Professor calls for centrist approach to arbitration against citizens

Tuesday, October 06, 2015

LAWRENCE — In the wake of the 2008 financial crisis and subsequent call for Wall Street reform, Congress enacted the Dodd-Frank Act, which created a new federal agency, the Consumer Financial Protection Bureau. Among the CFPB’s charges is to consider new rules on the often-controversial business practice of arbitration clauses in consumer contracts. While such consumer arbitration agreements divide judges, legislators and interest groups along predictable political lines (progressive vs. conservative), a University of Kansas law professor argues in a new article that a centrist approach makes more sense.

The article, forthcoming in the Harvard Journal on Legislation, is titled “The Politics of Arbitration Law and Centrist Proposals for Reform.” Its author, Professor Stephen Ware, has also been invited by the CFPB to participate in its field hearing Wednesday, Oct. 7, in Denver.

Ware’s forthcoming article proposes centrist reforms for law regarding “adhesion contracts,” the agreements that businesses present as “take it or leave it” to consumers.

“Although some contracts are the result of negotiated drafting by two parties represented by lawyers, most contracts that individuals have are adhesion contracts, drafted by businesses, and the individual simply decides whether or not to consent,” Ware said.

Many of these consumer adhesion contracts now have clauses providing that disputes will be resolved in arbitration rather than litigation.

These “adhesive arbitration clauses” in consumer contracts are at the center of a variety of hotly contested legal issues that are much more controversial than the issues raised by arbitration agreements between businesses.

The conservative approach is to stay with the status quo established by the 1925 Federal Arbitration Act and broad interpretations of that act by the Supreme Court. Some of these broad interpretations were made by the Supreme Court’s five justices appointed by Republican presidents over dissenting votes from the court’s four justices appointed by Democratic presidents. A particularly key 5-4 decision interpreted the Federal Arbitration Act to pre-empt states’ efforts to preserve consumer class actions from adhesive arbitration clauses prohibiting such lawsuits.

At the other end of the political spectrum are those who would simply ban all arbitration clauses in consumer contracts. This approach, advocated by many progressives, is contained in a bill supported by most congressional Democrats. While enactment of that bill is unlikely while Republicans control Congress, the CFPB already has the power to ban all arbitration clauses in an important category of consumer contracts — financial services, such as credit cards, checking accounts and payday loans. So, Ware says, “the action has shifted now from Congress to the CFPB.”

Ware’s article goes beyond proposing reforms to offer the CFPB drafting specifics — the language of a rule — with which the CFPB could enact into law the reforms he proposes.

In between the conservative status quo of broadly enforcing consumer arbitration clauses and the progressive approach of banning them entirely, Ware advocates an intermediate position. It rests on the principle that “adhesive arbitration agreements should be treated like other adhesion contracts,” Ware said. “This approach, which I’ve been developing incrementally in a series of articles for over 20 years, is for courts to enforce consumer arbitration clauses unless one of three exceptions applies.”

Exceptions Ware calls for:

  • When a party to the contract argues the contract containing the arbitration clause was induced by fraud, duress or other misconduct;
  • When the arbitration clause prohibits class actions under circumstances in which a contract lacking an arbitration clause but otherwise prohibiting class actions would be unenforceable;
  • When arbitration has already occurred and a party argues that the arbitrator made an error of law, the court should review the arbitrator’s ruling closely before enforcing it.

Ware’s arguments are timely as the CFPB has completed its study of consumer arbitration and is expected to issue new rules soon. Ware said he is glad the CFPB is interested enough in his views to invite him to participate in Wednesday’s field hearing. He hopes the current political climate is one in which the CFPB will be attracted to his centrist approach.

“The basic principle behind these positions — behind the centrist position — is that, with few and relatively uncontroversial exceptions, adhesive arbitration agreements should be as enforceable as other adhesion contracts, but not more so,” Ware wrote. “In other words, this article rejects conservative-supported anomalies that enforce adhesive arbitration agreements more broadly than other adhesion contracts, and proposes — contrary to progressives — that once these anomalies are fixed, adhesive arbitration agreements should be as generally enforceable as other adhesion contracts.”

Ware is an expert on arbitration law who has authored two books and dozens of journal articles on the topic. His scholarship has been cited by the Supreme Court and in at least 28 other federal and state cases. Ware has testified on arbitration before both houses of Congress and in court as an expert witness. 

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There is absolutely nothing wrong with judges making decisions that reflect the political views held by elected officials, according to Kansas University law professor Steve Ware.

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