately related to the situation being arbitrated. Uniform vetting of asserted credentials and required training and certification must be standardized.

14. The potential for real or perceived conflicts of interest by an arbitrator must be addressed with uniform guidelines and standards. This is not easily accomplished as work experience, referrals, and fee payments create a tangled web of relationships. Overturning the arbitration award should be a foreseeable and easily accomplished consequence of conflict of interest violations.

15. The difficult issue of the confidentiality of arbitration evidence and awards must be addressed. Judicial records are public precedents while arbitration awards are typically not public. A wrongdoer with numerous victims should not be able to use arbitration to shield information to the detriment of those who have been harmed.

16. To the extent that the movement toward pre-dispute arbitration addresses real problems in our contemporary judicial system, such as delay, expense, and fear of arbitrary jury actions, then meaningful judicial reform must be a part of any proposal for fundamental fairness reform of arbitration agreements. The business community, individuals, and society as a whole have a stake in the efficient and impartial administration of justice.

The private justice of arbitration may be either a benefit or a detriment, depending on the situation. To insure fundamental fairness, many individuals and organizations are thoughtfully considering numerous issues. We should be supportive of these efforts as the fair and impartial administration of justice is one of the foundations of political, social, and economic freedom.