Necessity Never Made a Good Bargain: When Consumer Arbitration Agreements Prohibit Class Relief

The American system of arbitration is constantly evolving. From the first formal arbitration tribunal in 1786—established by the New York Chamber of Commerce—to the creation of the Federal Arbitration Act in 1925—passed to suppress judicial hostility towards arbitration -- the system has continuously adapted to accommodate changing business practices and rising judicial concerns over the legitimacy of the institution. In fact, the system’s adaptation has been so effective that the Supreme Court now recognizes a “national policy favoring arbitration.” This “national policy” is the most recent phase of the arbitration evolution, and it raises several concerns. Most significantly, lower courts are relying on it to effectively eliminate any review of arbitration agreements under state laws of unconscionability. Consequently, banks, phone companies, and other consumer businesses are implementing mandatory arbitration clauses that provide complete immunization from both class actions and classwide arbitration. As potential defendants, these companies hope that courts will force individual resolution of all consumer claims against them by upholding their agreements to arbitrate. Such an exercise raises an important, yet unanswered, question: To what extent should courts use the “national policy favoring arbitration” to protect consumer arbitration agreements that prohibit all class relief? The Supreme Court will have an opportunity to address this question when it resolves a split between the Seventh and Ninth Circuits on the interplay of the Federal Arbitration Act (FAA), the Federal Communications Act (FCA), and state laws of unconscionability. Essentially, the Court will have to revisit previous decisions on what type of role states play, if any, in determining arbitration policy within their borders. Part II of this paper discusses the history of federal preemption under the FAA and the growing dissatisfaction with the Supreme Court’s federal preemption jurisprudence. Part III addresses federal preemption under the Federal Communications Act and how companies now use the FCA to shield arbitration agreements from review under state laws of unconscionability. Part III also discusses how the Supreme Court can develop a new federal preemption policy—and suppress some of the dissension over its prior preemption decisions—when it resolves the split between the Seventh and Ninth Circuits. This new proposal still recognizes the “national policy favoring arbitration,” and requires courts to respect arbitration agreements accordingly. However, it returns greater authority over arbitration procedure to the states. Thus, when faced with an arbitration agreement that prohibits both class actions and classwide arbitration, courts may uphold the parties’ decision to arbitrate, but review state law to determine whether to permit arbitration to proceed on a classwide basis. Finally, Parts IV and V discuss the justifications for such a proposal and suggest several safeguards that states may want to enact to ensure that class arbitration proceedings are an efficient and effective method of alternative dispute resolution