I wanted to share some new legal arguments that could be helpful to invalidate arbitration clauses containing harsh terms. I just published a new article that proposes what I believe is a novel way of looking at the Federal Arbitration Act (FAA). In a nutshell, I propose that as a matter of federal law, the FAA must be understood as operating like a giant, binary, “on-off” switch – either an arbitration clause is fully enforceable, or it is not enforceable at all.
If an arbitration clause in an employment or consumer agreement contains a harsh term, such as an abbreviated statute of limitations or a provision requiring arbitration in a distant location, judges will sometimes merely sever the harsh term and enforce the rest of the arbitration clause. In fact, some judges believe the Federal Arbitration Act and its strong federal policy favoring arbitration require severance of any harsh provisions so that arbitration will still occur, minus the oppressive terms. This severance approach is problematic and may encourage drafting parties to overreach and include harsh terms in an arbitration clause if the only penalty at the end of the day is mere severance of such terms.
My new article demonstrates that the Federal Arbitration Act embodies a simple, binary approach to the enforcement of arbitration agreements: either an arbitration agreement is fully enforceable, or it is not enforceable at all. The core thesis of my article is that as a matter of federal law, the text, history, and policy of the Federal Arbitration Act require courts to invalidate an arbitration clause in its entirety if it contains any harsh provisions. Severance of harsh terms should not be permitted under the FAA in order to rescue parties who overreach and draft arbitration clauses with oppressive terms. These issues were raised in a U.S. Supreme Court case a few years ago, MHN Govt. Services v. Zaborowski, a decision from the 9th Circuit; the parties settled the case before oral argument occurred in the Supreme Court.
If this strict invalidation approach (as opposed to mere severance) is adopted by courts, this new approach, in the long run, would hopefully incentivize parties to draft fairer provisions in arbitration clauses and help restore the use of arbitration as a good faith, mutual undertaking to resolve disputes, instead of using harsh arbitration clauses to suppress claims.
A copy of the article can be downloaded through SSRN at the following link: https://ssrn.com/abstract=3228773
The full citation is Imre S. Szalai, A New Legal Framework for Employee and Consumer Arbitration Agreements, 19 Cardozo. J. Conflict Resol. 653 (2018).
Great idea! I look forward to reading it. And:
How does this fit – as to state law grounds such as unconscionabikity – where the rule is to treat the same as other state contracts? If states blue line an over-reaching noncompete to rewrite as unenforceable must they do the same here? Perhaps not as to federal defects, such as excessive fees, but yes as to limiting the damages?
Thanks so much. I have 2 responses. I am proposing this complete invalidation doctrine as a matter of federal arbitration law, which would preempt any conflicting state law, much like the federal law presumption from Moses H. Cone regarding the interpretation of the scope of an arbitration clause overrides any state law contract doctrines of contra proferentem. In other words, this federal doctrine of complete invalidation would still work with the general idea that state contract law forms the basis for the formation of an agreement, but at the same time, this proposed federal doctrine of complete invalidation would override and preempt any state contract law requiring severance or blue-lining.
My second response is more historical. It is well-established that the FAA is interpreted today as involving a hybrid of federal law and state contract law. However, state law doesn’t really appear in the statute. I believe that section 2, as originally enacted and before the sea change of Erie v. Tompkins, embodied a federal common law. The enforceability of arbitration agreements under the FAA was originally supposed to involve a national, uniform standard based on federal common law.
Sounds interesting. Keep fighting the fight!