Proposed Arbitration Fairness Act Would Ban Pre-Dispute Arbitration Clauses in Consumer Contracts

By: Andrew C. Glass, Robert W. Sparkes, III, Roger L. Smerage, Eric W. Lee

Two members of Congress are seeking to expand the reach of a federal ban on pre-dispute arbitration agreements to cover nearly all consumer contracts. The proposed legislation would have a widespread effect, barring the use of pre-dispute arbitration provisions in credit card agreements, auto loan agreements, wireless telephone service contracts, and many other types of consumer-facing agreements that often contain such provisions.

Two members of Congress are seeking to expand the reach of a federal ban on pre-dispute arbitration agreements to cover nearly all consumer contracts. The proposed legislation would have a widespread effect, barring the use of pre-dispute arbitration provisions in credit card agreements, auto loan agreements, wireless telephone service contracts, and many other types of consumer-facing agreements that often contain such provisions.

On April 29, 2015, Senator Al Franken (D-Minnesota) and Representative Hank Johnson (D-Georgia) introduced the Arbitration Fairness Act of 2015 (“AFA”) (S. 1133; H.R. 2087). The proposed legislation would amend the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq. (“FAA”), to prohibit parties from entering into agreements to arbitrate consumer disputes in advance of a dispute arising. The bar on pre-dispute arbitration agreements would also apply in the context of employer, antitrust, and civil rights disputes.

The AFA would not prevent parties from entering into an arbitration agreement after a dispute arises. Yet, pre-dispute agreements are often seen as an efficient way to manage risk on a business-wide basis, something that post-dispute agreements cannot do. And, while the AFA would not expressly seek to prohibit pre-dispute arbitration clauses in business-to-business agreements or in collective bargaining agreements (in fact, the bill contains a safe-harbor for the latter), it could potentially be read as rendering void any pre-dispute arbitration agreement, regardless of its context, that potentially applies to consumer disputes, even if the agreement was not intended to be used in a consumer-contract setting.

Federal law currently prohibits pre-dispute arbitration agreements only in certain narrow contexts. For example, in 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress amended the federal Truth-in-Lending Act to prohibit the use of pre-dispute arbitration provisions in residential mortgage contracts and home equity line of credit (HELOC) agreements. See 15 U.S.C. § 1639c(e)(1). The AFA would expand these existing prohibitions by amending the FAA itself, adding a new chapter to the FAA with the ban.

The AFA is the third effort in recent years to expand the prohibition against pre-dispute arbitration agreements. In 2011, Senator Richard Blumenthal (D-Connecticut), Senator Sheldon Whitehouse (D-Rhode Island), and Senator Franken sponsored the Consumer Mobile Fairness Act of 2011 (S. 1652), which would have prohibited pre-dispute arbitration agreements between individuals and providers of wireless services or mobile broadband internet access. And, in 2013, Senator Franken led a group of senators who introduced the Arbitration Fairness Act of 2013 (S. 878), the text of which is substantively identical to the newly proposed legislation. Both prior bills were referred to the Judiciary Committee where hearings were held, but neither was reported out of committee.

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