Mandatory Arbitration And The Federal Arbitration Act
Mandatory Arbitration and theFederal Arbitration ActJon O. ShimabukuroLegislative AttorneyJennifer A. StamanLegislative AttorneySeptember 20, 2017Congressional Research Service7-5700www.crs.govR44960
Mandatory Arbitration and the Federal Arbitration ActSummaryArbitration is a method of legal dispute resolution in which a neutral, private third party, ratherthan a judge or jury, renders a decision on a particular matter. Under a growing number ofconsumer and employment agreements, companies have come to require arbitration to resolvedisputes. While arbitration is often viewed as an expeditious and economical alternative tolitigation, consumer advocates and others contend that mandatory arbitration agreements createone-sided arrangements that deny consumers and employees advantages afforded by a judicialproceeding.The Federal Arbitration Act (FAA) was enacted in 1925 to ensure the validity and enforcement ofarbitration agreements in any “maritime transaction or . contract evidencing a transactioninvolving commerce[.]” The U.S. Supreme Court (Court) has recognized the FAA as evidencing“a national policy favoring arbitration.” The application of the FAA, however, particularly in lightof various state law requirements and the use of different types of arbitration agreements, hasraised numerous legal questions and been the subject of several cases before the Court.The question of whether the FAA preempts a state law or judicial rule is a subject of frequentlitigation. In these cases, the Court has routinely held that the FAA supersedes state requirementsthat restrain the enforceability of mandatory arbitration agreements. This report examines theFAA and reviews the Court’s decisions involving the statute’s preemption of state lawrequirements. The report also explores the Court’s decisions involving mandatory arbitrationagreements that prohibit a consumer or employee from maintaining a class or collective action. Inits October 2017 term, the Court will consider three consolidated cases that challenge suchagreements on the grounds that they violate the right to engage in “other concerted activities”under the National Labor Relations Act (NLRA).Finally, concern over a perceived lack of “meaningful choice” to decide whether to submit aclaim to arbitration has prompted regulatory activity, as well as legislation that would amend theFAA to render certain types of pre-dispute arbitration agreements unenforceable. The reportdiscusses some recent examples of federal regulatory action that aim to restrict the use ofmandatory arbitration in the consumer arena, and reviews bills like the Arbitration Fairness Act of2017 (H.R. 1374/S. 537), which would prohibit the enforcement of an arbitration agreement thatrequires arbitration for an employment, consumer, antitrust, or civil rights dispute if theagreement was executed prior to the dispute’s occurrence.Congressional Research Service
Mandatory Arbitration and the Federal Arbitration ActContentsIntroduction . 1The Federal Arbitration Act . 2Preemption and the FAA . 5Background . 5FAA Preemption and the Supreme Court . 7Class Arbitration Waivers and the FAA .11Recent Federal Regulatory and Legislative Action . 14Federal Agency Action to Restrict Mandatory Arbitration . 14Legislation in the 115th Congress . 16ContactsAuthor Contact Information . 17Congressional Research Service
Mandatory Arbitration and the Federal Arbitration ActIntroductionUnder a growing number of consumer and employment agreements, companies are requiringdisputes to be resolved through arbitration, a method of dispute resolution involving a neutral,private third party, rather than a judicial proceeding. In 2015, for example, the ConsumerFinancial Protection Bureau found that tens of millions of consumers use consumer financialproducts that are subject to arbitration clauses.1 In nonunion workplaces, it is estimated that atleast a quarter of all employees are now subject to mandatory arbitration agreements.2 Whilearbitration is often viewed as a faster and less expensive alternative to litigation,3 consumeradvocates and others maintain that mandatory arbitration agreements create one-sidedarrangements that deny consumers and employees advantages afforded by a judicial proceeding,such as the availability of a jury trial.4The Federal Arbitration Act (FAA or the Act) was enacted in 1925 to ensure the validity andenforcement of arbitration agreements in any “maritime transaction or . contract evidencing atransaction involving commerce[.]”5 The U.S. Supreme Court (Court) has recognized the FAA asevidencing “a national policy favoring arbitration.”6 The application of the FAA, however,particularly in light of various state law requirements and the use of different types of arbitrationagreements, has raised numerous legal questions and been the subject of several cases before theCourt. Concern over a perceived lack of “meaningful choice” to decide whether to submit a claimto arbitration has also spurred recent federal regulatory action, as well as legislation that wouldamend the FAA to render pre-dispute arbitration agreements unenforceable.7This report examines the FAA and reviews the Court’s decisions involving the statute’spreemption of state law requirements. The report also explores the Court’s decisions involvingmandatory arbitration agreements that prohibit a consumer or employee from maintaining a classor collective action. In its October 2017 term, the Court will consider three consolidated casesthat challenge such agreements on the grounds that they violate the right to engage in “otherconcerted activities” under the National Labor Relations Act (NLRA).81CONSUMER FINANCIAL PROTECTION BUREAU, ARBITRATION STUDY: REPORT TO CONGRESS, PURSUANT TO DODD-FRANKWALL STREET REFORM AND CONSUMER PROTECTION ACT § 1028(A) 9 (2015), http://files.consumerfinance.gov/f/201503cfpb HERINE V.W. STONE AND ALEXANDER J.S. COLVIN, ECON. POLICY INST., THE ARBITRATION EPIDEMIC:MANDATORY ARBITRATION DEPRIVES WORKERS AND CONSUMERS OF THEIR RIGHTS 15 (2015), .pdf.3See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985) (discussing the “simplicity,informality, and expedition of arbitration.”); AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 345 (2011) (“[T]heinformality of arbitral proceedings is itself desirable, reducing the cost and increasing the speed of dispute resolution.”).4Jessica Silver-Greenburg and Robert Gebeloff, Arbitration Everywhere, Stacking the Deck of Justice, N.Y. TIMES,Oct. 31, 2015, at A1; STONE AND COLVIN, supra note 2 at 26.59 U.S.C. § 2.6Southland Corp. v. Keating, 465 U.S. 1, 10 (1984).7See, e.g., Arbitration Fairness Act of 2017, S. 537, 115th Cong. (2017); Arbitration Fairness Act of 2017, H.R. 1374,115th Cong. (2017).8Murphy Oil USA, Inc. v. Nat’l Labor Relations Bd., 808 F.3d 1013, 1015 (5th Cir. 2015), cert. granted, 85 U.S.L.W.3341 (U.S. Jan. 13, 2017) (No. 16-307); Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1150 (7th Cir. 2016), cert. granted,85 U.S.L.W. 3343 (U.S. Jan. 13, 2017) (No. 16-285); Morris v. Ernst & Young LLP, 834 F.3d 975, 979 (9th Cir. 2016),cert. granted, 85 U.S.L.W. 3344 (U.S. Jan. 13, 2017) (No. 16-300).Congressional Research Service1
Mandatory Arbitration and the Federal Arbitration ActThe Federal Arbitration ActSection 2 of the FAA provides:[a] written provision in any maritime transaction or a contract evidencing a transactioninvolving commerce to settle by arbitration a controversy thereafter arising out of suchcontract or transaction, or the refusal to perform the whole or any part thereof, or anagreement in writing to submit to arbitration an existing controversy arising out of such acontract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save uponsuch grounds as exist at law or in equity for the revocation of any contract.9By enacting Section 2, Congress sought generally to promote the enforcement of arbitrationagreements.10 Historically, American courts viewed arbitration with judicial hostility.11 It isbelieved that this hostility flowed from a similar enmity displayed by English courts.12 Arbitrationinfringed on the livelihood of English judges who were paid fees based on the number of casesthey decided.13 English courts were also generally unwilling to surrender their jurisdiction overvarious disputes.14The hostility toward arbitration subsided as industrialization led to an increased number ofbusiness disputes.15 In 1924, the Court upheld a New York law that compelled arbitration in adispute involving a maritime contract.16 The Court’s decision in Red Cross Line v. Atlantic FruitCompany is believed to have opened the door for federal legislation that recognized the validityof arbitration agreements.17President Calvin Coolidge signed the United States Arbitration Act (commonly referred to as theFederal Arbitration Act) on February 12, 1925.18 The enactment of the new law “declared anational policy favoring arbitration and withdrew the power of the states to require a judicialforum for the resolution of claims which the contracting parties agreed to resolve byarbitration.”19 While Congress’s primary motivation for drafting the FAA reflected its interest inprotecting the enforcement of arbitration agreements as agreed to by the contracting parties, italso understood the potential benefits that would be provided by the law’s enactment:It is practically appropriate that the action should be taken at this time when there is somuch agitation against the costliness and delays of litigation. These matters can be99 U.S.C. § 2.See, e.g., H.R. REP. NO. 96, 68th Cong., 1st Sess., 1 (1924) (noting that the FAA was designed to place arbitrationagreements “upon the same footing as other contracts”).11Id. at 2.12See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991) (“[The Federal Arbitration Act’s] purpose wasto reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and hadbeen adopted by American courts[.]”); See also Preston Douglas Wigner, The United States Supreme Court’sExpansive Approach to the Federal Arbitration Act: A Look at the Past, Present, and Future of Section 2, 29 U. RICH.L. REV. 1499 (1995).13WIGNER, supra note 12 at 1502.14H.R. REP. NO. 96, supra note 10 at 1-2.15WIGNER, supra note 12 at 1502.16Red Cross Line v. Atlantic Fruit Co., 264 U.S. 109, 124 (1924).17WIGNER, supra note 12 at 1503.18Pub. L. No. 68-401, 43 Stat. 883 (1925).19Southland Corp. v. Keating, 465 U.S. 1, 10 (1984).10Congressional Research Service2
Mandatory Arbitration and the Federal Arbitration Actlargely eliminated by agreements for arbitration, if arbitration agreements are made validand enforceable.20Although Section 2 of the FAA requires the enforcement of arbitration agreements in maritimetransactions and contracts “evidencing a transaction involving commerce,” the precise scope ofthis latter group of contracts has not always been certain. Congress provided a definition for theterm “commerce” in Section 1 of the FAA, but it did not identify the extent to which a contractmust “evidenc[e] a transaction involving commerce” before the FAA would apply.21Prior to 1995, there was a split among courts interpreting Section 2. Some courts concluded thatthe FAA applied only to those contracts where the parties “contemplated” an interstate commerceconnection.22 In Burke County Public Schools Board of Education v. Shaver Partnership, forexample, a North Carolina court stated that where performance of the contract “necessarilyinvolves, so that the parties to the agreement must have contemplated, substantial interstateactivity the contract evidences a transaction involving commerce within the meaning of theFederal Arbitration Act.”23Other courts held that the Section 2 phrase “involving commerce” reached to the limits ofCongress’s power under the Commerce Clause.24 In Snyder v. Smith, for example, the U.S. Courtof Appeals for the Seventh Circuit (Seventh Circuit) maintained that the courts should take intoaccount Congress’s broad power to regulate under the Commerce Clause when deciding whichcontracts involve commerce.25 Because Congress may reach activities “affecting” interstatecommerce under its Commerce Clause authority, the Seventh Circuit reasoned that it was logicalto conclude that any contract affecting interstate commerce falls under Section 2 of the FAA.26In 1995, the Supreme Court determined that a broad interpretation of “involving commerce” isappropriate. In Allied-Bruce Terminix Companies, Inc. v. Dobson, the Court held in a 7-2 opinionauthored by Justice Breyer that the phrase “involving commerce” signaled the full exercise ofCongress’s power under the Commerce Clause.27 The Court concluded that the FAA’s legislativehistory “indicates an expansive congressional intent.”28 For example, the House Report thataccompanied the FAA stated that the Act’s “‘control over interstate commerce reaches not onlythe actual physical interstate shipment of goods but also contracts relating to interstatecommerce.’”29 In addition, remarks in the Congressional Record indicated that the FAA “‘affectscontracts relating to interstate subjects and contracts in admiralty.’”30 The Court maintained that20H.R. REP. NO. 96, supra note 10 at 2.See 9 U.S.C. § 1 (“‘commerce’ . means commerce among the several States or with foreign nations, or in anyTerritory of the United States or in the District of Columbia, or between any such Territory and another, or between anysuch Territory and any State or foreign nation, or between the District of Columbia and any State or Territory orforeign nation . ”).22See, e.g., Burke Cty. Pub. Schs. Bd. of Educ. v. Shaver P’ship, 279 S.E.2d 816 (N.C. 1981); R.J. Palmer Constr. Co.v. Wichita Band Instrument Co., 642 P.2d 127 (Kan. 1982); Lacheney v. Profitkey Int’l, Inc., 818 F.Supp. 922 (E.D.Va. 1993).23Burke, 279 S.E.2d at 822.24See, e.g., Foster v. Turley, 808 F.2d 38 (10th Cir. 1986); Snyder v. Smith, 736 F.2d 409 (7th Cir. 1984).25Snyder, 736 F.2d at 418.26Id.27Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 273-74 (1995).28Id. at 274.29Id. (citing H.R. REP. NO. 96, supra note 10 at 1).30Id. (citing 65 CONG. REC. 1931 (1924) (remarks of Rep. Graham)).21Congressional Research Service3
Mandatory Arbitration and the Federal Arbitration Actthe word “involve” should be read as the functional equivalent of the word “affect.”31 Because thephrase “affecting commerce” normally signals Congress’s intent to exercise its Commerce Clausepowers to the fullest extent, the Court reasoned that the use of the phrase “involving commerce”should be given a similar reading.32After concluding that the phrase “involving commerce” should be interpreted broadly, theDobson Court further determined that the FAA applies to all contracts that involve commerce anddoes not require the contemplation of an interstate commerce connection by the parties.33 TheCourt found that a “contemplation of the parties” requirement was inconsistent with the FAA’sbasic purpose of helping parties avoid litigation.34 Such a requirement invited litigation aboutwhat was or was not contemplated by the parties.35 Any congressional recognition of an expediteddispute resolution system at the time the FAA was drafted would be undermined by thisadditional litigation.36In 2001, the Court confirmed that the FAA also covers employment agreements that requirearbitration to resolve work-related disputes. In Circuit City Stores, Inc. v. Adams, the Court heldin a 5-4 opinion authored by Justice Kennedy that an employment application that included amandatory arbitration provision was not excluded from the FAA’s coverage pursuant to thestatute’s exemption clause.37 Section 1 of the FAA provides that it will not apply to “contracts ofemployment of seamen, railroad employees, or any other class of workers engaged in foreign orinterstate commerce.”38The Court concluded that the Section 1 exemption clause should be given a narrow construction,and interpreted it to apply only to contracts with seamen, railroad employees, and othertransportation employees.39 According to the Court, a reading of the phrase “any other class ofworkers engaged in foreign or interstate commerce” to exclude all employment contracts from theFAA’s coverage would undermine the statute’s specific enumeration of the “seamen” and“railroad employees” categories.40 The Court observed:Construing the residual phrase to exclude all employment contracts fails to giveindependent effect to the statute’s enumeration of the specific categories of workerswhich precedes it; there would be no need for Congress to use the phrases “seamen” and“railroad employees” if those same classes of workers were subsumed within themeaning of the “engaged in . commerce” residual clause.41The Court also noted that the FAA’s exclusion of contracts involving seamen and rail employeeswas reasonable given the adoption of federal legislation, such as the Shipping Commissioners Actof 1872 and the Transportation Act of 1920, that provided for the arbitration of their disputes.42 In31Id. at 273-74.Id.33Id. at 278.34Id.35Id.36Id.37Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 109 (2001).389 U.S.C. § 1.39Circuit City Stores, 532 U.S. at 119.40Id. at 114.41Id.42Id. at 121.32Congressional Research Service4
Mandatory Arbitration and the Federal Arbitration Actlight of these laws, the Court opined that the exclusion would allow “established or developingstatutory dispute resolution schemes” to remain undisturbed.43Preemption and the FAABackgroundHistorically, states have played an active role in the regulation of arbitration agreements, and allfifty states currently maintain statutes that operate alongside the FAA and govern the validity ofarbitration agreements and awards. 44 However, state legislatures and state courts have also soughtto place various restrictions on the enforcement of mandatory arbitration clauses and proceedings,particularly in situations where there may be unequal bargaining power between the contractingparties.45 These restrictions have included state requirements that mandate a judicial forum forcertain kinds of legal disputes, as well as those that impose special conditions or proceduralsafeguards on the arbitration process.46As the Supreme Court has noted, Section 2 of the FAA “limits the grounds for denyingenforcement of ‘written provision[s] in . contract[s]’ providing for arbitration,” and because ofthese limits, courts commonly find that the FAA preempts state laws or judicial rules that interferewith these contracts.47 Nevertheless, some state legislatures and state courts have attempted toinvalidate certain mandatory arbitration agreements, commonly in instances where there is aperception that requiring the parties to settle their disputes through arbitration would be unfair,contrary to publ
2017 (H.R. 1374/S. 537), which would prohibit the enforcement of an arbitration agreement that requires arbitration for an employment, consumer, antitrust, or civil rights dispute if the agreement was executed prior to the dispute’s occurrence.
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