Arbitrator Authority: Violating State Laws?

Arbitration is a common method for settling disputes, and often, parties to a contract will include an arbitration clause dictating that disputes be settled through arbitration. However, the question of whether arbitration is governed by federal or state law is a complex one. The Federal Arbitration Act (FAA) has been interpreted by the Supreme Court to preempt state laws, meaning that state efforts to regulate arbitration are subject to preemption by the FAA. However, state courts have the primary responsibility for interpreting and applying the FAA, and some state courts have flouted the Supreme Court's decisions, leading to a discombobulating dynamic between federal and state systems. Furthermore, state legislatures are free to enact legislation combating abuses through private litigation, and some states have done so, helping consumers respond to arbitration clauses.

State laws vs federal laws

In the United States, laws are created by either the federal government or a state government. Federal laws apply to everyone in the US, while state laws apply to people who live or work in a particular state, commonwealth, or territory. Each state has its own system of laws and courts that handle a range of issues, including family law, debt collection, and housing.

Federal laws are rules that apply throughout the country and cover areas such as immigration, bankruptcy, the postal service, intellectual property, and the military. Federal courts have traditionally only heard cases related to the interpretation of the US Constitution, the Bill of Rights, and topics authorized by the Constitution. However, federal law now also controls areas such as federal anti-discrimination and civil rights laws, protecting against racial, age, gender, and disability discrimination.

State laws, on the other hand, cover areas that are generally not federal law, such as family law, divorce, child custody, and guardianships. While federal law takes precedence over state law in conflicts, state courts play a crucial role in interpreting and applying federal laws. In the context of arbitration, the Federal Arbitration Act (FAA) has been the subject of debate, with some arguing that it preempts state laws, while others defend state regulatory power.

In matters of commercial arbitration, the Supreme Court's decisions regarding the FAA have limited state efforts to regulate arbitration. This has resulted in a dynamic that contradicts fundamental constitutional principles. Despite this, state courts have asserted their authority in various ways, including openly defying or imposing arbitrary limitations on the reach of federal decisions. For instance, in Smith v. Nobiletti Builders, Inc., a New York appellate court invalidated an arbitration clause under state law, concluding that the FAA did not preempt it.

Mandatory arbitration

In the context of employment, mandatory arbitration clauses are commonly found in the fine print of one-sided, take-it-or-leave-it employment contracts. These clauses require employees to waive their right to sue their employer in court and instead submit any disputes to binding arbitration as a condition of their employment. This means that employees cannot bring a lawsuit against their employer for violations of their rights, such as minimum wages and overtime pay, rest breaks, protections against discrimination and unjust dismissal, privacy protection, and family leave, among other state and federal employment rights.

The use of mandatory arbitration has been criticised for denying consumers and employees their rights and for being controlled by, and biased towards, corporate defendants. It allows employers to circumvent the judicial system and avoid accountability for wrongdoing. Additionally, the cost of arbitration can be a barrier for employees, as they typically have to bear the cost of initiating arbitration, and arbitrators can charge several hundred dollars per hour for their services.

Despite these concerns, the Supreme Court has enabled the use of mandatory arbitration, holding that the Federal Arbitration Act (FAA) preempts any state laws with which it conflicts. This has resulted in a shift in the civil justice system, with corporations having greater power to force customers and employees into arbitration for alleged violations of state and federal laws.

Supreme Court decisions

The Supreme Court has played a significant role in shaping arbitration law and its intersection with state laws. Here are some key Supreme Court decisions that address the topic:

Southland decision and Mitsubishi decision: In the 1980s, the Supreme Court issued two decisions that significantly expanded the scope of the Federal Arbitration Act (FAA). The Southland decision held that the FAA preempted any conflicting state laws, allowing for the preemption of state efforts to regulate arbitration. The Mitsubishi decision extended the FAA's reach to statutory disputes, including business disputes involving allegations of violating antitrust laws.

Gilmer v. Interstate/Johnson Lane Corp.: In 1991, the Supreme Court ruled that an employee's age discrimination claim, which alleged a violation of civil rights laws, had to be resolved through arbitration. This decision further expanded the types of claims subject to arbitration and demonstrated the Court's preference for arbitration over state legislation protecting consumers and employees.

AT&T v. Concepcion: In 2011, the Supreme Court upheld the enforceability of class-action waivers in arbitration agreements, allowing corporations to ban class actions and prevent consumers or employees from collectively challenging systemic wrongdoing.

American Express Co. v. Italian Colors Restaurant: The Supreme Court ruled that the cost of litigation was not a valid reason to invalidate a class-action waiver, even if the cost exceeded individual recovery. This decision limited state courts' ability to refuse the enforcement of class-action waivers.

Badgerow v. Walters: In 2022, the Supreme Court narrowed the authority of federal courts to hear petitions to confirm or vacate arbitration awards under the FAA. This decision shifted more cases to state courts, impacting the jurisdiction of federal courts.

Morgan v. Sundance, Inc.: The Supreme Court unanimously held that a party could waive arbitration by first litigating its claims in state court, regardless of whether the other party was prejudiced. This ruling made it easier to oppose arbitration on waiver grounds.

Union of India v. Tulsiram Patel: The Indian Supreme Court clarified that natural justice, as guaranteed by Article 14 of the Indian Constitution, applies to arbitration proceedings. Any deviation from fairness or impartiality, even in non-state actions, was considered a violation of the constitutional mandate.

CORE II: The Indian Supreme Court clarified the law on arbitrator independence and impartiality, impacting public sector entities and their counterparts in arbitration. The decision challenged clauses in government contracts that gave undue influence in selecting arbitrators, ensuring balanced selection methods.

These Supreme Court decisions have had far-reaching consequences, influencing the rights of employees and consumers, the jurisdiction of federal and state courts, and the standards for impartiality and fairness in arbitration.

State court jurisdiction

In the context of commercial arbitration, state courts and arbitrators have complementary powers that span the pre-arbitration, arbitral proceedings, and post-arbitration phases. The concept of primary jurisdiction is key, denoting the jurisdiction of state courts in the place of arbitration. This primacy is comparable to the significance given to the procedural law underpinning the arbitral award.

State courts have the authority to intervene and resolve issues during arbitration, known as the "Juge d'Appui" or "Judge d'Appui." This includes matters related to the appointment and removal of arbitrators, compelling arbitration, and ruling on arbitration agreements. However, the exclusion of state court jurisdiction must be explicit and unambiguous. In certain cases, the specific exclusion of state courts' jurisdiction has been deemed a prerequisite for recognising an arbitration clause's validity.

Despite the FAA's language preserving the role of state law in regulating arbitration, the Supreme Court has held that the statute takes precedence over conflicting state laws. This expansion of the FAA's scope has had a significant impact on state efforts to regulate arbitration. In practice, state courts have responded to these decisions in various ways, from defiance to imposing limitations on their reach.

In summary, while state court jurisdiction is integral to the arbitration process, the interplay between state and federal law remains complex. The FAA's preemption and the Supreme Court's interpretations have shaped the landscape of arbitration, influencing the rights of employees and consumers and the dynamics between corporations and individuals.

Arbitrator qualifications

Arbitrators work in alternative dispute resolution (ADR) and are responsible for managing cases from referral through to resolution. They are tasked with writing notices of arbitration, gathering evidence, organising and conducting arbitration meetings, and summarising each side's position in a written document. The role of an arbitrator is growing as more people seek alternatives to traditional litigation.

In terms of qualifications, there are no universal standards for arbitrators. The specific requirements vary depending on the jurisdiction and the type of dispute. For example, in India, the Arbitration and Conciliation Act, 1996, states that any person of legal age and sound mind can be appointed as an arbitrator. However, the 2019 Amendment to this Act introduced stricter norms, requiring arbitrators to have specific qualifications, which was not well-received due to concerns about restricting party autonomy. Subsequently, the 2021 Amendment omitted these strict qualification requirements.

In some cases, arbitrators may need to meet certain legal qualifications, such as being an advocate, chartered accountant, cost accountant, or company secretary with a specified number of years of practice experience. Additionally, arbitrators can gain professional accreditations, such as chartership, by demonstrating their knowledge, skills, and experience in handling complex cases and contributing to the field of arbitration.

To enhance their qualifications, arbitrators can also engage in continuous professional development (CPD) and research to deepen their understanding of the field and stay updated with any legal changes. This is particularly important in areas like employment law, where regulations and practices may be subject to frequent revisions. Furthermore, arbitrators can contribute to training future practitioners by working with educational institutions and participating in programmes like CIArb's Partnership Programme, which focuses on teaching dispute management and resolution.

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