The State of Federal Arbitration Law and Waiver By Litigation Conduct

As many of our readers are aware, the Federal Arbitration Act (FAA) makes it difficult for consumers to enforce their rights in court when the standard form contracts that govern their employment relationships or their consumer purchases contain arbitration clauses.

The Supreme Court has interpreted the FAA broadly. Does the FAA apply in state courts as well as federal courts? The Supreme Court says yes (even though when the Act speaks of court enforcement it refers to federal courts). Does the Act apply to disputes over employment contracts? Yes (despite section 1 of the Act, which seems to exclude them). Does the Act override a state-law contract doctrine that would render unconscionable (and, thus, unenforceable) some contract provisions that ban class actions? You guessed it: Yes, in some circumstances (and so long as the class-action ban is laundered through an arbitration clause, even though FAA section 2 says that the Act does not override generally applicable contract principles).

You get the picture. Little guys have trouble getting into court when take-it-or-leave-it contracts include arbitration clauses. Maybe it's time for Congress to step in with something like the Arbitration Fairness Act.

Congress has already overridden the FAA in some areas (such as for disputes over consumer mortgages, which were effectively excluded from the FAA in the Dodd-Frank law). (See also this piece by the National Consumer Law Center.) There are still some defenses to enforcement of consumer arbitration clauses. 

The Third Circuit just reminded us in In re Pharmacy Benefit Managers Litigation about one of those defenses: A party that participates in substantial litigation on the merits has "waived" its right to invoke an otherwise valid arbitration clause. The Third Circuit's decision is worth reading.

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