Federal Law Arbitration: Is It Possible?

Arbitration is an alternative method of resolving legal disputes where both parties present their complaints to an arbitrator or panel of arbitrators who decide the rules, weigh the facts and arguments of both parties, and then decide the dispute. The Federal Arbitration Act (FAA) was enacted in 1925 on the principle that arbitration agreements are enforceable. The FAA provides that when a dispute involves a contract with a written arbitration clause, a court must, upon motion, stay litigation so that the dispute can go to arbitration. The FAA gives courts limited power to review arbitral awards, and an award can only be set aside on four grounds: fraud, arbitrator bias, refusal to hear relevant evidence, or the arbitrator exceeded their power. The Supreme Court's preemption decisions concerning the FAA have disabled many state regulation efforts. This has resulted in a dynamic that is at odds with some basic commitments of the constitutional order.

The Federal Arbitration Act (FAA)

Section 2 of the FAA states that arbitration provisions can only be invalidated on the same grounds as contractual provisions generally, such as unconscionability or duress. This means that most state laws that oppose the enforcement of arbitration agreements are superseded by the FAA. However, state laws that regulate the procedures of arbitration without impacting its enforcement are not superseded.

The FAA gives courts very limited power to review arbitral awards. An award can only be set aside if it was obtained fraudulently, the arbitrator was biased, the arbitrator refused to consider relevant evidence, or the arbitrator exceeded their power as outlined in the arbitration agreement. These grounds have been interpreted very narrowly. Once an award is made, it must be "confirmed" in a court of law and can be enforced by the winning party like any other judgment.

The Supreme Court's preemption decisions regarding Section 2 of the FAA have hindered state regulation of arbitration. These decisions have been criticised as conflicting with federalism and congressional intent. In response, state courts have reacted in various ways, from outright defiance to imposing arbitrary limits on the decisions' scope.

In 2019, Democrats in both houses of Congress introduced the Forced Arbitration Injustice Repeal Act (FAIR Act) to modify the FAA. The proposed bill aimed to invalidate contracts requiring forced arbitration, except under specific conditions, and to make judges the decision-makers in disputes where arbitration is mandated. The bill passed the House of Representatives but did not pass the Senate.

State laws vs federal laws

Federal laws are rules that apply throughout the United States. They are decided by the Legislative Branch of the federal government (Congress) and are founded on the United States Constitution, which is the supreme law of the land. Federal laws apply in every state and cover areas such as immigration, bankruptcy, civil rights, and social security.

State laws, on the other hand, are specific to each state and apply to people who live or work in that particular state. They are adopted by the state legislature and signed into law by the state governor. The purpose of state laws is to grant citizens within a state additional rights and responsibilities that are not explicitly provided by federal law. State courts have jurisdiction over matters like criminal law, real estate law, and welfare issues.

In the case of a conflict between state and federal laws, federal law generally prevails, as established by the Supremacy Clause in Article VI of the Constitution. However, if a state law affords more rights to its citizens than federal law, the state law is legally presumed to prevail within that state. For example, if a state has legalized the use of marijuana for recreational or medical purposes, it conflicts with federal law, which considers cannabis a controlled substance. In this case, while federal law enforcement can still arrest or prosecute distributors of cannabis, local law enforcement in states that have legalized marijuana is unlikely to do so.

The Federal Arbitration Act (FAA), enacted in 1925, has been a point of contention between federal and state laws. The FAA mandates that when a contract includes a written arbitration clause, litigation must be stayed so that the dispute can be arbitrated. The Supreme Court's interpretation of the FAA has limited state efforts to regulate arbitration. However, state courts have responded in various ways, from open defiance to arbitrary limitations, highlighting the dynamic between federal and state laws.

Employees' rights

Arbitration is a method of resolving employment disputes outside of court, involving a neutral third party (the arbitrator) making a binding and enforceable decision. It is a relatively new practice that has become increasingly common in recent years, with over 60 million workers now subject to mandatory arbitration.

While arbitration is intended to be a faster and more cost-effective way of resolving disputes, it is generally considered to be more favourable to employers than employees. This is because arbitration awards are private and do not set binding rules for future courts or arbitrators, allowing companies to continue violating the law without public scrutiny. Furthermore, employees are often required to waive their right to sue in court as a condition of their employment, and class-action waivers in contracts prevent workers from litigating their cases jointly.

However, employees always have the right to report illegal conduct to the Labor Department, regardless of whether they have signed an arbitration agreement. The Labor Department can provide a meaningful avenue for legal recourse when workers' rights are violated and can enforce the rights of workers who are unable to do so themselves.

To reduce the risk of legal challenge, employees in arbitration should be able to recover anything that would have been available to them under applicable law in court, including attorneys' fees and punitive damages. Arbitration agreements should also be fair and impartial, allowing employees the ability to vindicate their rights in a fair forum.

Consumer rights

At the federal level, the Federal Trade Commission Act (FTCA), first enacted in 1914, is a key piece of legislation that created the FTC and tasked it with enforcing antitrust statutes and promoting consumer protection. The FTC actively works to protect consumers, as evidenced by its role in halting deceptive business schemes, sending refunds to consumers, and temporarily halting the operations of fraudulent businesses.

Additionally, specific consumer protection laws address particular sectors and issues. For instance, the Fair Debt Collection Practices Act (FDCPA) protects consumers from improper debt collection activities, setting limits on contact times and requiring debt validation upon the consumer's request. The Truth in Lending Act (TILA) safeguards consumers against unfair practices by mandating lenders to disclose the total cost of a loan, including all interests and associated costs. The Real Estate Settlement Procedures Act (RESPA) prohibits deceptive practices in real estate, such as kickback payments. The Telephone Consumer Protection Act of 1991 bans unsolicited faxes, while the National Highway Traffic Safety Administration (established under the Highway Safety Act of 1970) enforces consumer safety laws for automobiles.

At the state level, each state's Attorney General plays a crucial role in investigating and enforcing consumer protection laws. Some states, like California, empower consumers with a private right of action, allowing them to vindicate their rights in court independently or alongside government action. State laws like lemon laws also protect consumers from misleading practices by used car dealers.

However, consumer arbitration has emerged as a controversial topic. Critics argue that arbitration clauses in consumer contracts can be biased, inconspicuous, and widely required for many goods and services. These clauses often prohibit consumers from pursuing class-action lawsuits, making individual litigation expensive and challenging. The Federal Arbitration Act (FAA), which businesses use to block consumer class actions, has faced opposition through bills like the Arbitration Fairness Act, aiming to carve out certain disputes from the FAA's scope.

Supreme Court rulings

The Federal Arbitration Act (FAA) was passed by Congress in 1925. While it was intended to be a purely procedural statute, the modern Supreme Court has interpreted Section 2 of the FAA as a substantive commitment to a federal pro-arbitration policy. This interpretation has been criticised as inconsistent with federalism and congressional intent.

In 2021, the Supreme Court issued four decisions that addressed the enforcement of arbitration agreements and confirmation of arbitration awards under the FAA. In Badgerow v. Walters, the Court narrowed the scope of federal courts' authority to hear petitions to confirm or vacate arbitration awards, ruling that federal courts have jurisdiction only when federal jurisdiction is presented by the petition itself. This ruling will likely result in more motions being brought in state court.

In another case, Morgan v. [name unavailable], the Supreme Court made it easier to prevail on a claim that a party waived its right to compel arbitration. The Court also addressed the issue of class-action style arbitrations, holding that arbitration clauses that require arbitration of individual claims but do not include consent to arbitrate class claims are enforceable.

In a recent unanimous decision, the Supreme Court held that the FAA requires courts to stay, rather than dismiss, lawsuits in which all claims are subject to arbitration. This decision resolves a split among federal circuit courts and clarifies the scope of judges' jurisdiction over cases subject to arbitration. The Court's opinion stated that when a federal court finds that a dispute is subject to arbitration, and a party requests a stay, the court does not have the discretion to dismiss the suit. This ruling will likely prevent immediate appeals of orders compelling arbitration.

The Supreme Court's rulings on arbitration have significant implications for the enforcement of arbitration agreements and the resolution of disputes. They reflect a preference for textualism in statutory interpretation and a commitment to a federal pro-arbitration policy.

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