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What does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties?

March 25th, 2009 Arbitrability, Legislative Developments 1 Comment » By Philip J. Loree Jr.

Part I of a Multi-Part Post: Introduction

On February 12, 2009 Representative Henry Johnson (D-GA) introduced the Arbitration Fairness Act of 2009 (H.R. 1020) (the “Fairness Act”), a consumer-oriented measure which, if enacted, would render invalid and unenforceable predispute arbitration agreements requiring arbitration of “employment, consumer or franchise disputes,” or disputes “arising under any statute intended to protect civil rights.”   The bill, which has been referred to the House Judiciary Committee, is nearly identical to the Arbitration Fairness Act of 2007, which was introduced in 2007, but ultimately did not make it out of committee.   (For a copy of the Fairness Act, click here.)

At first blush, the Fairness Act appears innocuous insofar as commercial and industry arbitration is concerned.  It begins with a series of “findings” concerning the alleged unfairness of arbitration as imposed on consumers, employees, franchisees, and civil-rights claimants, the first of which suggests that the Fairness Act was not intended to alter the status quo of commercial arbitration involving sophisticated, commercial entities:  “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.”

But the Fairness Act would amend Section 2 of the FAA in some significant respects, and would likely generate litigation over the extent to which, if at all, it was intended to alter the allocation of power between arbitrators and courts in commercial and industry arbitration involving sophisticated, commercial parties.  A newly added Section 2(c) would abrogate, at least to some extent, long-standing United States Supreme Court precedent concerning the “severability” of arbitration clauses from the contracts in which they reside.  Under this line of authority, arbitrators appointed under a broad arbitration clause get to decide disputes concerning the validity or enforceability of the contract as a whole – such as rescission claims or illegality defenses – because the arbitration agreement is deemed to be a stand-alone agreement whose validity does not depend upon the validity of the contract containing it.  Courts get to decide only enforceability or validity questions concerning the arbitration agreement itself, such as whether it is unconscionable or was induced or procured by fraud.  See, e.g., Buckeye Check Cashing, Inc. v. Cardegna,  546 U.S. 540, 549 (2006) (copy here).

The new Section 2(c) would also abrogate, at least to some extent, Supreme Court precedent permitting arbitrators to decide questions of arbitrability where the parties have unambiguously delegated that power to them.  See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945-46 (1995) (copy here).  Under this precedent, arbitrators get to decide questions concerning the validity or enforceability of the arbitration agreement itself, as well as ones concerning the scope of their own authority.

Here is what Section 2 will look like if the Fairness Act is passed, with the newly added, key language in bold:

Sec. 2. Validity and enforceability.

(a)  A written provision in .  .  .  a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable to the same extent as contracts generally, except as otherwise provided in this title.

(b) No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of–

(1) an employment, consumer, or franchise dispute; or

(2) a dispute arising under any statute intended to protect civil rights.

(c) An issue as to whether this chapter applies to an arbitration agreement shall be determined by Federal law.  Except as otherwise provided in this chapter, the validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement.  .  .  .

In subsequent posts we shall explore the implications of the Fairness Act on reinsurance and other commercial and industry arbitration, and consider alternative interpretations of the Act as applied to domestic and nondomestic arbitration proceedings involving sophisticated, commercial entities.  Because the Act is susceptible to various interpretations, and because the intended scope of proposed Section 2(c) is unclear, the courts may find themselves revisiting arbitrability principles that most (or all) of us have taken for granted for some time.  That may or may not be good news, depending on whether you prefer arbitrators or courts to determine contract validity defenses, including the rescission of reinsurance contracts.

More to follow….


One Response to “What does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties?”

  1. […] two cases involve, to some degree, the Buckeye Check Cashing/Prima Paint doctrine of severability—a/k/a “separability.”  Rent-a-Center also examines the “clear and unmistakable […]