Congress Acts to Reign in Mandatory Arbitration

I remind my first-year Contracts & Sales students at LMU just how ubiquitous contracts are in our daily lives. We all enter into contracts every day, often without even knowing it. Over the last few decades, an increasing number of those contracts have required the parties to arbitrate, rather than litigate, any claims arising out of the agreement. The rise of mandatory arbitration has been fueled by a generation of U.S. Supreme Court decisions reading the Federal Arbitration Act (FAA) expansively. This trend towards forced arbitration has, for the most part, been left unchecked by Congress, which has the power to amend the FAA as it sees fit.

It is possible that the tide may be turning. In February, Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act.1 The bill passed by broad bipartisan margins and was signed quickly into law by President Biden, becoming effective on March 3, 2022. The new law is designed to prevent employers from using mandatory arbitration provisions to silence victims of sexual assault or harassment in the workplace and beyond. While the Act certainly is a victory for the #MeToo Movement, it may have even broader repercussions.

An Era of Expansion for Mandatory Arbitration

Congress passed the FAA in 1925 to “place arbitration agreements on an equal footing with other contracts . . . and enforce them according to their terms.”2 Specifically, the FAA states that a contractual provision to settle disputes arising out of the contract via arbitration “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”3 No mind that the FAA was passed in response to courts’ open hostility to commercial arbitration agreements negotiated by parties with equal bargaining power. The Supreme Court has used its expansive view of the FAA to uphold the use of mandatory arbitration provisions in a variety of contexts unanticipated by Congress in 1925.

In 2011, the Court upheld the inclusion of mandatory arbitration provisions in contracts for consumer and financial services in AT&T Mobility LLC v. Concepcion. The Court struck down a California rule4 that boilerplate class-action waivers in certain types of consumer adhesion contracts were unconscionable and concluded that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”5 A series of subsequent decisions have reinforced the basic principles set forth in Concepcion in a variety of areas, including consumer agreements (again),6 merchant credit card agreements,7 and nursing home agreements.8

In 2018, the Court decided Epic Systems v. Lewis, which upheld mandatory arbitration and class-action waivers in employment agreements. 9 Notably, the percentage of private-sector, non-union employees in the United States who were subject to mandatory arbitration of employment disputes increased from two percent in the early 1990s to about 25 percent in the early 2000s to over 55 percent in 2017.10 Epic rejected a challenge by employees to an email their employer had sent requiring them to bring wage-and-hour claims “only through individual arbitration” and to waive, as a condition of their continued employment, “any right to collective action.”11

Ever-resilient, the plaintiff’s bar has been adjusting to the increased use of mandatory arbitration. For example, a June 2021 Wall Street Journal article observed that Amazon had changed its terms of service to allow customers to file lawsuits after 75,000 individual arbitration demands were filed by users of its Amazon Echo device (a/k/a “Alexa”).12 Remarked the plaintiff’s attorney whose firm filed the majority of the arbitration claims: “Companies thought they were getting out of liability altogether. Now they’re seeing exactly what they bargained for, and they don’t like it.”13

Motivated by the #MeToo Movement, Congress Acts

The success against Amazon notwithstanding, most plaintiffs do not have the resources to file mass arbitration claims. Given the continued lean of the U.S. Supreme Court towards business interests, the only real way to stem the tide of mass arbitration is for Congress to amend the FAA. Such a move seemed unlikely, given the politically toxic and divisive environment in Washington. But the incentive to act finally came with rise of the #MeToo Movement. The 2016 sexual harassment suit filed by former Fox News host Gretchen Carlson against CEO Roger Ailes, along with similar claims against other high-profile defendants, initiated a national conversation about the use of mandatory arbitration clauses and non-disclosure agreements (NDAs)

COVER STORY By: Matthew R. Lyon

Lincoln Memorial University Duncan School of Law

by employers. Business interests that had successfully quashed previous efforts to amend the FAA found their arguments much trickier when arbitration clauses were being used to silence employees who had been the victims of sexual abuse in the workplace.14 In addition, facing scrutiny from employees and the public, some private employers began exempting employee claims of sexual abuse from existing arbitration requirements.15

Co-sponsored by Senators Kirsten Gillibrand (D-NY) and Lindsey Graham (R-SC), the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act adds the following language to the FAA: [A]t the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute, or the named representative of a class or in a collective action alleging such conduct, no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.16 There are a few important points to highlight in this new law, as well as at least one open question, the answer to which will significantly impact the law’s reach and scope.

First, the law excludes sexual assault or sexual harassment disputes from existing arbitration agreements or class action waivers. It is immaterial when the mandatory arbitration agreement was executed; so long as the sexual harassment or sexual assault dispute is brought after March 3, 2022, the plaintiff(s) may choose litigation over arbitration.17

Second, the Act relies on existing federal, state, or tribal law for the definition of “sexual assault” or “sexual harassment.” Both the type of activity and size of employer that qualify under the statute may differ depending on the jurisdiction in which the case is filed.18

Third, the Act’s language technically is not limited to the employer-employee context. While that will be the most common circumstance in which a plaintiff in a sexual assault or harassment suit would otherwise be bound by a mandatory arbitration clause, there could be others, such as the relationship between a customer and a provider of services.19

Finally, a primary issue left unresolved is what the Act means by the undefined term “with respect to a case.” Sexual assault and harassment claims are not always brought in a vacuum; rather, they often are brought together with wage-and-hour or employment discrimination claims. The use of the word “case” rather than “claim” will encourage employee plaintiffs to add sexual assault and harassment claims to their cases in hopes of having the entire case litigated rather than sent to arbitration.20 It remains to be seen whether courts will consider the different claims together as one case or split out the sexual assault and harassment claims, allowing those claims to be litigated while sending the other employee claims to arbitration. The statutory text – the use of “case” instead of “claim” – supports the former, while courts’ recent treatment of mandatory arbitration clauses, as well as some legislative history of the Act, suggest the latter.21

Next Steps

We do not know whether the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act is a harbinger of further legislative action against mandatory arbitration or a one-off inspired by the #MeToo Movement. The Biden administration and legislatures in blue states may be interested in further curbing the practice of mandatory arbitration.22 But the 2022 midterm elections are looming, and a shift in the majority in either house of Congress to the Republicans would reduce the likelihood of further action. Moreover, the preemption doctrine leaves state laws opposing mandatory arbitration vulnerable to being overturned by courts applying the Supreme Court’s FAA precedents.

One such state law is currently in front of the Supreme Court. California’s Private Attorneys General Act (PAGA) permits workers who are contractually barred from litigating claims against their employer to “stand in the shoes” of the state for violations of the state’s labor and employment laws.23 Because the law allows employees to litigate claims that would be contractually barred if brought in their own name after Epic, some California employers have begun to include language requiring employees to waive PAGA claims as well. With employees having successfully challenged such waivers in California’s courts, the Supreme Court has taken a case, Viking River Cruises v. Moriana, 24 to determine whether such a waiver should be enforced under the FAA. Oral arguments in the case were heard on March 30, and if the justices’ questions are any indication, the Court is likely to enforce its precedents and hold that PAGA provides no path for employees to avoid mandatory arbitration.25

The confirmation of Justice Ketanji Brown Jackson, while historic, is highly unlikely to change the Court’s conservative lean generally, or its mandatory arbitration jurisprudence specifically. Therefore, opponents of forced arbitration should seek reform through Congress rather than through the courts. The #MeToo movement has provided a blueprint for doing just that.

1 Public Law 117-90 (Mar. 3, 2022). 2 AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011). 3 Id. (quoting 9 U.S.C. § 2). 4 See Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005). 5 Concepcion, 563 U.S. at 344. 6 DIRECTV, Inc. v. Imburgia, 577 U.S. 47 (2015). 7 American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013). 8 Kindred Nursing Centers Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017). 9 138 S. Ct. 1612 (2018). 10 Alexander J.S. Colvin, The Growing Use of Mandatory Arbitration, Economic Policy Institute (Sept. 27, 2017), available at https://www.epi.org/publication/the-growinguse-of-mandatory-arbitration/. 11 Lewis v. Epic Sys. Corp., 823 F.3d 1147, 1151 (7th Cir. 2016). 12 Sara Randazzo, Amazon Faced 75,000 Arbitration Demands. Now It Says: Fine, Sue Us, WALL STREET JOURNAL (June 1, 2021), available at https://www.wsj. com/articles/amazon-faced-75-000-arbitration-demands-now-it-says-fine-sueus-11622547000. 13 Id. 14 See David Horton, The Limits of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, 132 YALE L.J. FORUM ___, ___ (forthcoming 2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4051733. 15 Id.; see also Jean R. Sternlight, Mandatory Arbitration Stymies Progress Towards Justice in Employment Law: Where to, #Metoo?, 54 HARV. C.R.-C.L. L. REV. 155, 204 (2019); Emilie Shumway, After the #MeToo Bill, is the Future of Mandatory Arbitration in Question? (Feb. 22, 2022), available at https://www.hrdive.com/news/ after-the-metoo-bill-is-the-future-of-mandatory-arbitration-in-question/619229/ (noting that Google’s shift away from forced arbitration of such claims came after a planned walkout by 20,000 of its employees). 16 Pub. L. 117-90 (codified at 9 U.S.C. § 402(a)). 17 Barbara Hoey & Sebastian P. Clarkin, The End of Arbitration? What the “Me Too” Law Means for the Future of Employment Arbitration (Mar. 4, 2022), available at https://www.labordaysblog.com/2022/03/the-end-of-arbitration-what-the-metoo-law-means-for-the-future-of-employment-arbitration/. There is some question whether plaintiffs with qualifying suits that were already in arbitration on March 3 may now elect litigation. Id. 18 Id. 19 Id. 20 Robert Iafolla & Paige Smith, Court Battles Loom Over #MeToo Arbitration Bill’s Unclear Scope, BLOOMBERG LAW NEWS (Feb. 18, 2022). 21 Id.; see also Erin Webb, ANALYSIS: #MeToo Law May Keep Entire “Case” in Court, BLOOMBERG LAW NEWS (Mar. 21, 2022). 22 Shumway, supra note 15. 23 See Mia Farber & Shannon Bettis Nakabayashi, Ask A Litigator: What Do Employers Need to Know About PAGA? (Feb. 8, 2022), available at https://www. californiaworkplacelawblog.com/2022/02/articles/paga/ask-a-litigator-what-doemployers-need-to-know-about-paga/. 24 No. 20-1753. 25 Ronald Mann, Conservative Justices Seem Again Poised to Reverse California Courts on Arbitration Issue (Apr. 1, 2022), available at https://www.scotusblog. com/2022/04/conservative-justices-seem-again-poised-to-reverse-californiacourts-on-arbitration-issue/.