The American Legislative Exchange Council recently led a collation in filing an amicus curiae (“friend of the court”) brief on the topic of arbitration clauses in the U.S. Court of Appeals for the Fourth Circuit. In the case, entitled Solomon v. American Web Loans, Inc., the trial court refused to enforce arbitration agreements that were part of the broader contract.
Arbitration clauses are, by nature, agreements where parties agree to forego traditional litigation in a courtroom and instead resolve disputes before a private entity. In this case, the arbitration clauses gave the party filing the dispute the opportunity to select either the American Arbitration Association (“AAA”) or JAMS, the Resolution Experts (“JAMS”), as the arbitrator.
Through the amicus brief, ALEC, the Center for Individual Freedom (“CFIF”), and the American Consumer Institute (“ACI”) tried to educate the court on the benefits of arbitration, recent Supreme Court decisions that should impact the cases on which the district court relied, and a two-step test the Supreme Court requires when plaintiffs try to incorporate other federal statutes.
As stated in the brief, “Arbitration agreements play an important role in the free market system … [they] lower costs, create efficiencies, unburden an often-overloaded judiciary, and result in cost savings that are passed down to consumers. Arbitration agreements can save parties, especially individuals, significant time and money.” Not only do arbitration agreements play an important role in the free market, but the free market helps control the arbitration process. According to Professor Christopher Drahozal, as cited in the brief, “The interest of businesses in protecting their reputations reduces the likelihood of corporate opportunism, and arbitration institutions have strong incentive to promote the fairness of the arbitral process.”
Between the 2018 and 2019 terms, the Supreme Court issued at least three arbitration related decisions. The topics of these three decisions included whether parties could arbitrate as a class when the arbitration agreement is silent on the topic, the precise meaning of the “savings clause” of the Federal Arbitration Act, and if a trial court can hear the merits of a case when the arbitration agreement submits the “threshold question” to the arbitrator.
A law, known as the Federal Arbitration Act (“FAA”) requires courts to enforce arbitration agreements. The law provides only one exception. The exception is known as the “savings clause.” According to the Supreme Court, the clause applies to defenses available to attack the whole contract.
Also noted was that the trial court failed to apply a two-factor test announced in a case entitled Mitsubishi Motors, Inc. v. Soler Chrysler-Plymouth, Inc. When plaintiffs allege violations of federal statutes, the court must first ask whether the arbitration agreement “reaches” the federal statutes. That is to say, the court must ask if the agreement submits all claims, including the statutory claims, to the arbitrator. Then the court must ask if Congress specifically excluded the statute in question from the FAA. If the answer to the second question is “no,” the trial court must enforce the arbitration agreement.
ALEC, CFIF, and ACI filed the amicus brief because the trial court decided not to enforce the arbitration agreement. Arbitration agreements play an important role in the free market system and allowing trial courts to not incorporate Supreme Court decisions is a dangerous precedent.