Earlier this year, US lawmakers proposed legislation to protect employment, consumer, franchise and civil rights litigants from binding pre-dispute arbitration agreements and to vest courts, not arbitrators, with the sole jurisdiction to decide questions concerning the validity and enforceability of arbitration agreements in those contexts. The reaction to the proposed legislation has been mixed, as consumer protection advocates extol the legislation’s virtues while commercial arbitration practitioners worry it may have widespread unintended consequences on the practice of arbitration in the United States.

On February 12, 2009, the Arbitration Fairness Act of 2009 (H. R. 1020) (the House Bill) was introduced in the House of Representatives. As drafted, the House Bill would significantly alter the validity and enforceability of certain pre-dispute arbitration clauses and the allocation of decision-making authority between courts and arbitrators. The House Bill made extensive amendments to Chapter 1 of the Federal Arbitration Act (the FAA), which enshrines the long-standing federal policy favoring the enforcement of all arbitration agreements. The House Bill would invalidate binding pre-arbitration agreements in an “employment, consumer, or franchise dispute; or . . . a dispute . . . to protect civil rights,” and would provide that questions concerning “the validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator.” 1

The House Bill demonstrates that lawmakers intended to target arbitration agreements that are unilaterally and systematically imposed “between parties of greatly disparate economic power, such as consumer disputes and employment disputes.” 2 Lawmakers were not interested in affecting disputes between “commercial entities of generally similar sophistication and bargaining power.” 3 According to the drafters of the House Bill, the FAA “was intended to apply” to entities of equal bargaining power but not scenarios where one party has a significant bargaining advantage and can impose its desire for arbitration on its contracting party.4

The legislative intent behind the proposed House Bill may have been to focus on the context of arbitration in situations of unequal bargaining power (e.g., consumer, employment, civil rights, franchise). It is based on the premise that arbitration is inherently unfair or at least suspect in these contexts. However the, “unequal bargaining power” criterion is fact intensive, and could conceivably apply in the commercial context as well. The bill would also appear to reverse the strong federal policy in favor of arbitration developed by the US Supreme Court starting with Prima Paint in 1967.5 While noting that it is not the focus of the legislation, some critics have argued that the proposed statutory text could undermine some of the key pillars of commercial arbitration: 6

  • First, by seeking to amend Chapter 1 of the FAA, the House Bill would apply to all arbitration, not just the narrow enumerated categories of disputes and would erode long-standing and fundamental principles of federal arbitration law. Most notably, the House Bill would strip arbitrators of their authority to rule on the validity and enforceability of an arbitration agreement, arguably reversing long-standing Supreme Court decisions in Prima Paint and First Options7 (the widely accepted separability and kompetenz-kompetenz principles).8
  • Second, the House Bill would apply retroactively by invalidating existing pre-dispute arbitration clauses “with respect to any dispute or claim that arises on or after” the date the House Bill is passed.9
  • Third, while the House Bill is centered on American consumers, it contains no safeguards to limit its application in the international arena, notwithstanding the US’ obligations under the New York Convention, an international treaty on the recognition and enforcement of foreign arbitral awards and agreements. The House Bill could have profound effects on international arbitration, particularly with respect to franchise disputes and the allocation of decision-making authority between courts and arbitrators.

Lawmakers have responded favorably to the criticism that the text of their proposed Bill was overbroad and potentially detrimental to commercial arbitration. On April 29, 2009, Senator Russ Feingold D-WI introduced a revised Arbitration Fairness Act in the Senate (S.931) (the Senate Bill).10 Most importantly, the Senate Bill makes clear that these new rules (including the delegation of jurisdiction to courts) apply only to the protected classes of arbitrations and not to commercial arbitration, by implementing a new, free-standing Chapter 4 to the FAA. However, the Senate Bill fails to address concerns about its impact on international arbitration and its retroactive applicability. Moreover, the House Bill has remained unchanged.

Both the House Bill and the Senate Bill are currently pending in Washington, D.C. Neither version of the Arbitration Fairness Act is currently scheduled for a vote. However, it is likely that the text of the proposed legislation will continue to change as the House and Senate Bills make their way through committee. The Arbitration Fairness Act, if enacted into law, could have a profound impact not only on the world of consumer arbitration, but also on commercial and international arbitration, depending on the final legislative text.