Trial Magazine

Forced arbitration is on the minds of state and city legislators across the country as they grapple with the increasing popularity of these secretive clauses. Despite being constrained by a series of pro-corporate interpretations of the Federal Arbitration Act (FAA), over the past two years, 11 states and the city of Chicago have considered legislation that would restrict the practice of forcing consumers or employees into arbitration proceedings.¹

Most of the proposals have relied on a handful of proven exemptions that gave states and cities the authority to regulate forced arbitration clauses, including: delegating public enforcement authority to private attorneys; regulating arbitration providers; legislatively defining presumptively unconscionable terms; changing appellate procedure; and using the state or city market power to prohibit companies from using forced arbitration as a condition of doing business.

Positive News

Lawmakers in Connecticut, New York, and Vermont introduced legislation identifying certain contract provisions as presumptively unconscionable, such as those requiring consumers to waive their right to seek remedies provided by state or federal law.² The New York and Vermont legislation would make including such provisions in a standard form contract an unfair and deceptive practice, with statutory damages for a violation.

The Connecticut bill went further: It would empower any person subjected to a forced arbitration clause to bring a claim as a qui tam plaintiff acting on the state’s behalf, restoring consumers’ rights to enforce the Connecticut Unfair Trade Practices Act. This would allow Connecticut consumers to once again hold companies accountable for deceptive practices that they currently get away with due to forced arbitration.

Other states have focused on directly regulating forced arbitration clauses. In Mississippi, New Jersey, South Carolina, and Tennessee, legislators introduced bills that would void (or make voidable) forced arbitration clauses in consumer contracts.³

While the FAA would likely preempt some of these statutes, the FAA’s application is not universal—for example, it does not apply to the regulation of insurance. In addition, given the current makeup of the U.S. Supreme Court, if the interpretation of the FAA evolves in a more reasonable direction, such state-specific bans will be important.

Legislation attacking forced arbitration in specific industries where its use has become prevalent was introduced in a handful of states. For example, legislators in Hawaii introduced a bill that would void forced arbitration clauses regarding claims for damages arising from any data breach.⁴ Legislation was introduced in Massachusetts to prohibit a waiver of legal rights in discrimination, retaliation, or harassment employment claims.⁵

Finally, in New York and Vermont, lawmakers introduced legislation that mirrored the federal Fair Pay and Safe Workplaces Executive Order’s stance on forced arbitration⁶—prohibiting forced arbitration agreements between large state contractors and their employees.⁷

While all these bills merely began the conversation about forced arbitration, we expect that many will be reintroduced or expanded in 2017.

Chicago Takes a Stand

Leveraging states’ purchasing power is another strategy for addressing the widespread abuse of forced arbitration clauses. For example, Alderman Ed Burke in Chicago proposed an ordinance that would prohibit the city from contracting with businesses that require arbitration of an employment, consumer, or civil rights dispute.⁸ The committee voted to advance the ordinance to the full city council for consideration.⁹

City-level ordinances, like the one proposed in Chicago, would have a huge impact because many of the largest city government contracts are with com­munication service providers such as AT&T, Comcast, and Verizon—companies that have been repeatedly caught in illegal overcharge schemes or ­anticompetitive practices. By contracting with providers willing to participate in the civil justice system, cities can ensure that they are less likely to be deceived. These ordinances demonstrate to some of America’s largest corporations that forced arbitration has consequences.

Protecting Positive Court Rulings

Even though legislation largely stalled last session—with the notable exception of California—many plaintiff attorneys have been winning important victories in the courtroom by striking down forced arbitration clauses. However, some corporations or industries seek to overturn these victories through legislation.

In Missouri, for example, Hallmark Corp. pushed legislation to overturn a state court ruling that prohibited subjecting at-will employees to forced ­arbitration as a condition of their continued employment.¹⁰ The legislation would allow this practice by requiring the arbitrator, rather than a judge, to decide the enforceability of the arbitration requirement. The bill was stopped, but it highlights the ever-present threat that this type of legislation poses to people.

Testing the Limits

Corporations that find themselves constantly mired in litigation are increasingly turning to forced arbitration to gain an advantage, and state action is needed to stop this practice. Insurance companies are a prime example. Although the FAA does not apply to insurance contracts—which allows states to outright ban forced arbitration clauses without fear of preemption—some insurers are trying to include forced arbitration clauses in their contracts.¹¹

In Texas, the Farm Bureau petitioned the Texas Insurance Department for permission to include a forced arbitration clause in a homeowner’s insurance contract that would be offered in certain Texas counties.¹² After a strong showing by the Texas Trial Lawyers Association and its allies at a public hearing, the Farm Bureau dropped its petition.

However, forced arbitration clauses in insurance contracts will remain an issue until all 50 states prohibit this practice. Although many states have taken steps to do this, 24 states—including Texas—have no such prohibition or restriction in place.¹³ This is an example of why action at the state level is fundamental.

As the 2017 legislative session begins, state legislatures and city councils will likely continue to work on ways to prohibit and address forced arbitration. However, we also expect forced arbitration clauses to appear in more places—from hospital admission agreements to warranty agreements for common household goods. We are working to ensure the former outpaces the latter.

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Daniel Hinkle is AAJ’s state affairs counsel. He can be reached at daniel.hinkle@justice.org.

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 Notes

1. The states were California, Connecticut, Hawaii, Massachusetts, Mississippi, New Jersey, New York, Oklahoma, South Carolina, Tennessee, and Vermont.
2. H.B. No. 561, 2016 Sess. (Conn. 2016); S. 4388A, 2015 Reg. Sess. (N.Y. 2015); H. 784, 2015–2016 Leg. (Vt. 2016).
3. H.B. 681, 2016 Reg. Sess. (Miss. 2016); A. 215/S. 1920, 2016–2017 Leg. Sess. (N.J. 2016); H. 4840, 2015–2016 Gen. Assemb., 121st Sess. (S.C. 2016); H.B. 2388/S.B. 2268, 109th Gen. Assemb. (Tenn. 2016).
4. S.B. 2485, 28th Leg. (Haw. 2016).
5. S. 2153, 189th Gen. Ct. (Mass. 2016).
6. Fair Pay and Safe Workplaces, Exec. Order No. 13673, 79 Fed. Reg. 150 (Aug. 5, 2014).
7. S. 2452, 2015–2016 Leg. Sess. (N.Y. 2016); H. 784, 2015–2016 Leg. (Vt. 2016).
8. Chicago, Ill. Ordinance No. O2015-8190 (Nov. 18, 2015), /chicago.legistar.com/LegislationDetail.aspx?ID=2519679&%20GUID=DC023935-1007-4F86-8E39-ABDD397094F6&Options=Advanced&%20Search=&FullText=1.
9. Id.
10. See H.B. 1718, 98th Gen. Assemb., 2nd Reg. Sess. (Mo. 2016) (seeking to overturn Morrow v. Hallmark Cards, Inc., 273 S.W.3d 15 (Mo. Ct. App. 2008)).
11. See, e.g., Friday v. Trinity Universal of Kan., 939 P.2d 869 (Kan. 1997); Stephens v. Am. Int’l Ins. Co., 66 F.3d 41 (2d Cir. 1995); Standard Sec. Life Ins. Co. v. West, 267 F.3d 821 (8th Cir. 2001).
12. See Docket No. 2788, Notice of Public Meeting, www.tdi.texas.gov/alert/event/2016/07/dkt2788.html.
13. See Public Citizen, State Laws Regulating Arbitration in Insurance Contracts, /www.citizen.org/congress/article_%20redirect.cfm?ID=6560.