Recently, the American Legislative Exchange Council led a coalition that included the Center for Individual Freedom (CFIC) and the American Consumer Institute (ACI) in filing an amicus brief with the U.S. Court of Appeals for the Third Circuit.
The brief sought to educate the court on the value of arbitration and current Supreme Court cases discussing the topic. The brief is similar to the one ALEC filed in the U.S. Court of Appeals for the Fourth Circuit in August.
While like the brief in the Fourth Circuit, there were differences in the cases. The primary difference is that the case in the Third Circuit, entitled Williams v. Medley Opportunity Fund II, LP focused solely on the issue of arbitration. The defendants in the matter filed a motion to compel arbitration, whereas in the Fourth Circuit case, the trial court was asked to address other, substantive matters.
The analysis of the benefits of arbitration did not change. ALEC pointed out that arbitration agreements save parties — particularly consumers — both time and money. Arbitration claims often conclude faster than cases that are litigated in court. The savings that companies realize from the certainty of arbitration translate to lower costs to consumers.
Because this case focused on arbitration agreements, the brief was able to raise a few important points. First, the trial court did not consider how recent Supreme Court cases could have impacted its decision. Second, the trial court did not apply the two-step analysis required by other Supreme Court precedent.
Recent Supreme Court cases effectively limit a trial court’s ability to decide whether a case should be submitted to arbitration. In one case, the court ruled that when an arbitration agreement submits the threshold question of arbitrability to the arbitrator, the court has no option but to enforce the agreement. That means, when the parties agree that the arbitrator should decide whether the contract is subject to arbitration, trial courts do not have the discretion to set the agreement aside.
In another case, the court limited the reasons a trial court may set aside an arbitration agreement to those defenses available to the contract as a whole. For a contract to exist, it must be properly formed. That is, the parties need to agree on all the terms. There are defenses a party can raise to attack whether the agreement was properly formed and those are the defenses that federal law recognize, according to the court.
One of the arguments on which the trial court relied — that an agreement cannot waive federal statutory rights — appeared in the footnote of a Supreme Court decision. This is an argument that trial courts have seized upon in other circuits and expanded beyond the original meaning. The Supreme Court acknowledges the footnote is something called dicta, which means that the court was not asked to answer that specific question. And at least one of the recent court cases may have repudiated the assertion found within the footnote.
Finally, the court established a two-step analysis when a complaint alleges violations of federal law. The first step is to ask whether the arbitration agreement reaches the statutory question. That is, whether the arbitration agreement would submit the statutory question to the arbitrator. The second step is to ask whether Congress intended for the statute to supersede the Federal Arbitration Act. If the answer is “yes” to the first question, the trial court need not ask the second and must enforce the arbitration agreement. If the answer is “no,” the trial court may proceed to the second question. If the answer to the second question is that “Congress did not explicitly preempt the Federal Arbitration Act,” the trial court must enforce the arbitration agreement.
In this case, the trial court did not consider the recent Supreme Court cases and did not conduct the two-step analysis required. The result is that the arbitration agreement was not enforced, harming both the consumers and the companies that agreed to arbitrate their claims.
Arbitration agreements serve valuable functions. They allow for the expedient resolution of disputes. They save the parties money and provide market certainty. And ALEC is proud to stand for the importance of honoring the terms parties agree to in contracts.