Agreed, very well: a fair warning to the defendant companies to make sure to quickly lift the arbitration clause, under penalty of losing its protection. But the Morgan case must be placed in context. These days, clauses are everywhere – and under fire.
A consumer cannot buy a product or service online without having given his consent. They are increasingly common in employment contracts. And these days, cases involving arbitration clauses almost always stem from “adhesive” contracts, where the employee who wants the work or the consumer who wants the product has no choice but to accept the terms written by the company. The Mandatory Arbitration Clause may be buried deep in the boilerplate that even professors don’t read contracts before clicking “I Agree”, but it’s still valid, as long as the user is made clear that the conditions exist and the click will create a contract. (The user can escape if the notice is too discreet.)
Activists hate what they see as “discriminatory” provisions that disproportionately hurt low-income people. Critics of binding arbitration argue that it’s bad for employees and consumers. Others strongly dispute this assertion. At the very least, one must admit that the proof is complex. Although I understand what motivates the critics, I am a bit of a tramp myself; I think clauses have pros and cons, and they exist to solve a real problem.
In 1924, jurist Edwin W. Patterson coined the term “legal risk” to refer to the uncertainty of how a court might apply existing law to a given set of facts. If a company can’t predict whether a jury will award $100,000 or $10 million in the event of an accident, it’s hard to decide how much to invest in precautions. Patterson argued that companies need legal tools to manage uncertainty. Over the years, these tools have included everything from explicit warnings to limited warranties.
Since the turn of the 20th century, another key tool has been a binding arbitration clause, authorized by Congress in the Federal Arbitration Act, which was passed the year after Patterson’s paper appeared. When parties agree to arbitrate their disputes, they waive the right to sue. Except in rare circumstances, they also waive their right to appeal the referee’s judgment. In recent years, the Supreme Court has repeatedly ruled that the law enforces clauses prohibiting litigation – a trend for which judges have come under heavy criticism.
Once an arbitration clause is understood as a legal risk management device, it is easy to see that without such a clause, the business faces greater uncertainty. This uncertainty, in turn, will likely be built into the contract: a slightly lower wage for the employee, a slightly higher price for consumers. If wages or prices prove to be too rigid, the company may try to “reprice” other contract terms to provide some additional risk protection.
None of this means that mandatory arbitration is good, especially when it’s buried in the boilerplate. Perhaps the costs of reducing clause ubiquity are worth bearing. But these costs exist.
The edifice of binding arbitration has now existed for decades, but even before the Court’s decision in Morgan v. Sundance, there had been considerable erosion. In March, President Biden signed into law a ban on the application of mandatory arbitration clauses in cases alleging sexual harassment, aligning the federal policy with rules already adopted in many states. It should be noted that the concern crossed the political spectrum. The tally in the House of Representatives was 335-97; the Senate passed the measure by voice vote.
Later that same month, the House passed legislation that would ban clauses from most labor and consumer contracts. Although at present the bill’s prospects in the Senate look bleak, the winds of change are blowing. It would take a foolish undertaking indeed to ignore the direction of the gusts.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Stephen L. Carter is a Bloomberg Opinion columnist. A law professor at Yale University, he is the author, most recently, of “Invisible: the story of the black lawyer who shot down America’s most powerful gangster”.
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