Pushing, or Perhaps Ripping, the Arbitration Envelope
posted by Charles Sullivan
The New Jersey Supreme Court has just issued an opinion on arbitration that, while perhaps sensible in result, seems to turn the usual paradigms upside down. Instead of deciding whether an arbitration clause was unconscionable and should be stricken (or at least whether the unconscionable parts should be severed), the Court decided (1) it didn’t know what the clause meant, (2) that question was for the arbitrator, but (3) that if the arbitrator decided certain ways, that would be unconscionable. The effect, of course, was to interpret the agreement it wasn’t interpreting, at least by ruling out certain interpretations.
Given the pervasiveness of arbitration in both consumer and employment contexts, this is an important decision. How it fits into more conventional notions of the relationship between courts and arbitrators is anyone’s guess, but I’ll hazard a few.
The case is Delta Funding v. Harris, and I encountered it because one of my colleagues, Bahar Azmy in Seton Hall’s Center for Social Justice, submitted an amicus brief. The underlying dispute involved the usual predatory lending claim, with a twist: the arbitration clause exempted foreclosure proceedings. The result was that Ms. Alberta Harris, “a seventy-eight-year-old woman with only a sixth grade education and little financial sophistication,” was forced to defend a foreclosure proceeding in state court but if she wished affirmative relief (such as under the Consumer Fraud Act) or or to sue third parties, had to resort to arbitration.
The case reached the NJ Supreme Court by certification from the Third Circuit when Harris appealed from the federal district court’s order that the non-foreclosure claims be abitrated (which resulted in the state court dismissing those claims in the foreclosure proceeding). The Third Circuit asked the NJ Supemes (as the latter reformulated the question), “Is the arbitration agreement at issue, or any provision thereof unconscionable under New Jersey law, and, if so, should such provision or provisions be severed.”
To which NJ responded: we don’t know. Or more precisely: there are ambiguities that it is the job of the arbitrator to decide, and “To the extent that the unconscionability of those provisions ultimately turns on how the arbitrator resolves the ambiguities, we are unable to determine whether the provisions are, in fact unconscionable.” However, the Court then went on to explain in chapter and verse how certain provisions could be applied unconscionably, for example, allocation of the costs of the hearing.
Such an answer might not be so problematic within one court system (where the case could be sent down to a lower court for review consistent with the appellate opinion), but with the court/arbitration intersection, it raises real questions that the Third Circuit will have to struggle with in the first instance.
After all, the defendant wanted the arbitration clause struck down so it proceed in state court. If it were unconscionable (and not severable) that would be the indicated relief. But we now know it might or might not be unconscionable, so (maybe) the Third Circuit should affirm the district court order compelling arbitration of Harriss’s affirmative claims against Delta.
But if it does, and the case goes to arbitration, what is the effect of the NJ Supreme Court’s decision on the arbitrator? (One might also ask about the collateral estoppel effects, if any, of any decision in the foreclosure proceedings on the award, but that takes us too far afield). The Federal Arbitration Act does not pemit a very generous review of arbitral awards (to do so would convert arbitration into another system of lower courts), but it does allow limited review and, as interpreted by the courts, one basis for rejecting an award is “manifest disregard” of the law by the arbitrator. So, should the arbitrator interpret the agreement contrary to the Delta decision, presumably it can be set aside.
This, however, suggests an end-run around the notion that the arbitrator decides what a contract means — the enforcing court announces what the contract doesn’t mean, thereby cutting down substantially on the wiggle room the arbitrator would otherwise have. Plus, to the extent the NJ Court was focusing on issues specific to arbitration (such as cost allocation), it also results in state-mandated rules specific to arbitration, which the United States Supreme Court has rejected on Supremacy Clause grounds.
Given the pervasiveness of arbitration these days, Delta may be the best we can hope for, but whether it respects the boundaries the Supreme Court has tried to establish between court and arbitrator is another question.
It is probably too much to hope that the Third Circuit will decide that an arbitration clause that gives the arbitrator so wide latitude to impose unconscionable terms in the arbitration is thereby unconscionable and should not be enforced.
August 15, 2006 at 7:20 am
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Responses (2)
Dave Hoffman - August 15, 2006 at 7:18 pm
Really interesting case, thanks for bring it to wider attention. It strikes me that this is a nice example of the potentially troublesome relationship between certification and ripeness which you see sometimes discussed in fed. courts. scholarship. It is not clear to me (having not read the opinion, I admit) how manifest disregard as a standard relates to what I’d see as something very much like a bit of helpful, but advisory, dicta.
Charlie - August 16, 2006 at 4:50 am
I think I’ve been mostly concerned with what “manifest disregard” means — an especially difficult problem since arbitrators are generally not required to write opinions/explanations much less enter findings of facts and conclusions of law that might reveal they disregarded the law rather than construed it as applied.
But your question raises the deeper issue of what “law” is — at least common law. Before we get there, we might want to consider preclusion doctines, including law of the case (assuming, which I don’t know, this works as usual in the certification context), and collateral estoppel (if the legal proceedings are somehow collateral to the arbitration and binding).
But if we finally get to the ultimate question of whether Delta is “law” for this case, and presumably others in NJ, I guess I don’t see why it shouldn’t be. It answered a question that arose in litigation, it purported to dictate a result (admittedly in “you can’t do that” context rather than a “you must do this”), and I would assume (correct me if I’m wrong) that the Third Circuit is bound to follow this (by Erie) so long as the question turns on NJ law (rather than the FAA).
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