Source: http://employeerightsadvocacy.org/our-work/ending-forced-arbitration-in-the-workplace/justice-denied/faa-preemption-forcing-arbitration-in-the-states/
Timestamp: 2020-01-19 18:28:09
Document Index: 454635919

Matched Legal Cases: ['§3', '§3', '§1', 'Art. 12', '§2', '§ 2', '§4', '§3', '§1983', '§2', '§2', '§1', '§2', '§2']

FAA Preemption: Forcing Arbitration In The States | The Employee Rights Advocacy Institute For Law & Policy
Home | Our Work | Ending Forced Arbitration In The Workplace | Justice Denied: How The U.S. Supreme Court Forced America’s Workers Into Arbitration | FAA Preemption: Forcing Arbitration In The States
The Court’s standard on whether and to what extent states must enforce arbitration clauses has evolved over time. For the most of its history, the Federal Arbitration Act (FAA), a federal law governing the use of arbitration contracts, was enforced by federal courts in cases involving federal claims. Because the FAA specifically relegates jurisdiction of claims under the statute to federal district courts, state courts were not thought to have the power to compel arbitration under the FAA. Additionally, because the statute was created to facilitate the rapid dispensation of contract disputes between commercial entities of equal bargaining power when they were engaged in commerce across state lines or at sea, the notion that state statutory claims could be subject to forced arbitration under the FAA used to be unthinkable.
In the late 20th century, however, the U.S. Supreme Court embraced a wholly opposite view. Beginning in the 1980’s, the Court began forcing states to compel arbitration. Not only did the Court mandate that state courts to must enforce arbitration under the FAA, it also ruled that states legislatures are preempted from passing laws to limit the reach of arbitration clauses or to protect their citizens from the harms caused by forced arbitration. Because of the Court’s modern approach to the FAA, both state courts and state legislatures have very little power to protect citizens from being silenced by forced arbitration clauses when they have suffered unlawful violations in the marketplace and at work.
The Court holds that in a diversity suit, because state law controls under the Erie Doctrine, federal courts must enforce state laws which preclude arbitration in cases where the FAA does not apply, and that the FAA does not extend to cover simple contracts of employment.
Relevant Facts: A man was hired to work for a New York employer in New York. The employee later moved to Vermont but maintained his employment. When the company fired him, the employee brought a civil suit alleging wrongful discharge. Because the parties were now residing in different states and the value of the claim met the required threshold, the claim was removed to federal court under diversity jurisdiction. The employer then sought to enforce an arbitration clause in the employment contract under the Federal Arbitration Act (FAA).
The Opinion: The U.S. Supreme Court first looked to the text of the FAA to determine whether the statute applied and observed that the part of §3 of the FAA that provides for a stay of the trial of an action until arbitration has been had does not apply to all arbitration contracts. On the contrary, for §3 to apply, the contracts at issue must fall within the scope of §§1 and 2 of the FAA; that is, it only applies to contracts relating to maritime transactions or those involving interstate or foreign commerce. The Court determined the employment contract at issue here did not involve either of those classes of contract, and, thus, the FAA did not apply.
The Court disagreed with the appellate court’s conclusion that “arbitration is merely a form of trial, to be adopted in the action itself, in place of the trial at common law.” The majority explained, “We deal here with a right to recover that owes its existence to one of the States, not to the United States. The federal court enforces the state-created right by rules of procedure which it has acquired from the Federal Government and which therefore are not identical with those of the state courts. Yet, in spite of that difference in procedure, the federal court enforcing a state-created right in a diversity case is . . . in substance ‘only another court of the State.’ The federal court therefore may not ‘substantially affect the enforcement of the right as given by the State.’ Id.”
The Court continued, “If the federal court allows arbitration where the state court would disallow it, the outcome of litigation might depend on the courthouse where suit is brought. For the remedy by arbitration, whatever its merits or shortcomings, substantially affects the cause of action created by the State. The nature of the tribunal where suits are tried is an important part of the parcel of rights behind a cause of action. The change from a court of law to an arbitration panel may make a radical difference in ultimate result. Arbitration carries no right to trial by jury that is guaranteed both by the Seventh Amendment and by Ch. 1, Art. 12th, of the Vermont Constitution. Arbitrators do not have the benefit of judicial instruction on the law; they need not give their reasons for their results; the record of their proceedings is not as complete as it is in a court trial; and judicial review of an award is more limited than judicial review of a trial.”
“The nub of the policy that underlies Erie R. Co. v. Tompkins is that for the same transaction the accident of a suit by a nonresident litigant in a federal court instead of in a State court a block away should not lead to a substantially different result. There would in our judgment be a resultant discrimination if the parties suing on a Vermont cause of action in the federal court were remitted to arbitration, while those suing in the Vermont court could not be.”
In a landmark opinion, the Court held that the FAA preempts certain state laws and ruled that state courts must order arbitration under the FAA unless an exception applies.
Question Before The Court: Whether the state franchise statute conflicted with the FAA to the extent that it was preempted under the U.S. Constitution’s Supremacy Clause, and whether state courts have the requisite subject matter jurisdiction to grant motions to compel arbitration.
The Opinion: The Court reviewed this case, in part, to resolve a divide between enforcement of the arbitration clauses in state versus federal courts. The Court held that “[i]n enacting §2 of the FAA, Congress declared a national federal policy favoring arbitration and withdrew the power of states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration. . .. The purpose of the Act was to assure those who desired arbitration and whose contract related to interstate commerce that their expectations would not be undermined by federal judges.” The Court’s views here were based on the supposition that parties to a contract were sophisticated businessmen that had thoughtfully negotiated all the terms of their contract. It was on that premise that the Court determined Congress’ intent in passing the FAA was to “place arbitration agreements upon the same footing as other contracts.”
The Court declared that “Congress has mandated the enforcement of arbitration agreements,” and there are “only two limitations on the enforceability of arbitration provisions governed by the FAA: they must be part of a written maritime contract or contract ‘evidencing a transaction in commerce,’ and such clauses may be revoked [under the § 2 “savings clause”] upon ‘such grounds as exist at law or in equity for the revocation of any contract.’” The majority found that the savings clause did not apply in this case because that clause is limited in its application only to “any general contract defense” that would serve to revoke all contracts anywhere (like fraud or undue influence), and does not include contract defenses that are only available under a particular state’s law. The Court expressed concern that upholding the state supreme court’s interpretation of the law would encourage and reward forum-shopping, and held that the state’s franchise disclosure law was preempted by the FAA under the Supremacy Clause.
The majority rejected the dissent’s argument that “the FAA was never meant to encroach upon individual states,” and that Congress only intended the FAA to serve as a procedural statute applicable solely in federal courts. After declaring that Congress called upon its Commerce Clause powers in enacting the FAA—a view that is suspect in itself—the Court provided, “We are unwilling to attribute to Congress the intent, in drawing upon on the comprehensive powers of the Commerce Clause, to create a right to enforce an arbitration contract and yet make the right dependent for its enforcement dependent upon the particular forum in which it is asserted. . . . In creating a substantive rule applicable in state as well as federal courts, Congress intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements.” To reach this outcome, the Court also ignored how limited the Commerce Clause power was in 1925, the year the FAA was enacted.
Justice Sandra Day O’Connor, in her dissent, argued that Congress relied on its Article II power over the jurisdiction of the federal judiciary in passing the FAA, not the Commerce Clause. Her observation was not new, but was a view shared by both the majority and minority in Prima Paint, as well. Citing the legislative history, Justice O’Connor provided, “The FAA rests upon the constitutional provision by which Congress is authorized to established and control inferior Federal Courts.” The legislative history also supports the view that the FAA was never intended to reach the states. The ABA Committee that drafted the legislation provided, “So far as the present law declares simply the policy of recognizing and enforcing arbitration agreements in federal courts, it does not encroach upon the province of the individual states.” Joint Hearings on S. 1005 and H.R. 646 before the Subcommittee of the Committees on the Judiciary, 68th Cong., 1st Sess., 17 (1924).
Finally, the Court’s finding that the drafters didn’t intend for the FAA to be limited to federal courts is simply not supported by the plain meaning of the text. §4 of the statute expressly limits the power to issue orders to compel arbitration to “any United States District Court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties.” Under the Federal Rules of Civil Procedure, such jurisdiction only arises when there is a federal question at issue or the parties have so-called “diversity jurisdiction” (where the parties reside in different states and the amount of the claim at issue exceeds a statutory minimum). Under these jurisdictional requirements, state courts can never have the requisite jurisdiction to grant a motion to compel arbitration under the FAA and, absent diversity or ancillary jurisdiction, state claims should never be forced into arbitration under the Act.
The Opinion: In deciding this case, the Court resolved a circuit split on the issue of how to apply the process of compelling arbitration described in §§3 and 4 of the Federal Arbitration Act (FAA). Prior to this case, when faced with the question, some circuits applied the doctrine of intertwining, which provided that where “arbitrable and non-arbitrable claims arise out of the same transaction, and are sufficiently intertwined factually and legally, the District [court] may deny arbitration.” Other circuits held that “the FAA divests the District courts of any discretion regarding arbitration in cases containing both arbitrable and non-arbitrable claims, and instead requires that the court compel arbitration of arbitrable claims when asked to do so.”
Despite ruling that courts must order arbitration of pendant state claims bound to non-arbitrable federal actions, Justice Thurgood Marshall, writing for the majority, made a point of observing that “arbitration cannot provide an adequate substitute for a judicial proceeding in protecting the federal statutory and constitutional rights that §1983 [of the Civil Rights Act] is designed to safeguard.”
Prior to this case, the Supreme Court had never ruled that state law claims were arbitrable under the FAA. It’s worth noting that Justice Marshall rooted his finding they were arbitrable in Congress’ Article III power to restrain the jurisdiction of the courts, and not in the Commerce Clause. With this decision, federal district courts have no discretion to refuse to compel arbitration of state statutory claims if they are deemed to fall within the scope of actions covered within a broadly-written arbitration clause, even if it is presented in a consumer contract of adhesion between an individual and large corporation. By forcing arbitration “on issues as to which an arbitration agreement has been signed,” the Court opened the door for all types of statutory claims to be deemed de facto arbitrable— a move they fully committed to in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), a case they heard oral arguments for just two weeks after issuing the opinion in this case.
The Court ruled that a state labor law guaranteeing workers access to a public judicial forum to adjudicate their claims was preempted by the FAA.
The Court, in a footnote, spoke to the root of the issue, providing, “In instances such as these, the text of §2 provides the touchstone for choosing between state law principles and the principles of federal common law envisioned by the passage of that statute: an agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’
Thus, state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of §2. A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes non-arbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state law holding that enforcement would be unconscionable, for this would enable the court to effect what we hold the legislature today cannot.”
The Court vastly expands the reach of the FAA beyond the commercial context to include almost all contracts of employment.
Relevant Facts: A man filled out a job application to work at a big-box electronics retailer, and was hired. The fine print at the bottom of the company’s job application contained a forced arbitration clause. Two years later, the employee pursued a discrimination claim under state law. Citing the FAA, the company invoked the forced arbitration clause to move the claim out of court.
The Opinion: §1 of the FAA excludes from the Act’s coverage “contracts of employment of seamen, railroad employees, or any class of workers engaged in foreign or interstate commerce.” Applying a general rule of statutory construction, the Court held that, rather than exclude employment contracts from the FAA, “the better interpretation is to construe the statute . . . to confine the exemption to transportation workers.” To hold that the clause exempted all workers from the FAA, in the Court’s opinion, would be to render the specific reference to seamen and railroad workers superfluous. As a result, according to the Court, most non-transportation employment contracts containing an arbitration clause are subject to the FAA.
The Court rejected the argument that applying the FAA to most employment contracts would infringe on the traditional role played by states to regulate the employment relationship, including the passage of “state employment laws which restrict or limit the ability of employees and employers to enter into arbitration agreements.” Instead, the Court re-iterated its position in Southland that “Congress intended the FAA to apply in state courts and to preempt state antiarbitration laws to the contrary. . . The Court should not chip away at Southland by indirection, especially by adoption of the variable interpretation theory advanced by the respondents in the instant case [which argued for interpreting the statute in light of the extent of the legislature’s commerce clause power at the time of the law’s passage].”
With this case, the Court opened the floodgates on forced arbitration clauses in employment contracts. It is worth noting that the employer in this case raised the argument that the job application did not actually constitute an employment contract in its petition for certiorari, but the Court declined to rule on that point. The opinion in this case, then, is implicitly premised on the fact that the arbitration clause in the job application constituted a valid and enforceable contract.
After this ruling, with extremely limited exception, employers became free to require pre-dispute arbitration agreements—forced arbitration clauses—as a condition of employment, and they have done so with rapidity. Through job applications, employee handbooks, and other adhesive employment documents, over 60 million workers are now bound by forced arbitration clauses.
Relevant Facts: Consumers who responded to an advertisement for a free phone were subsequently charged a fee on their bill, so they sued AT&T for fraud. Their action was joined with others in a nationwide class proceeding. The defense invoked a forced arbitration clause in the consumer contract to force the class action out of the judicial forum and into individual arbitration. A question arose as to availability of class proceedings for the claims because the arbitration clause at issue contained a class action ban. If enforced, pursuit of valid claims would have been financially untenable because each individual claim was only valued at approximately $30 apiece – far less than the cost of legal proceedings. The district court acknowledged that fact and found the class action ban unconscionable under state law. The appeals court affirmed and held that the state law on which the ruling was based was not preempted by the FAA.
The Opinion: The Court began by addressing the application of the state law of unconscionability, saying, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward. The conflicting rule is replaced by the FAA. But the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or unconscionability, is alleged to have been applied in a fashion that disfavors arbitration.” The Court continued, “[a]lthough the §2 savings clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” The Court then ruled that the FAA preempts states from barring enforcement of class waivers in arbitration clauses, even for public policy reasons that have nothing to do with arbitration.
Focusing on the use of the class action ban to require individual proceedings, the Court provided, “Arbitration is a matter of contract and the FAA requires courts to honor the expectations of the parties. But [if] what parties have agreed to . . . is not arbitration as envisioned by the FAA and lacks its benefits . . . [it] may not be required by state law.” Rooting its reasoning in concern for defendants to appeal large adverse judgments from class arbitral proceedings, the Court declared that arbitration is poorly suited to the higher stakes of class litigation, finding that “the overarching purpose of the FAA is to ensure the enforcement of private arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
With this case the Court unambiguously elevated the importance of enforcing a contractual term to arbitrate above almost any other concern. Justice Thomas, in his concurrence, observed that based on the majority’s holding, to win on an FAA §2 savings clause argument now would require “a party successfully assert[] a defense concerning the formation of the agreement to arbitrate, such as fraud, duress, or mutual mistake. . . Contract defenses unrelated to the making of the agreement—such as public policy—could not be the basis for declining to enforce an arbitration clause.”
The Court reaffirms that states cannot pass laws that directly or indirectly “disfavor” arbitration.
Kindred Nursing Centers Ltd. P’Ship v. Clark, 137 U.S. 1421 (2017)
Relevant Facts: Beverly Wellner and Janis Clark, two individuals who did not know each other, used their respective powers of attorney to move their family members into a nursing and rehabilitation facility owned by Kindred Nursing Centers Limited Partnership (“Kindred”). Completing the relocation required signing a lot of paperwork, among which included an arbitration clause requiring all disputes with Kindred be resolved in arbitration. Within a year, each of the loved ones had died while in the care of Kindred. Wellner and Clark separately sued, each alleging wrongful death. Kindred moved to dismiss under the arbitration clauses. Because the state constitution declared the rights of access to the courts and trial by jury to be “sacred” and “inviolate” the state courts held the arbitration agreements were invalid under the state constitution.
Question Before The Court: Whether the state’s clear-statement rule, which permitted an agent to enter an arbitration agreement waiving the right to adjudication by a judge or jury of behalf of her principal only if expressly provided that authority in their power of attorney, is preempted by the Federal Arbitration Act (FAA).
The Opinion: The Court identified that the FAA “establishes an equal treatment principle: A court may invalidate an arbitration agreement based on ‘generally applicable contract defenses’ like fraud or unconscionability, but not on legal rules that ‘apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’ The FAA thus preempts any state rule discriminating on its face against arbitration . . . And not only that: The Act also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.”
Here, the Court found that the state supreme court did “exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial.” Because the clear-statement rule singled out arbitration for disfavored treatment, the Court held that it violated the FAA.
The Court emphatically rejected the argument that the state’s clear-statement rule “affects only contract formation because it bars agents without explicit authority from entering into arbitration agreements,” and that the FAA did not apply because “states have free rein to decide . . . whether such contracts are validly entered in the first instance.” Citing both the FAA’s text requiring arbitration contracts to be held “valid, irrevocable, and enforceable” and the Court’s existing case law on the formation of arbitration agreements, the Court held that, “A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act than a rule selectively refusing to enforce those agreements once properly made.”
With this ruling, the Court appears to be warning states that it will not permit any legislation that gives the slightest whiff of disfavoring arbitration, even if the potentially adverse effect on arbitration is merely incidental. Moreover, the Court is indicating that states are just as tightly restricted in writing laws governing the formation of arbitration contracts as they are in legislating their enforceability.
The Opinion: Under California law, the doctrine of contra proferentem provides that ambiguous contract terms should be interpreted against the drafter. Because the arbitration provision at issue here was ambiguous, the Ninth Circuit interpreted it in a way most favorable to the non-drafting employee required to accept it, allowing class arbitration to move forward. Relying on precedent from only the last decade, the U.S. Supreme Court reversed, holding that an arbitration contract must expressly authorize class arbitration in order for parties to access the arbitral forum collectively. In the Court’s view, the “traditional individualized arbitration contemplated by the FAA”—and the benefits the Court has assigned to it—are undermined by class arbitration. For that reason, the Court held that “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration provision agreed to ‘sacrifice the principal advantage of arbitration.’
In her dissent, Justice Sotomayor expressed her dismay as to the effect the majority’s rule would have on states, providing, “This Court normally acts with great solicitude when it comes to possible preemption of state law, but the majority today invades California’s contract law without pausing to address whether its incursion is necessary. Such haste is as ill advised as the new federal common law of arbitration contracts it has begotten.”