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Arbitration’s Unraveling

It has been over a decade since the Supreme Court declared that the Federal Arbitration Act preempts state-law policies that stand as an obstacle to enforcement of the class-banning arbitration clauses that companies tuck into standard-form contracts. In that time, plaintiffs’ lawyers have tried challenging class action–banning arbitration provisions on myriad legal grounds, as well as pressing for federal and state legislation to undo the Court’s ruling in AT&T Mobility LLC v. Concepcion. Neither strategy has borne much fruit—until now. In the past few years, congressional action has exempted specific categories of cases from mandatory arbitration, suggesting that an area-by-area attack on the arbitral edifice may be fruitful. More consequentially, in my view, the Supreme Court has cast substantial doubt on the “liberal federal policy favoring arbitration” upon which contemporary FAA jurisprudence rests. This is big news, suggesting that all judge-made, arbitration-specific rules created in the service of a supposed policy favoring arbitration are ripe for reexamination. One consequence, I show, is that the FAA must now be understood to exempt the contracts of all workers engaged in interstate commerce.

Meanwhile, entrepreneurial plaintiffs’ firms have sought to force corporate defendants to make good on their contractual promises to bear the cost of arbitrating large numbers of nominally individual claims. By marketing broadly to would-be claimants via social media and then financing the claimants’ portion of arbitral filing fees, these firms have filed thousands of simultaneous claims, forcing defendants to either settle or spend tens of millions of dollars on arbitral fees alone. At present, companies are groping for contractual tweaks to foreclose the risk of mass arbitration. But I expect those efforts will be thwarted by state unconscionability law in many states. And I also expect that companies will increasingly drop their arbitration clauses altogether and seek to implement standalone class action–waiver clauses, removing any pretense that the defense community was ever interested in arbitration, as opposed to class-action bans. But here, too, I think state unconscionability law will bring us back full circle to the state-by-state map that existed prior to Concepcion.

In short, there are reasons to believe that the hegemony of class-banning arbitration is unraveling before our very eyes.