Dave Hoffman Weighs in on Pennsylvania’s Approach to Arbitration

Over on his Substack, Contracts’ Empire, Dave Hoffman considers the latest battle in the on-going war between state courts, which are skeptical of mandatory arbitration in consumer contracts, and the federal judiciary, which demands that agreements to arbitrate be treated the same as any other contractual provision. In last week’s post, Professor Hoffman discusses the Chilutti case, about which we posted here and here, and the more recent Duffy v. Tatum case, about which we posted here.

Professor Hoffman dates the modern era in arbitration law to AT&T Mobility v. Concepcion in which the Court made clear that it will enforce class-action waivers in arbitration agreements notwithstanding state law prohibiting their enforcement in consumer contracts. This is so because the Federal Arbitration Act (FAA) preempts state law to the extent of conflict, and the Court determined that when parties agree to arbitration under the FAA, they agree to individual arbitration. It was a 5-4 decision. The FAA itself is silent on the matter. In Epic Systems, another 5-4 opinion, the Court went further, clarifying that federal statutes also cannot be used to get around a vendor or employer’s insistence on individual arbitration proceedings.

Pennsylvania seeks to evade those decisions and the impact of federal supremacy by finding that there is no agreement to arbitrate when a consumer is not on notice that they are agreeing to arbitrate and waiving their rights under the Pennsylvania Constitution to a civil jury. Where there is no agreement to arbitrate, the FAA does not apply. Simple. The problem is clickwrap or browsewrap contracting. The Pennsylvania Superior Court thinks there needs to be more robust indicia of assent before a court can find that the right to a jury trial has been waived. This approach seems to violate the principle of neutrality — that is, plaintiffs are not denying that they had a contract with the defendants; they are only denying the enforceability of the arbitration clause. But the plaintiffs entered into their agreement with defendants through the same mechanism as they used to signal their assent to arbitration.

Moreever, as Professor Hoffman points out, there is no evidence that the Superior Court’s preferred modes of contractual assent creates any better indicia of meaningful agreement than the ones that the Court rejected. That is, consumers are no more likely to read and consider scroll-wrap agreements than they are to read and consider click-wrap agreements. They will scroll to the bottom of the former without reading the text, and they will click the box of the clickwrap agreement without clicking on the hyperlink to read the terms. I do it all the time. I survey my students, and they do it too. In fact, inspired by Roseanna Sommers’ work, I surveyed a group of admitted students on whether they thought they had ever agreed to arbitration, and almost all of them thought that they had never done so.

Moreover, he has previously argued, there is little empirical evidence that arbitration hurts employees and consumers. Professor Hoffman suggests that we have arrived at an impasse. Pennsylvania is an outlier, as far as I can tell, but other states use unconscionability doctrine to strike down arbitration clauses in the consumer and employment contexts. Professor Hoffman would prefer that we get out of the impasse, either by striking down federal decisions that extend the FAA to the consumer and employment context or by just convincing state courts to be less skeptical about the benefits of arbitration. Another option would be to persuade plaintiffs attorneys that their clients are better served in arbitration than they are in litigation. Given the advantages of arbitration, especially consumer arbitration, to claimants over litigation, I would like to see survey data on why plaintiffs’ attorneys are so hostile to arbitration. I suspect it has to do with the un-reviewable power of arbiters, which eliminates, among other things, the attorneys’ ability to shape the case through discovery.

I agree with Professor Hoffman that it would be valuable to have empirical studies of the outcomes of consumer and employment arbitration. Professor Hoffman has identified problems with mass arbitration, but those problems sound pretty similar to me to the problems identified with class actions, and I remain convinced that, on the whole, class actions are valuable as a mechanism for disciplining commercial actors, even if they don’t result in optimal recovery for the class members. Professor Hoffman points to statistics provided by the arbitration organizations and it would be great for scholars skilled in empirical analysis (i.e., not me) to work with this information. Because we don’t have access to the opinions supporting the awards, I suppose the data would be useful to give some sense of what sort of relief consumers and employees, on the one hand, and firms on the other, get from arbitral proceedings. I don’t see how the data will help with qualitative assessment of what actually goes on in arbitration proceedings.

But I still have my vibesy reasons for thinking that arbitration, which may be better for consumers and employees is some, perhaps most, situations, still has disadvantages vis a vis court proceedings. Arbitration doesn’t establish precedents, so a vendor can persist in wrongful conduct if the value of that conduct to the company exceeds its exposure to liability and costs. In most cases, arbitral awards are not public, so the companies avoid adverse publicity attendant to findings of wrongful conduct. But that same adverse publicity can enhance settlement value to the claimants if public fora are available to them. A claimant who is aggrieved by an adverse arbitration agreement cannot, in most circumstances, challenge the award. Mass arbitration is an imperfect solution that was caused by the vendors’ refusal to allow representative claims, whether through class actions or class arbitration. Many claims that cannot be brought collectively cannot be brought at all. Finally, I note that if arbitration can really be a more efficient, cost-effective path to justice for claimants, claimants can always choose to arbitrate rather than litigate once a dispute arises. The fact that they are required to agree to pre-dispute arbitration already makes claimants and their representatives suspicious that they have given up something by doing so. Still, I second Professor Hoffman’s call for more empirical scholarship that might help us establish the costs and benefits of arbitration over litigation.

In the meantime, I would just note that, for me and for many critics of mandatory arbitration, the modern era of arbitration did not begin in 2011. It began in the 1960s and 70s when the FAA was made applicable in state courts, to statutory claims, and to consumer employment contracts to which, most but not all scholars agree, the FAA was never intended to apply. My preferred way out of the arbitration conundrum would be to narrow the reach of the FAA and let the federalist system do its work, creating laboratories of innovation. We may end up in roughly the same place. We may end up with very different regimes in blue states and red states. We may end up with some mix, which may symbolize the purplish bruise that arises from the process of reaching a democratic consensus.