Recent Developments in Arbitration Law Christopher Drahozal

Transcription

1 Recent Developments in Arbitration Law Christopher Drahozal May 19-20, 2016 University of Kansas School of Law

2 Recent Developments in Arbitration Law Christopher R. Drahozal * 1. Introduction: Use of Arbitration Clauses Arbitration clauses are widely used in many types of consumer contracts as well as some types of business contracts. See Tables 1 & 2. Arbitration clauses are not widely used in all types of business contracts; rather, use varies depending on the type of contract. For at least some types of consumer contracts, larger businesses are much more likely to use arbitration clauses than smaller businesses. For example, most credit card issuers do not use arbitration clauses. By comparison, until very recently, most credit card contracts included arbitration clauses. But in 2010, four large credit card issuers settled an antitrust suit by agreeing to remove the arbitration clauses in their credit card agreements for three-and-a-half years, and have not resumed using arbitration clauses even though the settlement period has expired. See Ross v. Bank of America, N.A., No. 05-cv-7116 (S.D.N.Y.). As a result, just over half of credit card agreements (measured by the dollar amount of credit card loans outstanding) now include arbitration clauses. Table 1. Use of Arbitration Clauses in Business Contracts % of contracts in sample Credit commitment domestic 2.0% Merger agreement domestic 19.0% CEO employment contract domestic 37.7% Licensing agreement domestic 24.3% Licensing agreement international 63.6% Joint venture agreement domestic 47.6% Joint venture agreement international 71.0% Sources: Theodore Eisenberg & Geoffrey P. Miller, The Flight from Arbitration: An Empirical Study of Ex Ante Arbitration Clauses in the Contracts of Publicly Held Companies, 56 DEPAUL L. REV. 335, 353 (2007); Christopher R. Drahozal & Stephen J. Ware, Why Do Businesses Use (or Not Use) Arbitration Clauses?, 25 OHIO ST. J. ON DISP. RESOL. 433, 466 (2010). Table 2. Use of Arbitration Clauses in Consumer Contracts % of companies % of market Credit cardholder agreement 15.8% 53.0% Checking account agreement 7.7% 44.4% Payday loan contract 83.7% 98.5% Cell phone contract 87.5% 99.9% Source: CFPB, Arbitration Study Report to Congress, pursuant to Dodd Frank Wall Street Reform and Consumer Protection Act 1028(a), at 8 (Mar. 2015), consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf. * John M. Rounds Professor of Law & Associate Dean for Research and Faculty Development, University of Kansas School of Law. I am serving as a Special Advisor to the Consumer Financial Protection Bureau (CFPB) on matters related to consumer financial services arbitration. The views stated here are my personal views and should not be attributed to the CFPB or the United States. 1

3 2. Recent Supreme Court Cases ** A. AT&T Mobility LLC v. Concepcion and American Express Cos. v. Italian Colors Restaurant 1. Background The highest profile and most controversial Supreme Court arbitration decisions in recent years involve the effect of arbitration clauses on the availability of class relief in court. Before discussing those decisions, a little background is necessary. An important reason businesses use arbitration clauses in at least some types of consumer contracts is to reduce their susceptibility to class actions. When consumers have agreed to arbitrate, they are not proper parties to class actions in court by definition, because they have agreed to arbitration instead. The Supreme Court s splintered decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), was seen by some as an endorsement of the use of class arbitration (class actions in arbitration) in lieu of class actions in court. The American Arbitration Association developed class arbitration rules and has administered several hundred class arbitrations since Bazzle. See AAA, Supplementary Rules for Class Arbitrations (Oct. 8, 2003). Businesses responded to the growth of class arbitration after Bazzle by increasingly including provisions in their arbitration clauses waiving the availability of class arbitration. The enforceability of those class arbitration waivers was challenged on two grounds. First, parties challenged class waivers as unconscionable under state contract law. Second, parties challenged class waivers as invalid because they precluded the effective vindication of federal statutory rights. 2. Concepcion & Italian Colors The Supreme Court sharply limited the use of unconscionability doctrine to invalidate arbitration clauses with class waivers in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 351 (2011). In Concepcion, the Court reversed a Ninth Circuit decision that had held an arbitration clause with a class waiver unconscionable under California law (based on the so-called Discover Bank rule), finding California law preempted by the FAA. The Court identified a number of ways in which class arbitration differs from bilateral arbitration: it sacrifices the principal advantage of arbitration its informality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment ; it requires procedural formality ; and it greatly increases risks to defendants. Id. at Because of these differences, the Court concluded that [r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA. Id. at 344. ** Portions of this section are adapted from the 2015 Update to CHRISTOPHER R. DRAHOZAL, COMMERCIAL ARBITRATION: CASES AND PROBLEMS (3d ed.) (2013), and from Christopher R. Drahozal, Class Arbitration in the United States, in CLASS & GROUP ACTIONS IN ARBITRATION (forthcoming 2016) (Dossier XIV: Proceedings of the 35th Annual Meeting of the ICC Institute of World Business Law). 2

4 Thereafter, the Supreme Court also limited the use of the effective vindication doctrine to invalidate arbitration clauses with class waivers in American Express Co. v. Italian Colors Restaurant, 133 S. Ct (2013). The plaintiffs in Italian Colors challenged the enforceability of the arbitration agreement (with class waiver) in their contract with American Express on the ground that litigating their antitrust claims would be too expensive without the ability to aggregate each (relatively small) individual claim in a class action. As a result, according to the plaintiffs, the arbitration clause precluded them from effectively vindicating their federal statutory rights under the Sherman Act. The Supreme Court rejected the claim, reasoning in important part that because class actions were not available when the Sherman Act was enacted, the lack of class relief could not deny plaintiffs the ability to effectively vindicate their federal statutory rights. Id. at 2311 ( [T]he individual suit that was considered adequate to assure effective vindication of a federal right before adoption of class-action procedures did not suddenly become ineffective vindication upon their adoption. ). Although the holding in Italian Colors was narrow, it has been applied more broadly such that at present the effective vindication doctrine is generally not available to challenge arbitration clauses with class waivers. 3. Open Questions A few arguments remain in play after Concepcion and Italian Colors for challenging arbitration clauses with class waivers. First, the California Supreme Court has held that the FAA does not preempt a state law that prohibits waiver of [Private Attorneys General Act] representative actions in an employment contract because the FAA s goal of promoting arbitration as a means of private dispute resolution does not preclude our legislature from deputizing employees to prosecute Labor Code violations on the state s behalf. Iskanian v. CLS Transport. L.A., LLC, 59 Cal. 4th 348, 360 (Cal. 2014), cert. denied, 135 S. Ct (2015). The U.S. Court of Appeals for the Ninth Circuit reached the same conclusion in Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425, 427 (9th Cir. 2015) ( After closely examining Concepcion and the Court's other statements regarding the purposes of the FAA, we conclude that the Iskanian rule does not stand as an obstacle to the accomplishment of the FAA's objectives, and is not preempted. ). Second, the National Labor Relations Board (NLRB) has concluded that an employer violates the National Labor Relations Act (NLRA) when it requires employees covered by the Act, as a condition of their employment, to sign an agreement that precludes them from filing joint, class, or collective claims addressing their wages, hours or other working conditions against the employer in any forum, arbitral or judicial ; such an agreement unlawfully restricts employees Section 7 right to engage in concerted action for mutual aid or protection, notwithstanding the Federal Arbitration Act (FAA), which generally makes employment-related arbitration agreements judicially enforceable. See, e.g., D.R. Horton, Inc., 357 N.L.R.B. No. 184 (2012); see also Murphy Oil USA, Inc., 361 N.L.R.B. No. 720 (2014) (reaffirming decision in D.R. Horton). But every court of appeals to have reviewed the NLRB s decision has rejected its interpretation. See Murphy Oil USA, Inc. v. N.L.R.B., 808 F.3d 1013, 1018 (5th Cir. 2015) (granting petition for review in part); D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344, 361 (5th Cir. 3

5 2013) (granting petition for review); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n. 8 (2d Cir. 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, (8th Cir. 2013); see also Bell v. Ryan Transp. Serv., Inc., 2016 WL , at *8 (D. Kan. Mar. 31, 2016) (Lungstrum, J.) ( The court firmly believes that the Tenth Circuit, if faced with this issue, would similarly reject the Board's decision in D.R. Horton. ). B. BG Group PLC v. Republic of Argentina In BG Group PLC v. Republic of Argentina, the Supreme Court addressed the question whether, [i]n disputes involving a multi-staged dispute resolution process, does a court or instead the arbitrator determine whether a precondition to arbitration has been satisfied? Petn. for Certiorari, at i, BG Group PLC v. Republic of Argentina (July 27, 2012) (No ). Multistep dispute resolution clauses which require parties to negotiate or mediate before they can go to arbitration are increasingly common. BG group involved a less common form of multi-staged dispute resolution process : a bilateral investment treaty (BIT) that required a party to litigate for 18 months before proceeding to arbitration. The D.C. Circuit had held that a court, rather than the arbitrators, should determine whether the condition precedent in the treaty had been satisfied. Republic of Argentina v. BG Group PLC, 665 F.3d 1363, 1373 (D.C. Cir. 2012). The Supreme Court reversed, finding the local litigation requirement [to be] highly analogous to procedural provisions that this Court ha[s] found are for arbitrators, not courts, primarily to interpret and to apply and concluding that the fact that the case involved an investment treaty did not change that usual result. BG Group PLC v. Republic of Argentina, 134 S. Ct. 1198, (2014) (citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002)). C. DIRECTV v. Imburgia At issue in DIRECTV v. Imburgia was a provision in DirecTV s arbitration clause, which provided that [i]f, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable. Imburgia v. DIRECTV, Inc., 225 Cal. App. 4th 338, 341 (Cal. App. 2014). The California Court of Appeal, in decision that conflicted with one by the Ninth Circuit, held that the law of your state referred to California law (as stated in Discover Bank) to the exclusion of preemptive federal law (as stated in Concepcion). See id. at As a general matter, the interpretation of contract provisions, including arbitration clauses, presents an issue of state law. The question in Imburgia was whether the California court s interpretation was preempted by the FAA. In an opinion by Justice Breyer, the U.S. Supreme Court held that it was, explaining: [T]he underlying question of contract law at the time the Court of Appeal made its decision was whether the law of your state included invalid California law. We must now decide whether answering that question in the affirmative is consistent with the Federal Arbitration Act. After examining the grounds upon which the 4

6 Court of Appeal rested its decision, we conclude that California courts would not interpret contracts other than arbitration contracts the same way. DIRECTV v. Imburgia, 136 S. Ct. 463, 469 (2015). As a result, according to the Court, California's interpretation of the phrase law of your state does not place arbitration contracts on equal footing with all other contracts, and so is pre-empted by the Federal Arbitration Act. Id. at 471 (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006)). D. MHN Government Services, Inc. v. Zaborowski On October 1, 2015, the Supreme Court granted certiorari in MHN Government Services, Inc. v. Zaborowski, a case on review from an unpublished Ninth Circuit opinion. In Zaborowski, the petitioner contended that California applies one rule of contract severability to contracts in general, and a separate rule of contract severability to agreements to arbitrate ; the question presented for review by the Supreme Court was whether California s arbitration-only severability rule is preempted by the FAA. Petition for Certiorari, MHN Govt. Servs., Inc. v. Zaborowski, at i (June 10, 2015) (No ). Before the case was argued, however, the parties settled and the case was removed from the Court s argument calendar. Ronald Mann, February Argument Calendar Loses Arbitration Case to Settlement, ScotusBlog.com (Jan. 7, 2016), 3. Legislative and Regulatory Developments A. Proposed Legislation On February 4, 2016, Senator Leahy introduced into Congress the Restoring Statutory Rights and Interests of the States Act of 2016 (reprinted in full in Appendix A). The proposed Act provides that section 2 of the FAA, which makes arbitration agreements valid, irrevocable, and enforceable, shall not apply to a written provision that requires arbitration of a claim for damages or injunctive relief brought by an individual or small business concern (as defined in section 3 of the Small Business Act (15 U.S.C. 632)), in either an individual or representative capacity, arising from the alleged violation of a Federal or State statute, the Constitution of the United States, or a constitution of a State, unless the written agreement to arbitrate is entered into by both parties after the claim has arisen and pertains solely to an existing claim. Id. 3(a)(2). The proposed Act is a variation on the Arbitration Fairness Act, which in its most recent version provided that no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment dispute, consumer dispute, antitrust dispute, or civil rights dispute. H.R. 2087, 114th Cong., 3 (2015). The Arbitration Fairness Act has been introduced into Congress in various forms at least since

7 Given the current political environment in Congress, neither bill is likely to be enacted. If, however, the Democrats were to take control of both the House and the Senate after the elections this fall, and, of course, a Democrat were elected President, the prospects for the bill would certainly improve. B. Executive Order 13673: Fair Pay and Safe Workplaces On July 31, 2014, President Obama issued Executive Order 13673, Fair Pay and Safe Workplaces. Section 6(a) of the Executive Order provides that: Agencies shall ensure that for all contracts where the estimated value of the supplies acquired and services required exceeds $1 million, provisions in solicitations and clauses in contracts shall provide that contractors agree that the decision to arbitrate claims arising under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment may only be made with the voluntary consent of employees or independent contractors after such disputes arise. Agencies shall also require that contractors incorporate this same requirement into subcontracts where the estimated value of the supplies acquired and services required exceeds $1 million. The Executive Order excluded from its application contracts or subcontracts for the acquisition of commercial items or commercially available off-the-shelf items and employees who are covered by any type of collective bargaining agreement negotiated between the contractor and a labor organization representing them. Id. 6(b) & (c)(i). For proposed regulations to implement Executive Order 13673, see Notice of Proposed Rulemaking, Federal Acquisition Regulation; Fair Pay and Safe Workplaces, 80 Fed. Reg (May 28, 2015) (FAR Case ). The Executive Order is an extension to all federal contracts of the so-called Franken Amendment, which provides the following for defense contracts: (a) None of the funds appropriated or otherwise made available by this Act may be expended for any Federal contract for an amount in excess of $1,000,000 that is awarded more than 60 days after the effective date of this Act, unless the contractor agrees not to: (1) enter into any agreement with any of its employees or independent contractors that requires, as a condition of employment, that the employee or independent contractor agree to resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention; or 6

8 (2) take any action to enforce any provision of an existing agreement with an employee or independent contractor that mandates that the employee or independent contractor resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention. Department of Defense Appropriations Act, 2010, Pub. L. No , 8116 (2009). For regulations implementing the Franken Amendment, see 48 C.F.R C. Proposed and Adopted Regulations 1. Consumer Financial Protection Bureau: Consumer Financial Services Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Consumer Financial Protection Bureau (CFPB) to study the use of arbitration clauses in consumer financial services contracts. Pub. L. No , 1028(a) (2010). In March 2015, the Bureau issued its final report to Congress of the results of its study. See CFPB, Arbitration Study Report to Congress, pursuant to Dodd Frank Wall Street Reform and Consumer Protection Act 1028(a) (Mar. 2015), cfpb_arbitration-study-report-to-congress-2015.pdf. Among the study s findings on arbitration clauses and proceedings were the following: In the credit card market, larger bank issuers are more likely to include arbitration clauses than smaller bank issuers and credit unions. As a result, while less than 16% of issuers include such clauses in their consumer credit card contracts, just over 50% of credit card loans outstanding are subject to them. Nearly all the arbitration clauses studied include provisions stating that arbitration may not proceed on a class basis. Across each product market, % of the contracts with arbitration clauses covering close to 100% of market share subject to arbitration in the six product markets studied include such no-class arbitration provisions. The [American Arbitration Association (AAA)] is the predominant arbitration administrator for all the consumer financial products we examined in the study. Most arbitration clauses contained provisions that have the effect of capping consumers upfront arbitration costs at or below the AAA s maximum consumer fee thresholds. From 2010 through 2012, an average of 616 individual AAA cases were filed per year for six product markets combined: credit card; checking account/debit cards; payday loans; prepaid cards; private student loans; and auto loans. 7

9 Almost all of the arbitration proceedings involved companies with repeat experience in the forum. And when consumers had counsel, counsel was generally a repeat player in arbitration. Of the 1,060 arbitration cases filed in 2010 and 2011, so far as we could determine, arbitrators issued decisions in just under 33%. In approximately 25%, the record reflects that the parties reached a settlement. The remaining cases ended in an unknown manner or were technically pending but dormant as of early Of the 341 cases filed in 2010 and 2011 that were resolved by an arbitrator and where we were able to ascertain the outcome, consumers obtained relief regarding their affirmative claims in 32 disputes. Consumers obtained debt forbearance in 46 cases (in five of which the consumers also obtained affirmative relief). The total amount of affirmative relief awarded was $172,433 and total debt forbearance was $189,107. Of the 244 cases in which companies made claims or counterclaims that were resolved by arbitrators in a manner that we were able to determine, companies obtained relief in 227 disputes. The total amount of such relief was $2,806,662. Id. at The Bureau also studied individual and class litigation in consumer financial services cases, compared public and private enforcement actions, and found no statistically significant evidence of an increase in prices among those companies that dropped their arbitration clauses and thus increased their exposure to class action litigation risk. Id. at Thereafter, in connection with its small business review process, the Bureau released an outline of proposals it was considering for a potential rulemaking dealing with arbitration agreements in consumer financial services contracts. See CFPB, Small Business Advisory Review Panel for Potential Rulemaking on Arbitration Agreements: Outline of Proposals Under Consideration and Alternatives Considered (Oct. 7, 2015), available at consumerfinance.gov/f/201510_cfpb_small-business-review-panel-packet-explaining-theproposal-under-consideration.pdf. The proposal would require: (1) any arbitration agreement within the scope of the rule to provide explicitly that the arbitration agreement is inapplicable to cases filed in court on behalf of a class unless and until class certification is denied or the class claims are dismissed, id. at 17; and (2) businesses subject to the rule and that use arbitration agreements in their contracts with consumers to submit initial claim filings and written awards in consumer finance arbitration proceedings to the Bureau, which in turn would monitor the materials and possibly make them public, id. at 20. The Bureau has held the meetings required by the small business review process. The next step, if the Bureau decides to proceed with a rule, is for it to issue a Notice of Proposed Rulemaking. 8

10 2. Department of Education: Higher Education Institutions In September 2015, the U.S. Department of Education began a negotiated rulemaking to clarify how Direct Loan borrowers who believe they have been defrauded by their institutions can seek relief and strengthen provisions to hold colleges accountable for their wrongdoing. See U.S. Dep t of Education, U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions (Mar. 11, 2016), available at Prior to the third and final negotiating session, the Department of Education released a proposal that would restrict the use of arbitration clauses by schools participating in the Direct Loan program (meaning that eligible students at the school may receive Direct Loans ). U.S. Dep t of Education, Negotiated Rulemaking for Higher Education, Issue Paper 5, at (Session 3: Mar.16-18, 2016), available at Option A in the proposal would (1) require the school to notify the Department of Education whenever a claim is asserted against it, either in court or in arbitration, based on any act or omission of the school attended by the student that relates to the making of a Federal loan or the provision of educational services financed by that loan, and submit copies of any filings in the case to the Department; (2) preclude the school from compelling through the use of predispute mandatory arbitration agreements or any other means, arbitration of any such claims asserted by students in cases filed in a court on behalf of a class unless and until class certification is denied or the class claims are dismissed ; and (3) regulate the arbitration process (specifying, for example, that the borrower must be able to appear in person or electronically in any arbitration hearing, any hearing must be open to the public and reported and transcribed, the borrower must be able to speak publicly about the dispute and the arbitration (except for any settlement terms), and consolidation of related cases must be permitted. Id. at 15 (Option A for (a)(11)). Option B is simpler but more far reaching. It provides that for any claim related to the making of a student loan or the provision of educational services : (i) The claim may only be arbitrated with the student s consent after the claim arises; (ii) The school will not prohibit students from asserting any such claim in cases filed in a court on behalf of a class; and (iii) The school will notify the Secretary upon the submission of and submit copies of any initial filings and decisions for such claim whether filed in court or in arbitration. Id. at 16 (Option B for (a)(11)) 3. Department of Health and Human Services: Long-Term Care Facilities On July 16, 2015, the Department of Health and Human Services issued a notice of proposed rulemaking for long-term care facilities. Notice of Proposed Rulemaking, Reform of Requirements for Long Term Care Facilities, 80 Fed. Reg (July 16, 2015) (CMS 9

11 3260 P). Included is a proposed rule that restricts the enforceability of pre-dispute arbitration agreements in various respects. See id. (setting out proposed 42 C.F.R (n)). Under the proposed rule, when a long-term care facility enters into an arbitration agreement with residents, it must ensure that: (i) The agreement is explained to the resident in a form and manner that he or she understands, including in a language the resident understands, and (ii) The resident acknowledges that he or she understands the agreement. Id (n)(1). The resident must enter into the agreement voluntarily and [a]dmission to the facility must not be contingent upon the resident or the resident representative signing a binding arbitration agreement. Id (n)(2) & (3). The agreement itself must [p]rovide for the selection of a neutral arbiter and a venue convenient to both parties, id (n)(2), and [t]he agreement must not contain any language that prohibits or discourages the resident or anyone else from communicating with Federal, State, or local officials, id (n)(4). Finally, the arbitration agreement may be signed by someone other than the resident if (i) Allowed by state law; (ii) All of the requirements in this section are met; and (iii) That individual has no interest in the facility. Id (n)(5) HHS identified the concern[s] supporting its proposed rule as follows: (1) the facilities superior bargaining power could result in a resident feeling coerced into signing the agreement ; (2) if the agreement is not explained to the resident, he or she may be waiving an important right, the right to judicial relief, without fully understanding what he or she is waiving ; and (3) the increasing prevalence of these agreements could be detrimental to residents health and safety and may create barriers for surveyors and other responsible parties to obtain information related to serious quality of care issues. 80 Fed. Reg. at Department of Defense and the Military Lending Act The Military Lending Act (MLA) provides that [i]t shall be unlawful for any creditor to extend consumer credit to a covered member or a dependent of such a member with respect to which... the creditor requires the borrower to submit to arbitration or imposes onerous legal notice provisions in the case of a dispute. 10 U.S.C. 987(e)(3); see also id. 987(f)(4) ( Notwithstanding section 2 of title 9, or any other Federal or State law, rule, or regulation, no agreement to arbitrate any dispute involving the extension of consumer credit shall be enforceable against any covered member or dependent of such a member, or any person who was a covered member or dependent of that member when the agreement was made. ). When first implemented by the Department of Defense, the MLA applied to a relatively narrow group of consumer credit products: certain payday loans, auto title loans, and tax refund anticipation loans. By final rule dated July 22, 2015, the Department of Defense expanded the definition of consumer credit so that it now reaches much more broadly, as explained by the Consumer Financial Protection Bureau (responsible, in part, for enforcing the MLA): The final rule announced today amends the definition of consumer credit covered by the regulation to more closely align with the broad, traditional definition of credit covered by the Truth in Lending Act. The rule generally covers consumer credit offered or extended to active-duty servicemembers or 10

12 their dependents, as long as the credit is subject to a finance charge or payable by written agreement in more than four installments. In accordance with the statute, the MLA regulation would continue to exclude residential mortgages and credit extended to finance the purchase of, and secured by, personal property, such as vehicle purchase loans. CFPB, CFPB Statement on Department of Defense Military Lending Act Final Rule (July 21, 2015), available at see 32 C.F.R (f)(1) ( Consumer credit means credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is: (i) Subject to a finance charge; or (ii) Payable by a written agreement in more than four installments. ). See generally Final Rule, Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 80 Fed. Reg (July 22, 2015) (DOD-2013-OS-0133). 5. Federal Trade Commission and the Magnuson-Moss Warranty Act Section 2310(a)(3) of the Magnuson-Moss Warranty Act permits warrantors of consumer products to require in their written warranties that consumers resort to an informal dispute resolution procedure before filing suit in court. 15 U.S.C. 2310(a)(3). In 2015, the Federal Trade Commission reiterated its interpretation of Magnuson-Moss as precluding warrantors from including binding arbitration clauses in written warranties, despite several rulings by courts of appeals rejecting that interpretation. Final Action Concerning Review of Interpretations of Magnuson-Moss Warranty Act, 80 Fed. Reg (July 20, 2015) (RIN 3084-AB24) ( [T]he Commission reaffirms its long-held view that the MMWA disfavors and authorizes the Commission to prohibit, mandatory binding arbitration in warranties. ). But see Walton v. Rose Mobile Homes, LLC, 298 F.3d 470, 478 (5th Cir. 2002) ( We therefore hold that the text, legislative history, and purpose of the MMWA do not evince a congressional intent to bar arbitration of MMWA written warranty claims. ); Davis v. Southern Energy Homes, Inc., 305 F.3d 1268, 1280 (11th Cir. 2002) ( After a thorough review of the MMWA and the FAA, combined with the strong federal policy favoring arbitration, we hold that written warranty claims arising under the Magnuson Moss Warranty Act may be subject to valid binding arbitration agreements. ). The only court of appeals decision consistent with the FTC s interpretation, Kolev v. Euromotors West/The Auto Gallery, 658 F.3d 1024 (9th Cir. 2011), was later withdrawn by the Ninth Circuit, 676 F.3d 867 (9th Cir. 2012). 6. Department of Agriculture and the 2008 Farm Bill Section 210(a) of the Food, Conservation, and Energy Act of 2008, Pub. L. No (2008) (the 2008 Farm Bill ) provides that [a]ny livestock or poultry contract that contains a provision requiring the use of arbitration to resolve any controversy that may arise under the contract shall contain a provision that allows a producer or grower, prior to entering the contract to decline to be bound by the arbitration provision. 7 U.S.C. 197c(a); see also id. 197c(b) (requiring conspicuous disclosure of the right of the contract producer or grower, prior to 11

13 entering the contract, to decline the requirement to use arbitration ). The 2008 Farm Bill also directed the Secretary of Agriculture to adopt regulations both to carry out this section and to establish criteria that the Secretary will consider in determining whether the arbitration process provided in a contract provides a meaningful opportunity for the grower or producer to participate fully in the arbitration process. Id. 197c(f). The U.S. Department of Agriculture (USDA) issued a final rule implementing these provisions on December 9, See Implementation of Regulations Required Under Title XI of the Food, Conservation and Energy Act of 2008, 76 Fed. Reg , (Dec. 9, 2011). The final rule specifies the following contract language that must appear on the signature page of the contract in bold conspicuous print : Right to Decline Arbitration. A poultry grower, livestock producer or swine production contract grower has the right to decline to be bound by the arbitration provisions set forth in this agreement. A poultry grower, livestock producer or swine production contract grower shall indicate whether or not it desires to be bound by the arbitration provisions by signing one of the following statements; failure to choose an option will be treated as if the poultry grower, livestock producer or swine production contract grower declined to be bound by the arbitration provisions set forth in this Agreement: I decline to be bound by the arbitration provisions set forth in this Agreement I accept the arbitration provisions as set forth in this Agreement 9 C.F.R (emphasis added). The rule also sets out various non-exclusive criteria that the USDA may consider when determining whether the arbitration process provided in a production contract provides a meaningful opportunity to participate fully in the arbitration process, including (1) whether the contract conspicuously discloses the costs of arbitration and any limitations on legal rights and remedies ; (2) whether the cost provisions and time limits for the arbitration process are reasonable ; (3) whether reasonable discovery is available; (4) [w]hether arbitration is required to be used to resolve only disputes relevant to the contractual obligations of the parties ; and (5) whether the arbitrator must issue a reasoned, written opinion based on applicable law, legal principles and precedent. Id (b). 12

14 Appendix A RESTORING STATUTORY RIGHTS AND INTERESTS OF THE STATES ACT OF 2016 S To restore statutory rights to the people of the United States from forced arbitration. IN THE SENATE OF THE UNITED STATES FEBRUARY 4, 2016 Mr. LEAHY (for himself, Mr. FRANKEN, Mr. BLUMENTHAL, Mr. DURBIN, and Mr. WHITEHOUSE) introduced the following bill; which was read twice and referred to the Committee on the Judiciary A BILL To restore statutory rights to the people of the United States from forced arbitration. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, SECTION 1. SHORT TITLE. This Act may be cited as the Restoring Statutory Rights and Interests of the States Act of SEC. 2. FINDINGS AND INTENT. (a) FINDINGS. Congress finds the following: (1) Chapter 1 of title 9, United States Code (commonly known as the Federal Arbitration Act ), represented an exercise of legislative power that required courts to recognize private voluntary agreements to arbitrate commercial disputes at a time when the courts were refusing to do so on grounds that arbitration represented a usurpation of the authority of the courts to resolve legal disputes. (2) The Federal Arbitration Act did not, and should not have been interpreted to, supplant or nullify the legislatively created rights and remedies which Congress, exercising its power under article I of the Constitution of the United States, has granted to the people of the United States for resolving disputes in State and Federal courts. (3) Recent court decisions, including AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) and American Express Co. v. Italian Colors Restaurant, 133 S. Ct (June 20, 2013), have interpreted the Federal Arbitration Act to broadly preempt rights and 13

15 remedies established under substantive State and Federal law. As a result, these decisions have enabled business entities to avoid or nullify legal duties created by congressional enactment, resulting in millions of people in the United States being unable to vindicate their rights in State and Federal courts. (4) States have a compelling interest in enacting rights and remedies to protect the welfare of their citizens, and the Federal Arbitration Act should not be, and should not have been, interpreted to preempt State legislation that enacted rights and remedies to protect the welfare of their citizens. (b) INTENT OF CONGRESS. In enacting this Act, it is the intent of Congress (1) to restate and reinstitute the primacy of congressional and State legislative bodies as the creators of the rights and remedies available to all the people of the United States; (2) to clarify that congressionally established rights and remedies may not be waived prior to the institution of a dispute by the party intended to be protected by such statute; and (3) to reinstate and reaffirm existing rights and remedies of the people of the United States enacted since the enactment of the Federal Arbitration Act regarding access to the courts that have, or may have been, abrogated or diminished. SEC. 3. ARBITRATION OF FEDERAL STATUTORY CAUSES OF ACTION. (a) ADJUDICATION OF FEDERAL STATUTORY RIGHTS OF ACTION. Section 2 of title 9, United States Code, is amended (1) by striking A written and inserting (a) IN GENERAL. Except as provided in subsection (b), a written ; and (2) by adding at the end the following: (b) EXCEPTION. Subsection (a) shall not apply to a written provision that requires arbitration of a claim for damages or injunctive relief brought by an individual or small business concern (as defined in section 3 of the Small Business Act (15 U.S.C. 632)), in either an individual or representative capacity, arising from the alleged violation of a Federal or State statute, the Constitution of the United States, or a constitution of a State, unless the written agreement to arbitrate is entered into by both parties after the claim has arisen and pertains solely to an existing claim. (c) INTERACTION WITH STATE LAW. For purposes of subsection (a), the phrase grounds as exist at law or in equity for the revocation of a contract shall include a Federal or State statute, or the finding of a Federal or State court, that prohibits the agreement to arbitrate on grounds that the agreement is unconscionable, invalid because 14

16 there was no meeting of the minds, or otherwise unenforceable as a matter of contract law or public policy. (d) VALIDITY AND ENFORCEABILITY. A determination as to whether this chapter applies to an agreement to arbitrate shall be made by a court, rather than an arbitrator, irrespective of whether the party resisting arbitration challenges the agreement to arbitrate specifically or in conjunction with other terms of the contract containing such agreement.. SEC. 4. VACATING AN AWARD MADE IN VIOLATION OF SECTION 2 OF TITLE 9, UNITED STATES CODE. Section 10(a) of title 9, United States Code, is amended (1) in paragraph (3), by striking or at the end; (2) in paragraph (4), by striking the period at the end and inserting ; or ; and (3) by adding at the end the following: (5) where the arbitration took place in violation of section 2.. SEC. 5. EFFECTIVE DATE. This Act, and the amendments made by this Act, shall take effect on the date of enactment of this Act and shall apply with respect to any dispute or claim that arises on or after such date of enactment. 15