The Arbitration Bootstrap
67 Pages Posted: 5 May 2016
Date Written: May 4, 2016
Arbitration clauses in contracts require consumers to waive their rights to bring litigation in court. The clauses are often unavoidable because firms include arbitration clauses in contracts of adhesion. In recent years, firms have begun to load their arbitration clauses with unconscionable terms unrelated to arbitration itself. For example, firms insert terms that shorten statutes of limitations, reduce damages, or prohibit injunctive relief. These contract terms are considered unconscionable – and, thus, unenforceable – in many states. However, the Supreme Court has interpreted the Federal Arbitration Act (the FAA) to require judicial deference to arbitration clauses. Consequently, many courts allow firms to bootstrap unenforceable contract terms into an enforceable arbitration clause in order to make those unconscionable contract terms enforceable.
The Supreme Court has invoked the legislative intent of the 1925 Congress in order to assert that the FAA applies to consumer contracts. Courts have further suggested that Congress intended arbitration clauses to be enforced as written and that this requires deference to anti-consumer terms that would otherwise be found unconscionable under state law. Finally, the Supreme Court has asserted that the FAA preempts all state efforts to police arbitration clauses, including basic notification requirements.
This Article examines the actual legislative history of the FAA and explains that Congress never intended the FAA to apply to consumer contracts. Congress was exclusively concerned with the enforceability of arbitration agreements between sophisticated businesses in commercial disputes. Congress never considered the possibility that retailers would impose mandatory arbitration clauses on their customers, let alone that these arbitration clauses would be structured to limit damages, to truncate statutes of limitation, or to otherwise remove procedural protections from consumers. The congressional intent that courts should enforce anti-consumer terms in arbitration clauses is an imagined one.
The Article concludes that courts should stop asserting that the FAA mandates enforcement of unconscionable terms so long as they reside in an arbitration clause. When confronting unconscionable terms in arbitration clauses, courts can take one of three actions: enforce the unconscionable terms; sever the unconscionable terms; or strike the arbitration clause as a whole because it is so overrun by unconscionable terms. The Article explains why only the latter two options are consistent with Congressional intent and good public policy.
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