In a summary opinion involving a consumer’s class action lawsuit against Verizon Wireless, the Second Circuit recently held that private arbitration does not involve state action or trigger due process rights. Katz v. Cellco Partnership, No. 18-1436 (2d Cir. Mar. 12, 2019) (click here for a copy of the decision). This is not a big surprise at the federal appellate level, with decisions from other jurisdictions reaching the same conclusion.
However, there are some aspects of arbitration that are difficult to reconcile with purely private action, such as: the subpoena powers of arbitrators with respect to non-parties to the arbitration agreement; the power of an arbitrator to issue punitive damages as a punishment, which seems to be quasi-criminal in nature; the ability of an arbitrator to enforce laws designed to benefit the public, such as antitrust laws; and the lack of meaningful consent that often exists in connection with consumer or employment arbitration clauses.
Also, despite these federal appellate decisions, I have noticed that lower courts and state courts sometimes refer to due process concepts when discussing private arbitration. See, e.g., Mayeaux v. Skyco Homes, 161 So. 3d 765, 768 (La. App. 3 Cir. 7/2/14) (“Neither statutory law nor jurisprudence restrict the authority of the courts to determine whether the arbitration was fundamentally fair applying our notions of due process of law.”).
Other interesting arbitration news:
The estate of Michael Jackson recently asked a court to compel a “public” arbitration of a dispute with HBO involving the new Leaving Neverland documentary. (Click here for a copy of the petition.) I have not previously seen a motion to compel involving public, open arbitration proceedings. Also, there is an interesting scope problem here. The arbitration clause appears in a contract from the early 1990s involving HBO’s filming of a Michael Jackson concert in Bucharest, and this contract imposed non-disparagement obligations on HBO. Does the scope of this arbitration clause from the 1990s cover the estate’s allegations regarding the new HBO documentary?
As a reminder that arbitration is not truly 100% confidential, especially because of the possibility of vacatur or confirmation proceedings: check out this arbitrator’s award against Fox in connection with allegations that Fox failed to pay actors their promised share of profits from the television show Bones. (Click here for a copy of the award.) Among other things, the arbitrator found that there was a company-wide, accepted culture at Fox involving a complete “aversion for the truth,” and the award included more than $120 million in punitive damages. The award became public in connection with a petition to confirm the award.
Hm, I had no idea “public” arbitration was even a consideration. A decision to grant the request may have huge implications. A
Thank you Imre Szalai for your insights on arbitration. Your website and posts are a valuable window on something that impacts us in ways most of us will never know.
I am sure there is a case somewhere discussing whether foregoing any review of an arbitrator’s award is a denial of due process but I don’t think I have seen one. The FAA “appeared” to limit arbitration to disputes arising out of the parties contracts or transaction. That clear limitation is long gone as you have pointed out. Arbitration was considered a great alternative to the judicial system because “experts” well versed in contract law could efficiently resolve black letter law business disputes. But what are the odds of a random arbitrator who likely is not familiar with a consumer protection statute getting to the right outcome? Especially, when the parties have limited discovery and in a consumer protection claim the evidence is normally in the business’s control. At least with a breach of contract claim the parties have a chance of establishing the facts needed to support their contentions. But with limited discovery and an arbitrator that does not get paid to do the heavy research consumer regulation disputes require it is probable that the outcome will not be sound. And if the consumer dispute is cutting edge with no guidance from court decisions it is certain the outcome will be unsound. Appeals are critical to consumer regulations which are always outpaced by changes in the industry. Arbitration of basic contract disputes may be fair and meet due process but even then one can point to the NAF racket and the fact that AAA no longer arbitrates debt collection cases submitted by the debt collector. Those were the supposedly simple contract cases that arbitration was touted as being a fair and competent dispute resolution process. Why would due process be obtainable in way more complicated consumer regulation cases. Especially without a system of review.
PS Courts have consistently held that as a matter of public policy one can’t waive the statutory protections of statutes of limitations in advance of the claim. After the claim arises one can waive or agree to extend the limitation period. Why haven’t any courts held it is against public policy to waive the right to appeal, or discovery, or a jury before one has any idea what the claim might be or who it is against? Might not be against public policy to waive those rights in advance if the possible claims are limited to just those arising out of the contract and against the party whom one has contracted with. But with a statute like the Fair Debt Collection Practices Act the claim will never be with the original creditor because the FDCPA excludes the original creditor. And one has no idea what bad act the debt collector will commit. Our system of review has allowed those consumer regulations to evolve and grow. It is essential to resolving legal uncertainty because one might expect to lose at the trial level but win on appeal. Even if lost on appeal the “legal ecosystem” is clarified and perhaps the legislature will step in to fix the problem. Arbitration kills all of that.
Thanks so much for your insightful comments. Regarding forgoing any judicial review of an arbitrator’s award – this situation is like the opposite of the Mattel situation. In Mattel, the Court held the statutory grounds of the FAA cannot be increased by agreement; they are the exclusive grounds (but Section IV of the Mattel decision allows for the possibility of expanded review under state law.) So, under Mattel, parties cannot expand the FAA’s grounds for vacatur. Can parties go in the opposite direction and agree to shrink the grounds for vacatur, or going one step further, even eliminate all judicial review of an arbitrator’s award? I’ve seen arbitration agreements whereby the parties purportedly waive all judicial review of the arbitral award, and courts are split whether such waiver clauses are enforceable. On the one hand, is the purpose of the FAA to respect the agreement of the parties (so parties can therefore waive all judicial review), or does the FAA set forth certain standards that can never be waived (so that parties cannot waive the FAA’s grounds for vacatur)? There are conflicting cases about reduced judicial review under the FAA.
I have heard of some other public arbitrations. While arbitration is typically private it need not be. One was the arbitration involving cyclist Lance Armstrong’s alleged drug cheating in the Tour de France, held at Pepperdine Law School. The other public arbitration I know of involved a dispute between the state of Florida and (as I recall) medicare funding or something like that. The arbitrator was William Webster, former judge and former head of the FBI.