By George H. Friedman*
Earlier this month, I authored a blog post, My 2015 Arbitration Predictions: Batting .700 is Pretty Good!, where I returned to my arbitration predictions for 2015 and honestly appraised how well I did (as Larry David says, “pretty, pretty, pretty, pretty good,” it turns out). Now it’s time for my prognostications for 2016. As I’ve said many times before, one of the nice things about predicting future events is that, while people can certainly disagree with you, they cannot state categorically that you are wrong, unless they claim to be time travelers. Also, it takes dedication and a good memory to wait a long time and then go check to see how the predictions turned out. But fear not, I promise to conduct the same reality-check in a year. That said, here are my fearless predictions on what’s coming in 2016.
- The Arbitration Fairness Act is still DOA; so is the Investor Choice Act
- The Consumer Financial Protection Bureau will ban class action waivers and start the process for banning mandatory arbitration in many types of consumer financial contracts
- The SEC will begin to act on mandatory investor-broker arbitration
- SCOTUS will continue rebuke California on its anti-arbitration intransigence
- Web-based ADR will continue to become much more prevalent
- Bonus: the next President will be…
- The Arbitration Fairness Act is still DOA; so is the Investor Choice Act
My prior blog posts go through chapter and verse on this one. Suffice it to say these bills would amend the FAA to ban predispute arbitration agreements (“PDAAs”) outright in consumer, securities and employment contracts. Both the AFA and ICA were reintroduced this year and have gone nowhere. They will continue going nowhere next year. Or, as Chevy Chase used to say in that old SNL sketch, the AFA and ICA “are still dead.”
Why this prediction? Quoting myself from a year ago, several attempts were made over the years to amend the Federal Arbitration Act (“FAA”) to limit or ban use of mandatory arbitration in consumer contracts. These failed when the Republicans controlled the White House and Congress, and have met a similar fate under Democratic control of these institutions as well. For example, in 2009 the Democrats regained the White House and control of both houses of Congress. The capital markets tanked, there were the Madoff and other scandals, and the economy crashed. But the Arbitration Fairness Act didn’t make it out of the House Financial Services Committee, which at the time was chaired by Barney Frank, an avowed critic of mandatory PDAAs in consumer contracts. If it didn’t happen then, it’s not going to happen in 2016 with a Republican-controlled Congress. You can book that one.
- The Consumer Financial Protection Bureau will ban class action waivers and start the process for banning mandatory arbitration in many types of consumer financial contracts
To review, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“ Dodd-Frank”), contains language governing the use of predispute arbitration agreements in consumer financial and investor contracts.[1] Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB”) and charged the new federal agency with studying the use of PDAAs in contracts for consumer financial products and services and addressing PDAAs “if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers…” For example, the CFPB can promulgate a rule that permits PDAA use, but bans class action waivers in arbitration agreements. Securities arbitration was left to the SEC, which has yet to act.
In March 2015, the CFPB issued its Final Report to Congress, finding that mandatory PDAAs are widely used in contracts for financial goods and services, and that they can be harmful to consumers. At an October 7 “field hearing” on arbitration in Denver, the CFPB announced that it will be proposing rulemaking that will: 1) ban class action waivers in arbitration clauses; and 2) require regulated financial institutions to file customer claims and Awards with the CFPB, which it may choose to publish. This will permit the Bureau to monitor these cases and, perhaps, decide down the road if further rulemaking to ban pre-dispute arbitration agreements is warranted. I’m betting that the Bureau in 2016 will, after collecting and analyzing consumer arbitration case filing and Awards data, start the process of banning mandatory PDAAs.
- The SEC will begin to act on mandatory investor-broker arbitration
During the summer of 2015, FINRA formed a Dispute Resolution Task Force to “suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum.” The Task Force and its subcommittees gathered written comments, held many meetings and issued its Final Report on December 16. Among the 51 recommendations were key ones on explained decisions, a raise for arbitrators, expungements, paper cases and motions to dismiss. The group, however, could not reach a consensus on mandatory predispute arbitration agreements, but they considered the subject. The Task Force identified mandatory arbitration as an important issue, but concluded “the mandatory nature of SRO securities arbitration is a defining characteristic of the process that engenders controversy about its fairness. Despite considerable discussion, however, the task force was not able to reach consensus. It concludes that the debate over mandatory securities arbitration is to a large extent a philosophical or policy question about which thoughtful, informed individuals disagree and which the task force cannot settle.”
What of the SEC, which has supervised securities arbitration for decades and since the 2010 had authority under Dodd-Frank section 921 to ban PDAAs, or limit or impose conditions for their use? After more than half a decade, there has been very little activity. And, as I’ve said before, I don’t see the SEC issuing regs banning PDAAs. Why not? The SEC would have to find that doing so is “in the public interest and for the protection of investors.” Essentially, the SEC would be saying: “Yes, we’ve been supervising customer-broker arbitration for decades. But, you know, we just realized it’s a terribly unfair system.” That’s just not going to happen.
But as I’ve said before, I think it’s politically untenable for the SEC to do absolutely nothing about PDAAs, especially in light of the pressure that’s been brought to bear on this issue by some in Congress, NASAA, PIABA, and others (for example the AFL-CIO), and especially in light of CFPB’s robust activities in the arbitration area.
My view is that, at a minimum, the SEC will study the subject (it has since 2010 been accepting comments on mandatory arbitration), and eventually require some changes (impose limits or conditions). How might that transpire? Now that FINRA Task Force has finished its work, I predict SEC will do a study of securities arbitration, building on the Task Force’s recommendations. The significant recommendations in the Final Task Force Report form a nice framework for the Commission to fulfill this part of my prediction from last year: “We’ve studied customer-broker arbitration and we’ve concluded that it’s a fair process. But, you know, these few changes will make it even better.” Just watch.
- SCOTUS will continue rebuke California on its anti-arbitration intransigence
A core element of SCOTUS’ support for PDAAs is the so-called separability doctrine, which holds that, under the FAA, a PDAA is a separate contract from the one in which it is embedded, and must be on “equal footing” with any other contract. Section 2 of the FAA provides that a PDAA must be enforced “save upon such grounds as exist in law or in equity for the revocation of any contract.” The issue of how far states can go in applying the “revocation of any contract” language in section 2 came to a head in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). There, SCOTUS preempted California’s rule of law that a predispute arbitration clause with a class action waiver was an unconscionable contract of adhesion and was unenforceable under California law. Said the Court, “Although [FAA] § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”
After Concepcion, the bottom line on FAA preemption of state law on arbitration was this: consistent with FAA section 2, states may invalidate PDAAs based on laws applicable to contracts in general, as long as they don’t single out PDAAs for burdensome or negative treatment. Ever since, California’s courts have in my view begrudgingly implemented Concepcion, but have tried to carve out exceptions. For example, in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348, 327 P.3d 129 (Calif. 2014), a divided Supreme Court of California held that an employee could pursue claims against his employer under the California Private Attorneys General Act (“PAGA”), despite the existence of a PDAA waiving such claims. How was this possible in light of Concepcion? The Court reasoned that allowing an employee to waive PAGA claims violated public policy, rendering that part of the PDAA unenforceable. Specifically, the Court squared this part of its decision Concepcion by noting that PAGA does not stand as an obstacle to the aims of the FAA: “We conclude that the FAA’s goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state’s behalf.”
Many in the arbitration universe thought SCOTUS would grant the employer’s petition for Certiorari, but alas the Court summarily declined to do so in an Order issued last January (case No. 14-341). I had suspected that SCOTUS didn’t take the bait in Iskanian because it would rather review a federal court’s ruling on preemption. Now, I’m not so sure. Read on.
Just this month, SCOTUS rebuked California over its begrudging acceptance of the supremacy of the Federal Arbitration Act and related Supreme Court rulings, in DIRECTV v. Imburgia, No. 14-462 (Dec. 14, 2015), a case involving a California court decision. The beginning of Justice Breyer’s Opinion has some rather strong language pointing out that the FAA “is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.”
Also, the Supreme Court has granted a Petition for Certiorari in an arbitration-related case, MHN Government Services, Inc. v. Zaborowski, No. 14-1458. As described in the Petition for Certiorari, “California law applies one rule of contract severability to contracts in general, and a separate rule of contract severability to agreements to arbitrate. The arbitration-only rule disfavors arbitration and applies even when the agreement contains an express severability clause… The question presented is whether California’s arbitration-only severability rule is preempted by the FAA.”
What does this all mean? I think SCOTUS took up Zaborowski because it wants to settle once and for all two things: 1) the overarching, preemptive reach of the Federal Arbitration Act; and 2) that state courts have to fully embrace SCOTUS’ rulings in this area. And, yes, I predict that Zaborowski will be the final nail in the FAA preemption-of-state-anti-arbitration-laws coffin.
- Web-based ADR will continue to become much more prevalent
For this one, I just repeat verbatim what I said a year ago. There’s a great scene in the classic 1967 movie The Graduate where a family friend of new college graduate Ben Braddock (played by Dustin Hoffman) gives some sage advice about the future to young Ben. With great fanfare, he leads up to a one-word prediction: “Plastics!”
Here’s my one-word prediction on technology and ADR: “C-ODR” which stands for complete – online dispute resolution services. This is a term developed by Arbitration Resolution Services, Inc., whose Board I chair. On what basis do I make this prediction? The dramatic and rapid advances in technology will make this choice an easy one for consumers, much like Amazon and other web-based entities have challenged brick-and-mortar shopping as the preferred method of commerce. Put differently, why drag yourself to a hearing and wait around for snail-mail when you can accomplish the same things via the cloud in a fraction of the time and cost?[2] At a minimum, I see this as another breakthrough year for web-based ADR. Case administration, from filing to conclusion – including hearings – will be done online, and paper will become passé. It doesn’t take a Nostradamus to see that improving technology will drive this change.
In fact, I see changes happening even before arbitrations are filed. That’s right, before. Insurance companies, securities firms, credit-based companies, and just about any firm that processes claims online will start to build web-based ADR into their claims handling processes. For example, if a customer’s claim is denied in whole or in part, I can see the company offering cloud-based ADR on a voluntary basis as the next online step. Oh, wait, that one has already happened! ARS did that last year.
As I stated in my assessment of how I did on my 2015 predictions, web-based ADR is expanding by leaps and bounds. I spoke on this topic at an international online dispute resolution symposium that was held in New York in June, where for two days one speaker after another described the rapid growth of online ADR. The SEC on November 16th published in the Federal Register a Final Rule on Crowdfunding (Vol. 80, No. 200, pages 71387–71680). The JOBS Act permits retail investors to buy unregulated securities through online crowdfunding portals, but pending adoption of SEC rules, this sort of crowdfunding was not legal. Also, FINRAs has proposed requiring all parties, except customers who are not represented by an attorney or other person, to use its Dispute Resolution Party Portal.
Bonus: the next President will be….
You really didn’t think I’d be so bold as to predict now the outcome of the presidential election next November, did you? What I had in mind was offering insights on how the President-elect might view arbitration, like “the next President will be supportive/critical/neutral/a blank slate about arbitration…” For example, I bet you didn’t know that in 1994, a young attorney named Barack Obama argued successfully to enforce an arbitration award in the Seventh Circuit? See Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704 (7th Cir. 1994). Or that President Theodore Roosevelt settled a dispute with Mexico[3] by using arbitration, and also received the Nobel Peace Prize for successfully mediating the Treaty of Portsmouth, ending the 1904-5 Russo-Japanese war?[4] Check back here after the election for my thoughts on the new President-elect’s views on arbitration.
Conclusion
The arbitration world is constantly changing, and will evolve yet again next year. Doubtless there are some things that will happen in 2016 that I just don’t see coming right now. And of course, some of my predictions may not come to pass, at least not yet. We will again compare notes in a year. In the meantime, see you in the future!
[1] For an in-depth analysis on what CFPB can and should do, see Friedman, George, What’s a Regulator to do? Mandatory Consumer Arbitration, Dodd-Frank, and the Consumer Financial Protection Bureau, 20:4 ABA Dispute Resolution Magazine 4 (Summer 2014), available at http://www.americanbar.org/publications/dispute_resolution_magazine/2014/summer/what-s-a-regulator-to-do–mandatory-consumer-arbitration–dodd-f.html.
[2] See Friedman, George, “Road Trips” in Consumer Arbitration: there Must be a Better Way (Sep. 15, 2013) available at https://www.arbresolutions.com/road-trips-consumer-arbitration-must-better-way/#.VGo-x_ldX84.
[3] See http://www.theodore-roosevelt.com/images/research/trtreaties/treaty13.pdf
[4] See http://www.nobelprize.org/nobel_prizes/peace/laureates/1906/roosevelt-facts.html
*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional.
