Arbitration Clauses Are Protected Under The Federal Arbitration Act

December 10, 2022

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What Are Arbitration Clauses?

An arbitration clause is an element in a contract (usually, but not always, an employment contract) that requires parties to use arbitration to settle disputes instead of taking the matters to court. That has been mainly in-person in the past, but online arbitration has made it possible to do this remotely and in a way that works better for the people involved.

Arbitration clauses may contain other stipulations, such as having it occur in a specific jurisdiction. However, these are becoming less popular, especially with the rise of remote work making it harder for people to agree on jurisdiction for arbitration.

Why Arbitrate?

There are many reasons to consider arbitrating over going to court. Notably, court systems can be slow to process claims, and that’s an issue when both sides prefer to resolve their differences and move on.

Online arbitration can lead to agreements within days or weeks, often resolving a case before a court could even have its first hearing.

Arbitration also tends to be more affordable and better for people’s schedules, especially when done online. Together, these make it a more appealing option for many people, especially with the extensive federal protections that arbitration receives.

Federal Protection

Arbitration has received protection in Federal Law and is currently under Title 9 of the United States Code (not to be confused with the better-known Title IX, a part of civil rights legislation).

The primary law here is the United States Arbitration Act of 1925, nicknamed the Federal Arbitration Act, and made into positive law in 1947.

The Federal Arbitration Act covers things like the appointment of arbitrators, the stay of proceedings related to arbitration, rehearings, court orders, and assorted maritime-specific matters, among other provisions.

However, as those familiar with the law know, regulations are rarely set in stone just because Congress passes some laws. It’s only once a law passes tests in the court system that it becomes final for many people.

Court Tests

Arbitration is a relatively common practice, so it’s been the subject of numerous court hearings since the original legislation passed. Several dozen of these cases have made their way to the United States Supreme Court, usually on specific or technical grounds. Here are some relevant cases involving the Federal Arbitration Act and how they pertain to arbitration’s protection.

Moses H. Cone Memorial Hospital v. Mercury Construction Corp

In this 1983 decision, the Supreme Court addressed civil procedures for arbitration clauses, including the ability of other courts to abstain from a case and let a member try to consolidate legislation.

Justice William Brennan Jr. wrote the opinion for the 6-3 majority decision, noting towards the end that the existence of federal arbitration legislation implies a preference for it, and therefore doubts should get resolved in favor of allowing arbitration when possible.

In short, this ruling means that not only is arbitration allowed under federal law, but also actively encouraged.

First Options of Chicago, Inc. v. Kaplan

This 1995 opinion covers a crucial part of arbitration: who decides whether a dispute is subject to arbitration?

The issue leading to the case came about from a disagreement between First Options of Chicago (a firm clearing stock trades) and the Kaplan couple (managers of an investment company).

The case eventually reached the Supreme Court, which unanimously agreed with a Third Circuit ruling that whether a case can get arbitrated is subject to court review when the parties haven’t agreed to use an arbitrator.

Interestingly, this decision does not always require courts to get involved. The Supreme Court’s decision here is that courts should decide independently and apply ordinary principles of state law and contract formation. That means they may not always agree arbitration is best, but that’s a potential result in many cases.

Buckeye Check Cashing, Inc. v. Cardegna

This 2006 case addressed a key element of contractual law: Whether an entire contract is void if a specific provision is against the law.

In this case, the plaintiffs argued that Buckeye Check Cashing, a payday lender operating in Florida, was charging a higher interest rate than allowed in state law and that it, therefore, could not compel arbitration.

The Supreme Court held that the arbitrator can rule on the legality of the overall contract unless the arbitration clause itself is being challenged, allowing an arbiter to distinguish between void and voidable contracts.

AT&T Mobility LLC v. Concepcion

This 2011 case is one of the more significant parts of judicial review protecting arbitration under the Federal Arbitration Act.

Decided 5-4, the Supreme Court held that the Federal Arbitration Act preempts state laws that would void elements of arbitration clauses, such as waivers against class action lawsuits.

Though narrowly decided, this decision is clear in that federal law not only protects arbitration clauses in agreements, but states cannot limit these clauses to a degree greater than federal law establishes as an option.

Are There Any Limits on Arbitration?