by Joseph M. Matthews
In the February 2007 edition of The Florida Bar Journal, Douglas J. Giuliano authored an article “Parochialism in Arbitration? How Some Arbitration Decisions by Florida Courts Are at Variance with Federal Arbitration Precedent.” The title and the article suggest that this variance is the result of parochialism by Florida courts. While acknowledging the significant differences between Florida courts and the U.S. Supreme Court, this rebuttal suggests that the disconnect between the Florida Supreme Court and federal courts — particularly the U.S. Supreme Court — regarding arbitration is more accurately understood as the consequence of a slow but massive change in federal case law interpreting what was originally a simple procedural statute, the Federal Arbitration Act of 1925, 9 U.S.C. §1, et seq.
This article also observes that the swing toward arbitration has probably reached that point in the arc of the pendulum at which its momentum has almost certainly diminished. In fact, the U.S. Supreme Court expansion of the FAA has pushed the U.S. past most other developed nations, particularly those in Europe, with respect to this dispute resolution technique, which is the primary means of resolving disputes in the international arena.
As a result, it is likely that Congress will attempt to legislatively retreat from the Supreme Court’s judicial expansion of this venerable statute. Hopefully, the role of arbitration in our system of civil dispute resolution will settle back into a state of equilibrium with our federal and state civil justice systems, and we will not see an equally massive and potentially more disruptive backlash against arbitration as a method for resolving disputes.
This article first seeks to place the topic in a broader historical context than that presented by the parochialism article. It then briefly analyzes the three primary areas in which federal courts have extended arbitration well beyond its historic domain — litigation of statutory rights, consumer litigation, and class actions. Finally, it identifies some significant potential legislative backlash or at least retrenchment in arbitration law at the federal level that may well prompt significant legislative revisions to the FAA.
Members of The Florida Bar who began practicing prior to 1986 have a completely different view of a legal doctrine known as the economic loss rule than those who became members of the Bar after the turn of the 21st century. Younger members of the Bar probably studied it in law school. Older members saw development of the economic loss rule as the creation of a legal doctrine out of whole cloth and observed that doctrine as it achieved near constitutional status. It has since settled back into equilibrium with other well-established tort and contract doctrines. Prior to the 1986 decision of the U.S. Supreme Court in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986) (where Chief Justice Rehnquist famously expressed his concern that the law of contract might “drown in a sea of torts”), and the decisions of the Florida Supreme Court in Florida Power & Light v. Westinghouse Electric, Inc., 510 So. 2d at 899 (Fla. 1987), and AFM Corp. v. Southern Bell Tel. & Tel. Co., 515 So. 2d 180 (Fla.1987), few lawyers and even fewer courts had ever heard of the doctrine. In less than 15 years, this judicially created rule became so prominent in Florida that one intermediate appellate court actually gave it the power to deny claimants recovery under statutorily created remedies. The Florida Supreme Court, adopting the dissent of Judge Gerald Cope of the Third DCA, reigned in the economic loss rule in Comptech Intern., Inc. v. Milam Commerce Park, Ltd., 753 So. 2d 1219 (Fla. 1999), and subsequent decisions.
In much the same way that proponents of the economic loss rule vested it with near constitutional gravitas sufficient to reject the right of the state legislature to create remedies, the U.S. Supreme Court has done the same with respect to the FAA to preempt state arbitration laws and to apply in areas never contemplated by those involved in its adoption. The parochialism article fails to put the decisions of the U.S. Supreme Court into their proper historical context while characterizing the courts of Florida as “parochial” for being out of step with those Supreme Court decisions. While the conclusion that Florida law was out of step with several landmark arbitration decisions of the U.S. Supreme Court is undeniably accurate, the conclusion that this is the result of parochialism on the part of Florida courts is not.
In a law review article recently published in the Florida State University Law Review, Professor Margaret L. Moses of Loyola University Law School reviews the history of U.S. Supreme Court decisions construing the FAA, including those landmark decisions upon which the parochialism article begins its analysis. Her article, entitled “Statutory Misconstruction – How the Supreme Court Created a Federal Arbitration Law Never Enacted by Congress,” begins with the following assessment of the Supreme Court’s treatment of the FAA:
This [a]rticle will focus on how a simple procedural statute enacted to require enforcement of arbitration agreements in federal court has become unrecognizable as the law Congress adopted in 1925. Today, as a result of judicial construction, the Federal Arbitration Act (FAA) reaches much further and imposes itself on a far greater proportion of our citizens than was ever envisioned in 1925. The FAA as interpreted affects statutory rights, consumer rights, and employee rights, as well as state police powers to protect those rights. Today’s statute — which has been construed to preempt state law, eliminate the requirement of consent to arbitration, permit arbitration of statutory rights, and remove the jury trial right from citizens without their knowledge or consent — is a statute that would not likely have commanded a single vote in the 1925 Congress….
Professor Moses analyzes key Supreme Court decisions in light of the legislative history of the FAA and observes numerous inconsistencies. For example, with respect to whether Congress intended the FAA to preempt states from adopting their own laws relating to arbitration, her research includes reference to the brief submitted in support of the bill by one of the primary proponents of the FAA, Julius Cohen, a lawyer who served as general counsel for the New York State Chamber of Commerce. Mr. Cohen made it crystal clear that the purpose of the FAA was not to affect the rights of states to fashion their own law of arbitration.
As for the application of the FAA to contracts of adhesion, such as the “pay day loans” involved in Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204 (2006), Professor Moses includes the legislative testimony of Mr. Cohen who, in response to questioning by senators about whether the bill would apply to “take it or leave it” contracts, testified that the law was not intended to permit a party with greater economic strength to compel a weaker party to arbitrate. As Representative Graham noted in the House floor debate in 1924, “[t]his bill simply provides for one thing, and that is to give an opportunity to enforce an agreement in commercial contracts and admiralty contracts — an agreement to arbitrate, when voluntarily placed in the document by the parties to it.”
Professor Moses summarizes the history of U.S. Supreme Court decisions interpreting the Federal Arbitration Act by noting that what was originally a procedural statute effective only in federal court has been applied to preempt state law and has been applied to statutory claims, employee claims, and consumer claims, as well as class actions. Professor Moses concludes as follows:
The Court has, step by step, built a house of cards that has almost no resemblance to the structure envisioned by the original statute. Each card put in place by the Court builds on the prior flimsy court created structure. The edifice we have today incorporates policies and practices that were never considered or developed by our legislative branch and in fact goes far beyond and even against what the 1925 Congress enacted.
When put in this historical context, dismissing Florida statutory and case law, which attempted to balance the role of courts and arbitrators as parochial, is simply not a fair characterization. It was the U.S. Supreme Court that changed the law and then decided that it should impose those changes on the states.
Employment, Consumer, and Class Actions — Who is Truly Parochial?
The U.S. Supreme Court has, over the past half century, extended the FAA to claims arising under federal statutes; to employment disputes; to consumer disputes; and finally to consumer class actions.
One of the foremost experts on international arbitration in the United States, Professor William W. (Rusty) Park, has been a proponent of legislative reform to the FAA in the area of international disputes. One of his arguments for such reform is the very fact that the U.S. Supreme Court has extended arbitration to employment and consumer credit contracts, such as the one involved in Buckeye. In a law review article published in the Vanderbilt Journal of Transnational Law in 2003, even before the Supreme Court’s decision in Buckeye, Professor Park argued that the time had come for the FAA to be amended to function more effectively in the area of international arbitration. He argued that a separate statute for international business arbitration was required because, among other reasons, the U.S. Supreme Court has expanded the scope of the FAA to employment and consumer contracts.
Professor Park reviewed the status of arbitration law in several European countries and concluded that virtually every country other than the U.S. has well-established protections against mandatory arbitration provisions in employment and consumer transactions.
In short, it is the U.S. Supreme Court that would have to be viewed as “parochial” if one views arbitration in the broader context of international dispute resolution. Professor Park and other international arbitration experts are well aware that the U.S. Supreme Court’s “one size fits all” approach to the FAA, applying it to employment and consumer disputes, has jeopardized its continued viability in areas that it was originally intended to serve, such as classic domestic and transnational business-to-business disputes.
The U.S. Supreme Court’s treatment of consumer class actions and arbitration may well be the straw that breaks the back of the venerable FAA. The Supreme Court surprised many members of the class action bar and the arbitration bar with its plurality decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (U.S. 2003), which sanctioned the class action mechanism in arbitration proceedings under the FAA. The decision sent the American Arbitration Association and other supporters and practitioners of arbitration in the U.S. scurrying to develop rules and procedures for the conduct of class-wide arbitration. The AAA’s experience with class arbitrations is growing and has the chance to become a fine method of processing consumer claims with modest sums in dispute.
However, many consumer oriented businesses now include language that seeks to prevent class treatment of claims by arbitration. Whether such waivers will be enforced remains undecided. The Third, Fourth, Seventh, and 11th U.S. circuit courts have all enforced such waivers that were included within arbitration provisions in consumer contracts. Recently, the First Circuit parted company with the other circuits and held that a class arbitration waiver in a consumer contract was unenforceable to prevent a class action based on federal antitrust laws.
The U.S. Supreme Court is likely to take up this issue soon and, based on the trend apparent during the past session, will probably uphold the enforceability of class arbitration waivers. Consumer rights groups and trial lawyers are looking to Congress for relief.
Growing Pressure for Legislative Reform
Amendment of the FAA, thus, became not merely a political issue but also a highly partisan political issue during the 1990s and early years of this century, consumer interests being closely allied with the Democratic Party and business interests closely allied with the Republican Party. During the 107th U.S. Congress (2002), nine bills were introduced by Democratic members to amend the FAA for various purposes. Five bills would have amended the FAA to address issues involving arbitration of employment disputes. Two bills would have amended the FAA to address arbitration in the context of motor vehicle franchise contracts. Another bill would amend the FAA to address arbitration of consumer credit contracts. The 107th Congress was controlled by the Republican Party. None of the bills were reported out of committee.
The Civil Rights Procedures Protection Act has been introduced every Congress since the 103rd Congress. Its purpose is to overturn the Supreme Court’s decision in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001). If enacted, the bill would amend civil rights statutes to guarantee access to federal court for a plaintiff alleging violations of the civil rights laws. Several bills have been introduced to require that any employment dispute can only be arbitrated if arbitration is agreed to after the dispute has arisen. The Motor Vehicle Franchise Contract Arbitration Fairness Act of 2001 would have amended the FAA in a similar fashion to provide that disputes in franchise contracts could only be arbitrated if the agreement was entered into after the dispute has arisen. The Consumer Credit Fair Dispute Resolution Act of 2001 would amend the FAA to make invalid or unenforceable a written arbitration provision in any consumer credit contract.
In 2006, the Democratic Party regained control of both houses of Congress. On July 12, 2007, Democratic Senators Feingold and Durbin introduced the Arbitration Fairness Act of 2007. The proposed legislation is based in part on the following proposed findings:
(1) The Federal Arbitration Act (now enacted as chapter 1 of title 9 of the United States Code) was intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power.
(2) A series of United States Supreme Court decisions have changed the meaning of the Act so that it now extends to disputes between parties of greatly disparate economic power, such as consumer disputes and employment disputes. As a result, a large and rapidly growing number of corporations are requiring millions of consumers and employees to give up their right to have disputes resolved by a judge or jury, and instead submit their claims to binding arbitration.
This proposed legislation was the subject of public hearings on October 25, 2007, before the Subcommittee on Commercial and Administrative Law of the House Judiciary Committee.
If the Democrats retain control of Congress in 2008 and a Democrat is elected president, the pressure to amend the FAA will be substantial to reverse one or more of the decisions of the U.S. Supreme Court that extended its reach to consumer, employment, and franchise relationships. A Democratic president would likely sign such legislation into law.
Revision of the FAA is no longer purely a partisan issue. Even before the Democrats regained control of Congress, Republican members began to introduce industry-specific legislation aimed at exempting certain parties from mandatory arbitration provisions. For example, in December 2005, Republican Senator Jeff Sessions of Alabama introduced the Fair Contracts for Growers Act of 2005, pursuant to which livestock or poultry contracts would receive exemptions from the FAA, by providing that if such contracts provide for the use of arbitration to resolve a controversy, arbitration may be used to settle the controversy only if, after the controversy arises, both parties consent in writing to use arbitration to settle the controversy.
The American Arbitration Association has often found itself in the middle of the fray over the Supreme Court’s expansion of the FAA. The AAA has been a devoted supporter of the FAA and has lauded all Supreme Court decisions that are viewed as “pro-arbitration” including those that have extended arbitration into areas never anticipated. However, while committing itself to the process of arbitration and the defense of the FAA, the AAA has periodically had to impose limits on the extent to which it will administer cases when a particular party might attempt to use arbitration inappropriately. For example, in 1998, the AAA, in conjunction with the American Bar Association and the American Medical Association Commission on Health Care Dispute Resolution promulgated a “Health Care Due Process Protocol.” The most significant feature of this protocol is that agreements to arbitrate personal injury disputes about health care are enforceable only if they are entered into after a dispute arises. The rationale for this is quite simply that nobody would view an arbitration agreement signed by a patient on the way into the emergency room as “voluntary.” This concept of requiring that agreements to arbitrate be enforceable only if they are executed after a dispute arises is at the core of many of the proposed amendments to the FAA reviewed above. In the area of business-to-business contracts, such a change would gut the FAA of one of its most important features, enforcing pre-dispute agreements to arbitrate.
Perhaps the most extensive undertaking by the AAA to adjust arbitration so that it fits into the consumer relationship and remains a fair and just method of dispute resolution is embodied in its “Consumer Due Process Protocol.” This protocol provides extensive protections in an attempt to ensure that mandatory arbitration provisions in consumer contracts produce a fair method for resolving disputes. It includes provisions that shift the costs of the arbitration, impose geographic limitations, and otherwise attempt to ensure that a mandatory arbitration clause is not abused in contracts where one party has a significant economic advantage over the other party. The AAA has gone further. It has pressed corporate America to ensure that consumer arbitration is conducted in a fundamentally fair way for all parties. The AAA has also made significant attempts to diversify its panels of neutral arbitrators.
Nonetheless, there remains a fundamental policy flaw that flows from the decisions of the Supreme Court extending the FAA to consumer, employment, and other areas where there is a disparity in the bargaining power of the parties. The FAA does not apply only to arbitration proceedings that are administered by the AAA or other responsible forums. To the contrary, one of the key features of modern arbitration statutes is that they provide a framework within which parties may design their own arbitration architecture and be relatively certain that an award will be respected by the courts. Such arbitrations are often called ad hoc, and they are estimated to far exceed the number of arbitrations that are administered by the AAA and other forums. Moreover, the tidal wave of arbitration has spawned a plethora of new arbitration forums. Some such forums are industry-specific and the quality of the “neutral” arbitrators, as well as the fairness of the procedures employed by such forums, are often suspect. Thus, reliance on arbitration forums to ensure a fair procedure may be unwarranted.
Arbitration is a fine method for resolving disputes. For many disputes, particularly those involving sophisticated business interests from different countries, it is far superior to litigation. The decisions of the U.S. Supreme Court extending the FAA to employment and consumer disputes have permitted business interests in this country to use mandatory arbitration as another path to accomplish tort reform or to preempt class actions and jury trials through federal preemption of state laws or procedures that these business interests find offensive. It will be a shame if truly legitimate principles of arbitration are sacrificed to the selfish interests of some businesses that have co-opted this method for resolving disputes between consenting parties and used it to effect a change in the balance of power between corporate America and consumers.
While it is truly valuable to educate members of the bench and bar about the differences between the law of arbitration as it existed in this state before the U.S. Supreme Court expanded the reach of the FAA, it is not appropriate to paint the Florida Supreme Court as parochial when it was the U.S. Supreme Court that changed the rules of the game.
Whether or not consumer groups or others will pressure Congress into amending the FAA, and regardless of one’s view about the need for such reform, a fair assessment of the current state of the law of arbitration in the United States does not permit a characterization of Florida courts as parochial.
1 Wikipedia, the open source online encyclopedia defines parochialism as the “attitude or state of being parochial in its sense of a rather polite adjective to point out showing an interest only in the close (at heart) aspects of what is mainly a much broader subject: Like in countries where every village and every part of town has a parish (Latin: parochia)…. In the broader sense, parochialism often supports and/or leads to governmental corruption and deters real economic health and outside investment. Parochialism reinforces an insular society and economy, many times to the detriment of the citizens who are the willful victims of parochialism, their local prejudices and regional attitudes.” Merriam Webster provides the following definition: “
2 Reference to constitutional principles was also used by the current chair of the board of the American Arbitration Association in a speech delivered to the spring meeting of the International Commercial Dispute Resolution Committee of the Section of International Law, American Bar Association and republished in the Summer 2004 International Arbitration News. Arguing that the FAA should not be amended, John M. Townsend suggested that the FAA, along with such statutes as the Sherman Antitrust Act and the Civil Rights Act, have achieved “quasi-constitutional status.”
3 See Comptech International, Inc. v. Milam Commerce Park, Ltd., 711 So. 2d 1255 (Fla. 3d D.C.A. 1998).
4 Margaret L. Moses, Statutory Misconstruction: How the Supreme Court Created a Federal Arbitration Law Never Enacted by Congress, 34 Fla. St. U. L. Rev. 99, 101 (2006).
5 Observers of Supreme Court jurisprudence will recognize that several of the landmark decisions relating to interpretation of the FAA, particularly the decision in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), have been reached in the context of a philosophical debate among the court’s members and academics as to what impact legislative history should have on statutory interpretation. There is considerable irony in the fact that the Supreme Court justices primarily responsible for the expansive view of the FAA were appointees of Republican presidents, given the popular view that it is “liberal” judges who “legislate from the bench.”
6 Southland Corporation v. Keating, 465 U.S. 1 (1984).
7 Interestingly, the parochialism article opens with a quotation from the U.S. Supreme Court’s decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985), which in turn quotes from H.R. Rep. No. 96, 68th Cong., 1st Sess., 1-2 (1924). The quotation comes from the brief submitted by Julius Cohen in support of the act.
8 Margaret L. Moses, Statutory Misconstruction: How the Supreme Court Created a Federal Arbitration Law Never Enacted by Congress, 34 Fla. St. U. L. Rev. at 105. Professor Moses quotes Mr. Cohen’s brief as follows:“The statute as drawn establishes a procedure in the [f]ederal courts for the enforcement of arbitration agreements. . . . It is no infringement upon the right of each [s]tate to decide for itself what contracts shall or shall not exist under its laws. To be sure whether or not a contract exists is a question of the substantive law of the jurisdiction wherein the contract was made. But whether or not an arbitration agreement is to be enforced is a question of the law of procedure and is determined by the law of the jurisdiction wherein the remedy is sought.” Id.
9 Id. at 113.
10 The lone dissent in Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204 (2006), was written by Justice Thomas who has been the only justice to consistently argue that the FAA does not preempt states from adopting inconsistent arbitration laws.
11 Shearson American Express, Inc. v. McMahon, 482 U.S. 220 (1987).
12 Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).
13 Gilmer v. Interstate Johnson Lane Corp., 500 U.S. 20 (1991); Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 444 (1995).
14 Green Tree Fin. Corp. v. Bazzle, 539 U.S. 4 (2003).
15 William W. Park, The Specificity of International Arbitration: The Case for FAA Reform, 36 Vand. J. Transnat’l L. 1241 (2003).
16 Id. at 1291-92. Professor Park notes: “Europeans take for granted that consumer transactions should be subject to a separate legal framework. The European Union has adopted forceful limitations on the validity of consumer arbitration clauses and other ‘unfair’ contract terms. European member states have implemented this European Union Directive in various ways. For example, in England general consumer protection regulations have been made expressly applicable to arbitration agreements. The 1996 Arbitration Act extends the consumer protection scheme to arbitration agreements regardless of whether they cover present or future disputes and regardless of what law is applicable to the arbitration agreement. Moreover, arbitration agreements will be considered unfair (thus, presumptively invalid) if they relate to claims below an administratively fixed amount.
“Independent of the Directive, many European countries have their own traditions of protecting consumers and less sophisticated parties. France has long made a distinction between the pre-dispute clause compromissoire and the post-dispute compromise, the former being valid only in contracts between merchants (commercants) or persons contracting with respect to a professional activity. In Germany, both parties must sign consumer arbitration agreements, which must either be contained in a separate document or have notarial certification. Sweden prohibits enforcement of pre-dispute arbitration clauses with respect to goods and services supplied for private use.” Id. (footnotes omitted).
17 But see Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 (Supreme Court of Canada, July 13, 2007), in which the Canadian Supreme Court held that an arbitration clause by online retailer Dell Computers inserted in the terms and conditions posted on Dell’s Web site was binding and enforceable and prevented plaintiff from proceeding in a class action in the Canadian courts, requiring the plaintiff to bring the claim in the national Arbitration Forum, the forum selected by Dell.
18 In another irony, Professor Park notes that following the Supreme Court decision in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), on remand the Ninth Circuit Court of Appeals held the arbitration clause was unenforceable in part due to the fact that it was linked to a limitation on damages. Professor Park points out that if this prohibition against contractual damage caps were subsequently applied in an international arbitration setting, it would be inappropriate since the right to contract for damage caps is clearly desirable in international commerce, where such caps facilitate cross-border transactions by permitting corporations to manage global risks more effectively. Park, The Specificity of International Arbitration: The Case for FAA Reform, 36 Vand. J. Transnat’l L. at 1288-89.
19 See Johnson v. West Suburban Bank, 225 F.3d 366 (3d Cir. 2000); Snowden v. CheckPoint Check Cashing, 290 F.3d 631 (4th Cir. 2002); Livingston v. Associates Fin., Inc., 339 F.3d 553 (7th Cir. 2003); Jenkins v. First Am. Cash Advance of Ga., 400 F.3d 868 (11th Cir. 2005)
20 Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006).
21 S. 1782 IS, 110th Cong.
22 S. 2131 IS, 108th Cong.
23 American Arbitration Association, Health Care Due Process Protocol, (July 27, 1998), available at .
25 American Arbitration Association, Consumer Due Process Protocol, available at .
26 For example, in August 2004, Public Citizen, a national consumer group, published an article challenging an arbitration service known as Construction Arbitration Services, Inc., which was then located in Texas. Public Citizen wrote: “Public Citizen has asked Colorado insurance commissioners to investigate whether insurance companies have been improperly requiring homebuyers to arbitrate disputes using Construction Arbitration Services (CAS), a private firm that hears cases over defects in new homes.” The article may be seen at . In letters to state officials, Public Citizen describes how “CAS is co-owned by a former lawyer who was disbarred for stealing client funds and operates in apparent violation of 12 states’ laws.” CAS responded to the charges in April 2006, after relocating to Michigan. In fairness, it is impossible to evaluate the charges and counter charges in this article. CAS may well be working to become a fair and neutral administrator of mediation and arbitration services to the real estate and construction industries. Nonetheless, the Public Citizen accusation that CAS employed a disbarred lawyer was apparently accurate and CAS announced that this lawyer would have no continued employment or administrative involvement with CAS, though CAS has not indicated whether he has any ownership interest. The CAS response may be seen at .
Joseph M. Matthews is a trial lawyer with Colson Hicks Eidson in Coral Gables. He is a fellow of the International Academy of Trial Lawyers and has served on its board of directors. He is also a member of the board of directors of the American Arbitration Association. His trial practice includes representing business interests in disputes before state and federal courts and transnational business disputes before all the major arbitral forums. He also serves as arbitrator in domestic and international disputes and in September 2006 taught a seminar on International Arbitration at the National University of Mongolia School of Law. The views expressed in this article are exclusively those of the author and are not intended to represent the views of the AAA or any other person or organization.