Arbitration Double Standards

A case out of the Third Circuit demonstrates the frustration that many of us have with the current state of consumer arbitration law. The consumer had purchased a Dell computer that he alleged had design flaws leading to repeated failure of his motherboard. After Dell refused to fix the computer a third time, he brought a class action against Dell for the alleged design defects.

Dell invoked an arbitration clause which read that any dispute "SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF)." This clause was found in "clickware," that is an agreement to which the consumer agreed by checking a box on Dell's web site when he purchased the computer. The capital letters were in the original agreement, presumably to make this language stand out due to its importance. As many readers of this blog will quickly pick up, there is a problem with this language -- because of abuses the National Arbitration Forum agreed to a consent judgment where it would no longer administer consumer arbitrations.

This case should have been easy. Dell offered its customer a "take it or leave it" form contract that Dell drafted. In that contract, Dell specified an arbitral forum that had to stop doing consumer arbitrations because of its abusive practices toward consumers. In its own contract language, Dell made clear that any dispute had to be resolved "exclusively" by the National Arbitration Forum. Because Dell's own contractual language fails to bind the consumer given the unavailability of the National Arbitration Forum, the consumer is not required to bring his claim in arbitration. In dissent, Judge Sloviter makes similar points. The lower court in this case also came to this conclusion.

The majority of the appellate court, however, sets up an outcome where Dell wins where the coin comes up heads and where the consumer loses when the coin comes up tails. The court notes that the word "exclusively" in the arbitration clause could be read to modify "binding arbitration" rather than the forum where the arbitration occurs. Well, I suppose that language could be read that way, but we normally do not go out of our way to construe an ambiguity in favor of the drafter, especially in a consumer form contract.

The majority also makes much of section 5 of the Federal Arbitration Act, but it makes the same mistake that many of my students make coming out of a first-year law school curriculum that is heavy in case analysis. The majority spends a lot of time talking about what courts say about section 5, literally relegating the actual language of section 5 to a footnote (the underlining is mine):

If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator, or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator.

Section 5 could be read to allow the court to name an arbitrator on these sorts of facts which, in fairness to the court majority, some courts have done. But, there are at least two questions raised by such an interpretation. On the facts of this case, is there a "lapse in the naming of an arbitrator?" Second, is the National Arbitration Forum even an "arbitrator" within the meaning of the statute. The NAF is an arbitral forum, and the language of the statute as a whole suggests that, where it says "arbitrator," it means the actual human being who will conduct the arbitration. Here, the problem was not a lapse in naming an "arbitrator" but the unavailability of the organization designated to administer the arbitration as chosen by the parties to the contract.

Fair-minded people might see contractual and statutory arguments going both ways, and the majority admits as much. Thus, the majority rests heavily on what we might call a "tie breaker," and it is here where my frustration lies. In reaching its decision, the majority makes six references to the "federal policy favoring arbitration." This seemingly high-minded policy is not exactly a neutral principle. A policy "favoring arbitration" necessarily favors big corporate interests over consumers. It is a policy that is hostile to consumer claims and to class actions. Maybe the court wants to be hostile to such claims, but it is dishonest to dress it up as a neutral appeal to preferring arbitration. One also might wonder where this "policy" comes from such that the court would not be wiser sticking to the "policy" articulated by Congress in the words of the statute.

The application of this so-called policy becomes a "heads I win, tails you lose" rule. When companies get the arbitration clause correct, they can ask the courts to enforce the clause as written. When companies overreach and offer arbitration clauses with enforceabillity issues, they can ask the courts to fix their mistake, construing the clause or law to require arbitration nonetheless. In their extreme application, these principles can undermine public confidence in the courts to treat all parties equally.