SAC Contributing Legal Editor and Board of Editors Member
Ed: As reported in SAA 2019-10 (Mar. 6), House and Senate Democrats introduced several anti-arbitration bills in late February and early March. The new bills seek to amend the Federal Arbitration Act (“FAA”), specific statutes like Dodd-Frank, or both. We asked SAC Contributing Legal Editor and Board Member and Fordham Law Professor George H. Friedman to prepare an analysis of the new bills. Last December he authored in the SAC Blog an article on this very topic, correctly predicting that anti-arbitration bills would resurface in the new Congress, so his insights should be very interesting. The words that follow are Professor Friedman’s.
Undaunted by the rather poor prospects of enactment, Congressional Democrats announced February 28 - March 1 the reintroduction of several bills aimed at curtailing mandatory arbitration in a broad range of contracts.
Déjà vu All Over Again
They’re baaack! Recall that the Democrats introduced several anti-mandatory arbitration bills in the last Congress that went nowhere. The new bills – all introduced by Democrats – are similar to those introduced in the 115th Congress. To one extent or another, the bills aim to protect consumers – including investors – employees, small businesses, civil rights claimants, data breach victims, and/or whistleblowers, from mandatory arbitration. Some bills ban future use of predispute arbitration agreements (“PDAA”) and/or enforcement of existing ones, while some create procedural safeguards. The bills in part seem to incorporate lessons learned from SCOTUS as to delegation, class action waivers, and conflicts between the FAA and other federal laws. I present my analysis in order of their interest to financial services arbitration constituents. Note that in some instances the House or Senate version has not yet been introduced.
Forced Arbitration Injustice Repeal (FAIR) Act of 2019 (H.R. 1423 and S. 610): As the Alert reported in SAA 2017-10 (Mar. 8), the Arbitration Fairness Act (“AFA”) has been reintroduced with a new name and some significant enhancements. I call the new Bill the “AFA on steroids.” This version of the AFA is at a high level the same as the old one and would amend the FAA to eliminate mandatory predispute arbitration agreements for disputes involving “consumer, civil rights, employment, and antitrust.” It would be retroactive, applying to claims made after the effective date. What’s new? It would definitely cover brokers and investment advisers; bars class action/collective action waivers in or out of a PDAA; extends to “digital technology” disputes; reserves for court determination any arbitrability or delegation issues “irrespective of whether the agreement purports to delegate such determinations to an arbitrator;” and clearly extends to sexual harassment claims.
Arbitration Fairness for Consumers Act (H.R. ____ and S. 630): These would amend Dodd-Frank to ban retroactively: 1) PDAAs for disputes involving a consumer financial product or service, including “securities or other investments;” and 2) class action/collective action waivers irrespective of whether part of an arbitration clause. It, too, covers digital technology conflicts.
Restoring Statutory Rights Act (H.R. ____ and S. 635): This is a reintroduction of bills of the same name that were not passed by the last Congress. The bills would amend the FAA as to individuals, those bringing representative actions, and small businesses to: 1) ban PDAAs covering claims for damages – and injunctive relief – involving federal or state statutory rights and those derived from state Constitutions; 2) amend section 2 of the FAA to include, under the “grounds as exist at law or in equity for the revocation of any contract” basis for resisting a PDAA, a state or federal statute or court ruling “that prohibits the agreement to arbitrate on grounds that the agreement is unconscionable, invalid because there was no meeting of the minds, or otherwise unenforceable as a matter of contract law or public policy;” and 3) state that arbitrability issues are to be resolved by courts, not arbitrators. The proposed Act would legislatively overrule SCOTUS decisions on FAA preemption of federal and state law, and gives as examples AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) and American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013). It would be retroactive, applying to “any dispute or claim that arises on or after the date of enactment of this Act.”
Ending Forced Arbitration of Sexual Harassment Act (H.R. 1443 and S. ____): This is a reintroduction of Bills (S. 2203 and H.R. 4570) of the same name that were introduced in the last Congress in the wake of seemingly daily accusations of workplace sexual harassment. The proposed Act would amend the FAA to retroactively ban predispute arbitration agreements covering sexual discrimination disputes. And, no delegation: “The applicability of this chapter to an agreement to arbitrate and the validity and enforceability of an agreement to which this chapter applies shall be determined by a court, rather than an arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement.” This, by the way, is the only bill I think has a decent chance of enactment. Why? The same bills introduced in the 115th Congress had significant bipartisan support, and I suspect he President would not veto this version if it comfortably passes in both houses of Congress.
Ending Forced Arbitration for Victims of Data Breaches Act (H.R. 327 and S. ____): This bill was introduced on January 9. It aims to “prohibit entities from requiring individuals to submit to arbitration for disputes arising from a security breach, and for other purposes.” The bill does so by defining such PDAA use as an “unfair or deceptive act or practice” under the Federal Trade Commission Act. Note that this bill does not attempt to amend the Federal Arbitration Act, which in my view is a sound tactic as discussed in more detail below. The current draft does not have an effective date.
Court Legal Access and Student Support (CLASS) Act (H.R. 1430 and S. 608): These would amend the FAA and the Higher Education Act of 1965 to ban enforcement starting one year after enactment of PDAAs in enrollment agreements made between students and for-profit institutions of higher education receiving Title IV student aid funding, and prohibit class action waivers. What’s the driver? Says sponsor Rep. Maxine Waters (D-CA) in a February 28 Press Release: “The CLASS Act aims to end the strategic use of mandatory arbitration and class action waiver clauses in enrollment agreements by for-profit colleges. Legitimate non-profit colleges and universities do not include mandatory arbitration clauses in their enrollment agreements, but these clauses are a hallmark of the for-profit college industry.”
Safety Over Forced Arbitration Act (H.R. ____ and S. 620): The bill would amend the FAA to bar mandatory predispute arbitration where “an activity, substance, or condition ... has a potential to cause harm to the health or safety of the public.” Post-dispute arbitration agreements are permitted. Where the parties agree to arbitrate after a dispute arose, Awards would have to be explained and documents couldn’t be sealed. What’s the driver? Says a Factsheet issued by sponsor Sheldon Whitehouse (D-RI): “When claims affecting the broader public’s health and safety are arbitrated, it denies the public the opportunity to learn about the potential harms.” This bill deviates from the others in that it is prospective, applying to contracts entered into after enactment.
A New Strategy?
Notice how the bills overlap in scope and coverage? Some seek broad amendments to the FAA, which is in my view quite ambitious and doomed to failure. It seems to me the fallback is to target specific federal statutes as well, given that very clear and well-settled SCOTUS jurisprudence holds that the FAA will prevail over another federal statute unless the latter clearly and expressly prohibits arbitration. A prior example of this approach would be Dodd-Frank in 18 U.S.C. §1514A(e)(2), which specifically bars enforcement of predispute arbitration agreements for whistleblower claims asserted under Sarbanes-Oxley. I suspect that the Democrats’ strategy is to aim for amending the FAA, but fall back to targeted amendments to discrete federal laws. But, if the FAA is to be amended, here’s an idea: why not have an omnibus single bill containing all proposed FAA amendments instead of several different bills attempting this piecemeal? Just sayin’ …
What’s Ahead, IMHO?
Most if not all of these bills will pass the Democrat-controlled House. And most if not all will go nowhere in the Republican-controlled Senate. And if by some quirk a bill passes the Senate, the President will veto it with no chance of an override. The nonpartisan www.GovTrack.us Website rates the bills’ chances of enactment as between 2% and 10%, with most single-digit. As stated above, in my opinion the lone exception will be the Ending Forced Arbitration of Sexual Harassment Act, which I do think will eventually become law.
Just because almost all the anti-arbitration bills will not be enacted doesn’t mean the road to statutory oblivion will be smooth. How so? Rep. Jerrold Nadler (D-NY) now chairs the House Judiciary Committee and Rep. Maxine Waters (D-CA) the Financial Services Committee. There should be House hearings on these bills and on SEC and SRO oversight. In fact, the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets already had a March 14 hearing focused on the SEC’s proposed Regulation Best Interest (ed: covered elsewhere in this Alert). Also, look for the House to request Government Accountability Office examinations of FINRA, the SEC, and the financial services industry. And, I think the SEC may feel pressured to exercise its Dodd-Frank section 921 authority to at least study securities arbitration.
(ed: *Thanks, Prof! Looks like you can check off one of your predictions for 2019: “The Democrats in 2017 introduced several anti-arbitration bills that have predictably gone nowhere…. The bills will undoubtedly be reintroduced in the new Congress….” **We continue to think that retroactive nullification of existing PDAAs invites legal challenges based on the Constitution’s Takings Clause. ***We chafe at the underlying assumption that arbitration is a bad thing. ****Mr. Friedman is on the adjunct faculty at Fordham Law School and Chairman of the Board of Arbitration Resolution Services.)
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