Mandatory pre-dispute arbitration: Have its best days passed?

Historically, courts were hostile to pre-dispute arbitration agreements. To address this hostility, Congress enacted the Federal Arbitration Act, or FAA, that placed arbitration agreements on the same footing as other contracts.

Arbitration is a powerful weapon against lawsuits. Since passage of the FAA, there has been a strong federal policy in favor of arbitration. Any doubts regarding the scope of arbitrable issues are to be resolved in favor of arbitration. And, in many instances, even non-signatories to a pre-dispute arbitration agreement can be forced to arbitrate a dispute.

With regard to federal statutory claims, an arbitration provision will be enforced unless Congress makes clear that it intended to preclude a waiver of judicial remedies for the statutory rights in dispute. Courts have rarely discerned such Congressional intent.

Given the virtual “get out of court free” card granted by the FAA, it’s no wonder that a surge in arbitration provisions developed. Nearly all large businesses employ them, including banks, telephone companies, credit card companies, major online retailers, and so forth. For decades these provisions, coupled with class action waivers, have been relied upon by these businesses to provide protection from litigation and class-wide claims and recoveries.

But has the tide started to turn against arbitration? Initially, it was hoped that arbitration would be cheaper and more efficient than litigation. No doubt in some cases both are true. In many, however, neither is true and the basic premise underlying arbitration proves false. Many times, years are spent arguing over the applicability of an arbitration provision in the courts.

The FAA does not require efficiency and sometimes permits portions of a dispute to be arbitrated while others are litigated in court. In some circumstances, the FAA requires piecemeal resolution of disputes, when needed to give effect to an arbitration agreement. And, if there is a factual dispute regarding the making of the arbitration agreement, a trial is necessary. Arbitration is often not efficient.

Arbitration proceedings are often not cheap, either. Arbitrators are paid well, often by the defendant seeking to enforce the arbitration agreement. With the advent of modern technology, it is increasingly easy for plaintiffs to identify large groups of similarly situated persons and file large numbers of claims in arbitration, each of which requires payment, making arbitration very expensive for the defendant.

If a lawsuit is filed, most defendants file a motion to dismiss in court seeking to have all claims dismissed on substantive grounds. If that doesn’t succeed it will then move to compel arbitration on all claims that were not dismissed. This process takes months and, sometimes, years.

In defending against the motion to compel arbitration, plaintiffs would normally allege that any right to arbitrate was waived by the initial pursuit of litigation. Until recently, that argument was usually dead upon arrival because the plaintiff generally could not prove he was prejudiced by the defendant’s tactic. Delay alone was rarely enough to constitute waiver.

This approach took a hit last year. On May 23, 2022, the Supreme Court held in Morgan v. Sundance that courts can no longer require a showing of prejudice as a condition to waiver of the right to arbitrate. Having decided to seek dismissal of a claim, it will now be harder to subsequently seek to arbitrate, since the focus of waiver will now be on the actions of the party seeking arbitration rather than on any prejudice to the party resisting arbitration. Those seeking to arbitrate will now be wise to choose their initial dispute resolution strategy and forum carefully.

Further, Congress has shown a willingness to restrict the areas in which access to the courts can be waived in favor of arbitration. Recently, Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, or EFAA, which became effective on March 3, 2022. The EFAA makes pre-dispute arbitration agreements unenforceable with respect to a case relating to a sexual harassment dispute. To date, the EFAA has been broadly construed to ban enforcement of arbitration agreements in cases alleging sexual harassment, including non-sexual harassment claims asserted in the same complaint.

Additional legislation has been introduced even more recently in Congress to end forced arbitration of any dispute involving racial discrimination or age discrimination.

In addition to recent actions by courts and Congress, some businesses are reconsidering their embrace of arbitration and are abandoning it. The world’s largest online retailer is a case in point. On Aug. 19, 2011, Amazon.com added an arbitration clause to its conditions of use. After years of litigation over its arbitration provision and its associated costs, and facing the high cost of arbitrating thousands of claims related to the sale of one of its products, Amazon abandoned the use of its mandatory pre-dispute arbitration clause. On May 3, 2021, Amazon amended its conditions of use to require litigation of all customer disputes.

Whether mandatory pre-dispute arbitration agreements will become a thing of the past only time will tell. While the FAA is alive and well and there still exists a liberal federal policy in favor of arbitration, Congress appears willing to limit the applicability of the FAA in some areas. Courts are nipping at the periphery and even the world’s largest online retailer, Amazon.com, has ceased using pre-dispute mandatory arbitration agreements.

Gregory S. Duncan is a sole practitioner in Charlottesville, Virginia. He has a litigation practice and has litigated many issues related to the applicability and scope of mandatory pre-dispute arbitration agreements.