When Arbitration Becomes Impossible: When are parties excused from an agreement to arbitrate?
By Jeffrey I. Ehrlich
Advocate January 2006 | Download .pdf
Arbitration – do it yourself tort reform for businesses
At every turn, businesses are including arbitration clauses in their standard-form consumer contracts. Anyone who buys health coverage, trades stocks, opens a bank account, has a cell phone, or applies for a job, is likely required to accept arbitration of disputes as part of the contract. There is no mystery about why this is so. Businesses perceive that arbitration favors their interests, because it is likely to deter claims from being made against it, and it will reduce the value of the claims that are presented.
Arbitration deters claims because it is expensive. Someone who wants to file a civil lawsuit has to hire a lawyer and may have to pay the costs of depositions and experts. But the costs of having a forum to hear the case are usually nominal. In arbitration, the costs of the lawyer and discovery are the same (unless no discovery is permitted) but the forum costs money – often a lot of money. And that does not even count the cost of the arbitrator. The filing fee for the American Arbitration Association in a standard commercial case is computed as a percentage of the amount at issue, and can amount to thousands of dollars. Arbitrators are typically practicing lawyers or retired judges who charge $400 to $750 per hour.
Arbitration reduces the value of claims because arbitrators commonly do not make awards to claimants as large as juries and judges do. Some of this may be the result of the “repeat player” effect. Large businesses tend to need the services of arbitration providers and arbitrators on a regular basis. These providers and arbitrators want the business, and may refrain from taking actions that might jeopardize it, like making a large award to a claimant. The California Supreme Court has acknowledged the repeat-player effect, and its tendency to result in lower arbitration awards to claimants. (Armendariz v. Foundation Health Psychcare Services,Inc. (2000) 24 Cal.4th 83, 115 [99 Cal.Rptr.2d 745].)
While it is increasingly easy for consumers to get sucked into arbitration, it is difficult to get out. In Armendariz, the court imposed certain minimal due-process protections for arbitrations that involve the claims of employees under Fair Employment and Housing Act (“FEHA”)(Gov’t Code § 12900, et seq.) Under Armendariz, employers who wish to require their employees to arbitrate disputes arising under the FEHA, or other similar statutes, must use arbitration agreements that provide for a truly neutral arbitrator, more than minimal discovery, a written award, and the full panoply of relief available under California law. (Armendariz, 24 Cal.4th at 102.) In addition, the arbitration system may not impose costs on the employee that exceed those that the employee would incur in court.
The California Supreme Court extended the protections afforded in Armendariz to employees who are pursuing tort claims for wrongful discharge in violation of public policy.(Little v. Auto Steigler, Inc. (2003) 29 Cal.4th 1064, 1077 [130 Cal.Rptr.2d 892].) But it refused to extend them even further, to arbitrations involving claims by insurance policyholders against their insurers for breach of the insurance policy and insurance bad faith. (Boghos v. Certain Underwriters at Lloyd’s of London (2005) 36 Cal.4th 495, 598 [30 Cal.Rptr. 3d 787].)
All arbitration agreements – not just those subject to heightened scrutiny under Armendariz or Little — can be challenged as unconscionable and therefore unenforceable. (See, e.g., Harper v. Ultimo (2003) 113 Cal.App.4th 1402, 1406 [7 Cal.Rptr.3d 418][arbitration clause in a construction contract].) But even when courts find that some aspect of the arbitration clause is unconscionable, they are required to sever the offending term and enforce the balance of the arbitration clause unless they determine that the entire agreement is “permeated by unconscionability.” (Armendariz, 24 Cal.4th at 122.)