Law professor calls for centrist approach to arbitration, removing it from 'class-action battlefield'

Monday, November 13, 2017

LAWRENCE — After a hard-fought political battle so close that an evenly divided U.S. Senate required the tie-breaking vote of Vice President Mike Pence, President Donald Trump recently signed the repeal of a Consumer Financial Protection Bureau rule that would have prevented banks from using arbitration agreements to insulate themselves from class-action lawsuits. This news shows the enduring divisiveness of class actions — in which a lawyer combines claims of many consumers — and the spillover effects on arbitration, said University of Kansas law professor and arbitration expert Stephen Ware. His forthcoming article in the Harvard Negotiation Law Review argues for a centrist approach to arbitration law that would remove arbitration from what he calls the “class-action battlefield.”

“Powerful interest groups fighting about class actions is the longstanding norm,” Ware said, “but newer is the centrality of that fight to debates about arbitration law.”

The CFPB studied consumer arbitration for years and could have greatly restricted it but instead chose to issue a rule that would significantly affect only one aspect of it: class actions.

Arbitration’s connection to class actions grew in 2011 when the Supreme Court’s conservative majority approved arbitration agreements requiring disputes to be resolved individually, rather than as part of a class, even though similar “class waivers” in nonarbitration agreements were rarely enforced. The CFPB rule — issued by a bureau directed by a Democrat — would have ended enforcement of arbitration agreements’ class waivers had it not been overridden by the Republican Congress and president.

The predictably partisan pattern of Republicans and business groups opposing class actions, while Democrats and progressive groups support them, increasingly extends to arbitration debates, according to Ware’s research. In contrast, his centrist position on arbitration would not take sides on whether to enforce arbitral class waivers but instead would instruct courts to enforce arbitral class waivers only when they would enforce a class waiver in a similar nonarbitration contract. This would allow courts in different states to have different standards about when to enforce class waivers and would allow such standards to evolve over time as views about class actions develop. Most beneficially for arbitration law, Ware believes, this approach would allow arbitration law to stop choosing sides in the long interest group fight over class actions, as arbitration law would simply adopt whatever approach other areas of law take to class waivers.

More broadly, Ware’s article in the Harvard Negotiation Law Review is the third in a trilogy arguing for a centrist approach to consumer arbitration law, in contrast with both current conservative arbitration law and progressive proposals to prohibit consumer arbitration agreements entirely.

“The law has been dealing for generations with a variety of provisions on consumers’ form contracts,” Ware said. “Few people want courts always to enforce all the words on these forms, and few people want courts never to enforce any of those words. Most people want the law to keep finding a happy medium.”

Courts presumptively enforce most terms on consumer contracts in most cases but sometimes find a particular provision “unconscionable,” or overly harsh, and thus unenforceable. Also, state and federal regulatory agencies such as the Federal Trade Commission and CFPB sometimes prohibit contract terms harsh to consumers.

“The CFPB apparently decided an agreement to arbitrate is not necessarily harsh to consumers,” Ware said. “And for good reason. The Bureau is receptive to the standard economic argument that arbitration agreements tend to lower businesses’ costs and some of these savings are passed through to consumers in the form of lower prices. In addition, the most relevant empirical evidence does not show consumers faring worse in arbitration of one-on-one disputes than they do in litigation of such disputes.”

The better-documented disparity between arbitration and litigation, Ware said, is the potential for a class action.

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Professor's book to assist students, lawyers in 'alternative dispute resolution'

Monday, November 07, 2016

LAWRENCE — A University of Kansas professor has authored a new edition of a book designed to help law students and lawyers develop important practical skills and learn the law governing disputes resolved outside of court.

Stephen Ware, professor of law, has written “Principles of Alternative Dispute Resolution,” now in its third edition. The book is a concise guide to the three main processes of what lawyers call “Alternative Dispute Resolution,” or “ADR”: arbitration, negotiation and mediation.

“Lawyers call these three processes ‘alternative dispute resolution’ because they are our most common alternatives to courts deciding cases,” Ware said. “While cases resolved by courts — judges and juries — typically get the most media attention, a great many cases are resolved by arbitrators, or by the disputing parties’ agreement reached through negotiation or mediation.”

Arbitration is like litigation in court because both arbitration and litigation allow disputing parties and their lawyers to present evidence and arguments to neutral decision-makers. However, those decision-makers in arbitration are neither judges nor jurors, but arbitrators chosen by the parties and usually paid by the parties. So an arbitration is basically a private-sector court created by the disputing parties’ contract.

Negotiation is the most common process of dispute resolution and is widely used by lawyers to settle cases that would otherwise be resolved by litigation or arbitration.

“Negotiation skills are among the most important skills a lawyer can have,” Ware said.

Mediation is a closely related skill because a mediator is a neutral person who assists parties in reaching a negotiated settlement.

“The idea behind increasing use of ADR was that courts were too crowded, litigation was too expensive, and that hopefully through alternative methods we could get better, cheaper resolution of disputes, or both,” Ware said.

The book has been used as the primary text for Alternative Dispute Resolution courses in several law schools. The book is suited for that role because it clearly and concisely explains the theory, practice and legal doctrine relating to arbitration, negotiation and mediation. This enables law school instructors using the book to save time “learning the law” so more class time can be devoted to students working with the law to develop practical skills in an experiential manner. For example, many ADR courses involve students negotiating or mediating the settlement of a hypothetical case or drafting a hypothetical arbitration agreement.

Ware emphasizes this sort of skill-building when he teaches ADR and, more broadly, in his other teaching. He also chaired a KU Law committee that led the law school to curricular innovations expanding opportunities for law students to develop a range of practical skills through experiential learning.

“This book is part of that effort to keep legal education practical and serve students by preparing them for their careers, and to serve practicing lawyers as well,” he said.

The three major processes of alternative dispute resolution are very pervasive in law, which makes knowledge of them useful to practicing lawyers in nearly every field and specialization of law. For example, the book is a quick resource for practicing lawyers looking to reach a negotiated settlement, whether in business, family, personal injury or numerous other areas of law. As a research tool, the book can introduce lawyers to areas of alternative dispute resolution they may not be familiar with, such as confidentiality requirements in mediation, and point them to relevant statutes and court decisions in those areas to help set the foundation for their research.

“Good legal research often begins with ‘I need a concise overview of the big picture of a given area of law,’” Ware said. “Then it moves to ‘I need leads to find the law in my jurisdiction about my specific legal issue.’”

Ware’s book provides both the concise overview and the leads for further research.

The new edition expands largely on arbitration. As international business has grown in recent years, international arbitration has grown as well. In addition, arbitration of consumer and employment disputes has grown and become increasingly controversial. The Supreme Court and other courts across the country have issued a number of decisions in the area, and the book has updated its research to reflect the changes and new rulings.

Ware has written extensively on ADR for more than 20 years and said seeing the many connections between ADR and other areas he has expertise in — such as contract, consumer, commercial and bankruptcy law — make alternative dispute resolution an especially rewarding area of law in which to work.

“One of the great, fun things about my career is the ability to teach a wide variety of areas and write on a wide variety as well, to be able to view law as a whole rather than focusing more narrowly,” Ware said.

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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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