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Case Watch: For Arbitrators

Will the Arbitration Fairness Act Survive the Midterm Election?

“… nothing would be easier than for the more astute party to oust the courts of their jurisdiction. By first making the contract and then declaring who should construe it, the strong could oppress the weak, and in effect so nullify the law as to secure enforcement of contracts usurious, illegal, immoral, and contrary to public policy.” Parsons v. Ambos, 121 Ga. 98, 101, 48 S.E. 696 (1904).

The type of hostility to arbitration expressed by the Georgia Supreme Court in its Parsons opinion above may have been the driving force behind the proposed Arbitration Fairness Act (H.R. 1020, S. 931), aka the AFA.  Introduced in February 2009, the AFA seeks to amend the United States Arbitration Act (aka the FAA) to end enforcement of any pre-dispute arbitration agreements between parties in employment, consumer and franchise transactions.  If enacted, the AFA would limit the FAA’s applicability and turn back the clock on federal policy favoring arbitration.

But in the recent midterm elections, Republicans gained a number of seats, including that of the FAA’s sponsor, Senator Russ Feingold.  That means the future of the FAA amendments and further regulation of arbitration in the lame duck Congress has become questionable at best.  That’s good for all potential parties to arbitrations, as it gives Congress time to seek out more reliable data on how well or how poorly employees and consumers fare in arbitration.

In the 20 years since the Supreme Court’s pro-arbitration decision in Gilmer v. Interstate/Johnson Lane Corp. 500 U.S. 24 (1991), court enforcement of arbitration agreements has expanded into the arenas of pre-dispute employment and consumer arbitration agreements.  However, over the years several criticisms have arisen against arbitration as a fair means of dispute resolution in employment and consumer issues.

For example, the preamble to the proposed Arbitration Fairness Act of 2007 (S.1782) stated that consumers and employees often have little or no meaningful alternative to submitting their claims to arbitration.  The bill’s sponsors asserted that consumers and employees were giving up “rights” as a condition to obtaining a new job, obtaining medical care or obtaining credit cards.  Critics considered arbitration an inadequate process for protecting civil rights or consumer rights because of “lack of transparency” in the process.  Private arbitration providers were accused of devising dispute resolutions systems to favor corporate repeat players.  And arbitration clauses contained in employer or lender agreements were considered contracts of “adhesion” – terms over which the employee or borrower had no bargaining power – and were derisively referred to as “mandatory arbitration” clauses that favored the powerful employer or lender.

Several studies purport to support this notion that arbitration outcomes favor lenders, sellers and employers over consumers and employees.  However, the methodology and thus the conclusions of those studies has been seriously questioned.  Nonetheless, the conclusions drawn from these studies often drive the debate to change the FAA as proposed in the AFA.  Judicial rationale supporting arbitration of statutory rights, expressed in cases such as Gilmer and subsequent circuit and Supreme Court cases, is often discounted.

It worth mentioning two studies that dispute the presumption of disparate arbitration outcomes for employees or consumers.  In 2003, Theodore Eisenberg of Cornell Law School and Elizabeth Hill of NYU Law School published a summary of their research comparing outcomes in arbitration and litigation.  Their summary concluded that arbitrators are not providing relief in a materially different fashion from the courts.   Employees won 43 percent of the cases, the summary noted, with an average award of $172,690. (The study also found that lawyers did not take employment litigation cases having a value of less than $60,000, which raises the issue of whether employee litigants have true access to the courts.)

Similarly, the Searle Civil Justice Institute of Northwestern University compared creditor claims in arbitration and in court and published its results in 2009.  The conclusions: the cost to consumers for claims less than $10,000 averaged $96; an award was rendered on average within seven months from date of filing; and consumers prevailed in 53.3 percent of the cases.

Both of these studies are limited in scope and examined hearings conducted by a single provider, the American Arbitration Association.  But they do suggest a need for more empirical studies that are not subject to the bias of a particular methodology.  There is no definitive evidence that supports a blanket indictment against employment and consumer arbitration.  Hard data, carefully developed, rather than policy based on emotion and perception, would be a better basis for amending the FAA.

Yes, arbitration has had its problems.  In 2009, the National Arbitration Forum settled a lawsuit with the Minnesota Attorney General’s Office.  There, the NAF was accused of a conflict of interest; firms that collected credit card debt had financial interests in NAF, which in turn provided arbitration services to the credit lending firms.  The NAF agreed to end its credit-card arbitrations.  In response, other consumer arbitration service providers and lenders have stopped administering or enforcing credit card arbitration agreements and are awaiting the results of  negotiations on proposed FAA amendments.  However, some recent legislation limits or may limit future arbitration agreements even without amending the FAA.

The Department of Defense Appropriations Act of 2010, Section 8116, prohibits mandatory arbitration of claims under Title VII or arising out of sexual assault or harassment.  This provision, which went into effect on June 17, 2010, requires a defense contractor to certify that it will not take any action to enforce an agreement that requires as a condition of employment that the employee agree to arbitrate any claim under Title VII or for any tort arising out of sexual assault or harassment.  Similarly, the Dodd-Frank Wall Street Reform Act, Section 1028, provides for study of consumer arbitration and authorizes the Consumer Financial Protection Bureau to prohibit the use of such agreements.  (Elizabeth Warren was recently appointed to head the Bureau, but at this time no study is published nor regulations proposed.)

There are many ways to improve the FAA’s applicability to consumer and employment arbitration.  But given the recent shift in the political make-up of the U.S. House of Representatives, it is unlikely that any action on the Arbitration Fairness Act will move forward in its present form.

For Georgia arbitrators that means that employment arbitration is and will continue to be governed by the Gilmer standards applicable to statutory rights cases unless the DOD Appropriations statute is applicable.  For consumer cases, the status is uncertain for the foreseeable future.

Certain questions remain. If the FAA is amended and arbitration of employment and consumer cases is curtailed, are the courts prepared to provide a forum for these disputes to be resolved, particularly those of a low dollar or no dollar value?  (This question, of course, raises the issue of class action litigation, which is a subject for a separate discussion.)  Are the policies favoring arbitration – efficiency, less expense, timeliness – outweighed by those favoring litigation as the best means of resolving these disputes, particularly given that some studies indicate in federal courts only 3.8 percent of these disputes are conducted as jury trials?  If the amended FAA policies are adopted, how will this change affect employers and employees under collective bargaining agreements governed by Federal labor law rather than the FAA and who submit statutory rights disputes to arbitration?  In a global economy what effects will the amendments have on the growing use of arbitration to resolve international disputes?

So the AFA might survive the recent elections.  However, a serious analysis of the proposed FAA amendments – supported by research data that all sides can view with confidence – will avoid shortchanging employee and consumer claimants.  And it will also dampen the likely criticism that the FAA amendments are simply modern restatements of the animus expressed by the court in Parsons.


John Allgood is of counsel at Ford & Harrison.  For more than 20 years he has arbitrated and mediated cases in commercial, employment, construction and securities law, as well as in real estate and anti-trust matters.  An adjunct professor of ADR at Emory University School of Law, he was a member of the U.S. Olympic Committee panel of arbitrators during the 1996 and 1998 Olympic Games.

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