The Future of Mandatory Arbitration Shock: Sides Square Off in Consumer Contracts and Employment Arenas

By Tom Hagy

Mandatory arbitration clauses. Companies and employers love them. Consumers and employees don’t. The end.

Or so some might wish. But there is much to this ubiquitous clause. There is the prickly matter of a gazillion consumer contracts that require the parties to submit to arbitration rather than knock heads in court. And there is the matter of employment-related class actions and whether employees have a right under federal law to join forces to pursue companies for alleged misdeeds—an issue the U.S. Supreme Court has agreed to take on.

Corporations like mandatory arbitration for the relatively low cost and predictability, since you never know how much litigation will run you and you certainly never know what a jury will do. Individuals and consumer advocates say it’s precisely the specter of litigation that keeps the big companies honest.

Ironically, perhaps, the issue over the fairness of mandatory arbitration is being litigated in at least two arenas: online consumer contracts and employment disputes.  While there are many groups weighing in on these issues, two groups consistently crank out amicus curiae briefs, press releases and articles on the subject:  Public Justice, for consumers and employees, and the U.S. Chamber of Commerce, for companies and employers. 

Click to Agree

We’re all familiar with just how unfamiliar we are with the terms and conditions we sign off on anytime we buy a product, register for a service, download software or hitch a ride. Besides, we often conduct our transactions in a rush or on the small screens glowing in our clumsy hands. (Given the readers of the LexisNexis Corporate Law Advisory are largely lawyers, we will pretend you are the exceptions.)

In a case before the Second Circuit U.S. Court of Appeal—Spencer Meyer v. Uber Technologies, 2^nd Cir., No. 16-2750—the dispute over the fairness of the mandatory arbitration clause follows whether—when you click to register as a Uber customer—you entered into a contract at all.

The U.S. Chamber weighed in on the importance of the mandatory arbitration clause by hailing the prompt, efficient and relative-to-litigation low cost of the process. The group says its members “have structured millions of contractual relationships—including enormous numbers of online contracts—around arbitration agreements.” They say that “subjecting online contracts that include arbitration provisions to a heightened test for enforceability” casts an “unacceptable cloud of uncertainty” over such agreements.

Public Justice thinks the Chamber has it backwards. This pro-consumer group says it is a “legal fiction that consumers knowingly and expressly waive their constitutional right to a jury trial by ordering goods or services subject to contracts with arbitration clauses.” That’s one thing, Public Justice says. “It is quite another thing to add yet another layer of legal fiction by pretending consumers have agreed to contractual terms that do not meet even the most basic contractual principles of offer and assent, principles that apply with no less force simply because they relate to arbitration. The Federal Arbitration Act (“FAA”), for all the deference to arbitration it requires, does not displace the basic rules of contract formation.”

Let Me Get My Glasses

Part of the argument over whether a contract was formed hinged on the prominence, positioning and clarity of the “click to agree” language in the Uber app and whether customers were given “effective notice” of what they were agreeing to.

The Internet Association and Consumer Technology Association said in their briefs in support of Uber that requiring such notice “threatens the efficient and now-customary experience between consumers and companies on mobile devices and the resulting benefits that flow to all parties.”

Public Justice didn’t use the word “hogwash” exactly, but it did say that mobile

companies “can operate perfectly well without duping consumers into waiving away

their rights. One need not speculate whether it is unduly burdensome for such

businesses to provide effective, conspicuous notice through a smartphone

application: Uber’s own actions readily establish that it is not.” Public Justice compared the prominence of the “click to agree” language of the customer registration process to that of other of its online agreements, such as when engaging drivers, and said Uber is capable of being more clear and conspicuous in its online agreements if it wants to be.

The Chamber didn’t use the word “balderdash” exactly, but did say that rather than recognize basic legal principles and “real-world practice” to enforce the contract, the District Court “flyspecked” a “meaningfully degraded” snapshot of Uber’s registration screen as it appeared on a mobile device to conclude that an enforceable agreement had not been formed.

The Second Circuit heard the case on March 24, 2017.

Employment Disputes

It is in the employment arena where not only do employees and employers disagree, but so do the courts, which is why the U.S. Supreme Court has agreed to hear the case, NLRB v. Murphy Oil USA, Inc., et al., Sup. Ct., No. 16-307, where the underlying claims involve a dispute over overtime pay. The Murphy Oil case came down against class action, and has been combined for review with Epic Systems Corp. v. Lewis, 7^th Cir., and Ernst & Young v. Morris, 9^th Cir., where the appellate courts agreed with the NLRB that waivers in arbitration agreements restrained employees’ rights to engage in concerted activity.

Questions raised in this important case include: Does the National Labor Relations Act (NLRA) override the FAA? Does the NLRA give employees a right to use class actions? Do class actions get a pass under the saving clause of the FAA? Would class actions discourage employers from using individual arbitration?

Public Justice has written that “workers’ rights hang in the balance.” The U.S. Chamber says, nope—employees have many ways to band together against employers, just not class actions.

In its petition to the Supreme Court, the NLRB says mandatory arbitration agreements are unlawful under the NLRB because they “deprive employees of their statutory right to engage in ‘concerted activities’ in pursuit of their ‘mutual aid or protection.’”

The NLRB says that the court of appeals wrongly held that “contracts that are unlawful under the NLRA must nevertheless be enforced pursuant to the FAA. To the contrary, the saving clause in 9 U.S.C. 2 does not require enforcement when a contract is unlawful for such reasons (i.e., reasons that are not limited to the context of arbitration agreements).”

Right Not Saved

The Chamber filed an amicus brief in this case as well, saying the right to file class actions is not saved under the FAA, and challenged the argument that barring employees from filing class actions infringes their right to act as a group.

“Employees who sign agreements to arbitrate on an individual basis can still engage in myriad forms of concerted activity, including striking, collective bargaining, and organizing,” the brief reads. “And even within the realm of litigation, employees are left free to communicate with co-workers about workplace problems, to exhort their co-workers to bring claims, to testify in each other’s cases, to jointly retain the same counsel, to share evidence, and to pool resources to fund litigation. The only thing restricted by agreements to arbitrate on an individual basis is employees’ ability to bring class actions.”

This is a case the legal and business world will watch closely, not only because of its potential sweeping impact, but because it will be the first big employment case for newly installed Supreme Court Justice Neil M. Gorsuch. 

In a post written by Ilyse W. Schuman and Michael J. Lotito, co-chairs of Littler Mendelson P.C.’s Workplace Policy Institute, the attorneys say Justice Gorsuch’s opinions on employment law “do not appear to contain any unpleasant surprises for employers.”

As for the mandatory arbitration issue, Schuman and Lotito wrote: “It is too early to predict how Judge Gorsuch . . . would come out on this issue, but it is instructive that . . . he has shown reluctance to support possible Board overreach.”

One thing the NLRB said is for sure. This is a question that will have an impact on “countless employees and employers nationwide.”