#11088 - Arbitration - Complex Litigation

Arbitration

1. In General

   1. Pursuant to Section 2 of the Federal Arbitration Act (“FAA”), an arbitration clause in a commercial contract “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (CB 668).

      1. Section 2 of the FAA reflects both a “liberal federal policy favoring arbitration” and the “fundamental principle that arbitration is a matter of contract.” Concepcion (CB 680).

      2. “[C]ourts must place arbitration agreements on equal footing with other contracts, . . . and enforce them according to their terms.” Concepcion (CB 680).

      3. The final phrase of Section 2, the savings clause, permits agreements to arbitrate to be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. Concepcion (CB 680).

   2. Enforcement Mechanisms:

      1. Section 3 of the FAA requires a federal court to stay its proceedings in favor of arbitration if a party requests it.

      2. Section 4 of the FAA allows a party to obtain an order from a federal court compelling arbitration.

   3. In upholding arbitration clauses generally under the FAA, the Supreme Court has repeatedly stated that “[b]y agreeing to arbitrate a statutory claim, a party does not forego the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than judicial, forum. It trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.” Mitsubishi (CB 674).

   4. The FAA is preemptive federal substantive law that applies in both state and federal courts to the exclusion of any conflicting law. Southland Corp. (CB 669).

   5. The FAA applies to the full reach of the modern Commerce Clause power. See Allied-Bruce Terminix (CB 670).

      1. The FAA applies broadly to economic activity that affects interstate commerce in the aggregate, whether or not the particular contract at issue itself substantially affects interstate commerce. See Allied-Bruce Terminix (CB 670).

   6. The FAA applies to statutory causes of action. See, e.g., Gilmer (CB 671).

   7. The FAA requires that arbitration agreements be written but does not mandate that they be signed in order to be enforceable.

   8. In Gilmer, the Court held that a securities broker could be compelled to arbitrate his federal age discrimination claim against his employer. (CB 671).

   9. Parties must choose and pay for their own arbitrators.

   10. Grounds for Appeal

       1. Section 10 of the FAA limits the grounds for appeal mainly to procedural defects.

          1. In particular, an award cannot be vacated on the usual ground of error as to law or fact.

          2. Further, the parties cannot expand the scope of appellate review by contract. Hall Street Assocs. (CB 674).

2. Arbitration and Class Actions

   1. Whether arbitration can proceed as class arbitration is for the arbitrators and not the court to decide, unless the parties specify otherwise. Bazzle (CB 674).

   2. Arbitrators cannot impose class arbitration without a basis for it in the parties’ agreement. Stolt-Nielsen (CB 675).

      1. It is not enough that the arbitration agreement is silent on the subject and the arbitrators believe that class arbitration is a good idea. Stolt-Nielsen (CB 675).

      2. The Court stated that “a party may not be compelled under the [FAA] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Stolt-Nielsen (CB 675).

      3. Although “parties that enter into an arbitration agreement implicitly authorize the arbitrator to adopt such procedures as are necessary to give effect to the parties’ agreement,” this principle does not extend to class arbitration. Stolt-Nielsen (CB 676).

         1. This is because “class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.” Stolt-Nielsen (CB 676).

   3. Class Action Arbitration Waivers

      1. Parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom a party will arbitrate its disputes. Concepcion (CB 682).

      2. The savings clause of Section 2 of the FAA permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” Concepcion (CB 680).

         1. In Concepcion, the Court held that California’s judicially created Discover Bank rule, which was employed to find the arbitration class and...