Tag Archives: Corporations

Slaying Class Actions: Italian Colors and the Triumph of Binding Arbitration Over Corporate Liability

By Luke Herrine, Staff Editor

The decision in American Express Co. v. Italian Colors Restaurant,[1] announced on June 20, was quickly lost in the anticipatory hubbub around same-sex marriage and voting rights. Admittedly, it would not have gotten much media attention even if it had been announced on a slow news day; the issues of contract arbitration and the vindication of rights through class action proceedings don’t generate many page views.

Yet the decision in Italian Colors, written by Justice Scalia on behalf of a five-justice majority, deserves the attention of the progressive legal community and, indeed, all citizens. It is the latest installment in a long saga of cases that has allowed corporations to insulate themselves from suit through the strategic utilization of fine print.

The specific sort of fine print at issue in Italian Colors was an arbitration clause. These clauses require any suit brought against the party that writes them to be removed from court and diverted to proceedings presided over by a private judge from an organization such as the American Arbitration Association. In 1925, Congress passed the Federal Arbitration Act after extensive corporate lobbying to counteract the distrust that many courts had for such clauses. [2] This was in an era before the proliferation of consumer contracts, before strong labor and employment regulation, and before the modernization of civil procedure. Passed in such a context, the FAA was meant mainly to reduce the costs of dispute resolution for businesses that sued each other.

This changed in 1984 when the Court handed down Southland Corp. v. Keating. [3] In Southland, the Court ruled that the FAA was “a national policy favoring arbitration,”[4] putting into effect unsubstantiated dictum from a case it had decided a year before.[5] Southland was the first case to rule that the FAA preempted a state policy against certain types of arbitration. It was also the first case to hint, contrary to then-established jurisprudence,[6] that violations of rights created by statutes were just as arbitrable as arguments about the contract.[7] It was the first case to uphold an arbitration provision in a contract of adhesion (a contract in which a consumer has no bargaining power).

Although there were many chances to turn back, Southland turned out to be the first step of a unidirectional trail towards the pro-arbitration stance of the contemporary Court. Over the past thirty years, the Supreme Court has declared that arbitration provisions must be enforced regardless[8] of whether the claim to be argued is an antitrust claim,[9] an employment discrimination claim,[10] a wrongful death claim,[11] or even a claim that the contract itself is invalid.[12] Arbitration clauses must be enforced whether the claim is in state or federal court[13] and whether or not the claimant had any reason to suspect that she was agreeing to such a broadly exculpatory provision.[14] And with Italian Colors the court has finally declared that it doesn’t matter if arbitration is even an effective way of resolving the dispute as long as the parties have “chosen” to resolve their dispute that way.

Justice Scalia’s opinion—building on his prior ruling in AT&T Mobility LLC v. Concepcion[15]—declared that, even if the suit would be prohibitively expensive to litigate without the benefit of class action, if the contract provides for one-to-one arbitration then one-to-one arbitration it shall be. Plaintiffs in Italian Colors were a group of merchants that used American Express’s charge card machines. They were suing American Express for taking advantage of a monopoly position to charge exorbitant fees, in violation of Sherman Antitrust Act § 1.[16] The cost of an expert economic analysis required in any modern antitrust case would have run upwards of $1 million, while “maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled.”[17] Although the Second Circuit ruled that class arbitration would be appropriate and the class waiver was unenforceable,[18] the Supreme Court was not swayed.

The Court rationalizes its expansive pro-arbitration position in this case and those that preceded it through a trio of flimsy fictions. First, it repeatedly relies on the purported (and aforementioned) “liberal policy favoring arbitration” despite the fact that scholars and multiple subsequent Justices have rejected this interpretation of legislative intent.[19] Second, it recites the platitudes of “freedom of contract” even when faced with situations in which one party obviously had no say whatsoever in the contract’s terms.[20] Third, it argues that arbitration agreements reduce costs for businesses, which then pass the savings on to the consumer or employee. Setting aside the fact that this is an unsubstantiated empirical claim, it assumes a falsity: that consumers are actively choosing between lower price and the ability to sue if injured.[21]

As the Court’s willingness to enforce exculpatory provisions through flights of fancy has increased, the role of these provisions has proliferated and metamorphosed. The FAA has become an instrument for reducing or eliminating the liability of big corporations, yet it has nearly ceased to be a means for businesses to work out disputes amongst themselves. In a 2007 survey of the telecommunications and financial services industries, a study found arbitration clauses in over 90% of employment contracts and in over 75% of consumer contracts, but in only 10% of contracts negotiated between businesses.[22]

If there is to be any hope of escape, it will not be through the Court. Enough precedent now exists proclaiming the comprehensive power of the FAA that legislative intervention is needed.[23] A bill called the Arbitration Fairness Act has already been introduced several times over the past few years, but has gotten nowhere.[24] As Professor Amalia Kessler of Stanford Law explained, this proposed bill “is no panacea, but it’s a start.”[25] Those of us who care about the judicial vindication of rights and about checking the power of corporations should get behind it as a first step out of the rabbit hole.[26]


[1] 133 S. Ct. 2304 (2013).

[2] See Hal Neth, The Federal Arbitration Act and How it Grew, 13 (May 2011) (unpublished Master’s thesis, University of Oregon), available at http://adr.uoregon.edu/files/2012/01/federalarbitrationact.pdf. Note that the FAA was passed before the 1938 Federal Rules of Civil Procedure.

[3] 465 U.S. 1 (1984).

[4] Southland, 465 U.S at 10.

[5] Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983).

[6] See Wilko v. Swan, 346 U.S. 427, 435 (1953).

[7] The statute involved in this case was the California Franchise Investment Law. The Court was not ruling on whether the rights created by the statute could be resolved in arbitration (the question was whether the fact that the statute seemed to preclude arbitration was preempted by the FAA); nevertheless its ruling suggested that the preference for arbitration stated in the FAA was more important than the potential for the arbitrator to not properly vindicate statutory rights (which was the Court’s concern in Wilko). Southland, 465 U.S. at 16.

[8] Unless the statute is a federal statute creating the cause of action that explicitly precludes arbitration, see CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012), and almost no statutes do. After all, Congress didn’t know it had to put this exception into statutes until the Supreme Court told it so.

[9] See, e.g., Italian Colors, 133 S. Ct. 2304 (2013); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).

[10] E.g. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).

[11] E.g. Marmet Health Care Ctr., Inc. v. Brown, 132 S.Ct. 1201 (2012).

[12] E.g. Buckeye Check Cashing v. Cardegna, 546 U.S. 440 (2006).

[13] Cf. Southland v. Keating, 465 U.S. 1 (1984); Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265 (1995).

[14] Most people don’t. Even Richard Posner has admitted to not reading most contracts of adhesion he enters into, and he is on notice (if anybody is) that such contracts might contain arbitration. David Lat, Do Lawyers Actually Read Boilerplate Contracts? Above the Law (June 22, 2010) http://abovethelaw.com/2010/06/do-lawyers-actaully-read-boilerplate-contracts-judge-richard-posner-doesnt-do-you/. The preclusion of unconscionability claims was the upshot of AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which built on a string of cases represented most recently by Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772 (2010).

[15] 131 S. Ct. 1740 (2011) (ruling that a California rule compelling class arbitration was preempted by the FAA).

[16] Italian Colors, supra note 1 at 423.

[17] Id.

[18] In re Am. Express Merchs.’ Litig., 554 F.3d 300 (2d Cir. 2009).

[19] E.g. Christopher Drahozal, In Defense of Southland: Reexamining the Legislative History of the Federal Arbitration Act, 78 Notre Dame L. Rev. 101, 103 (2002) (“the majority opinion in Southland, written by Chief Justice Burger, is widely held to be an illegitimate exercise in judicial lawmaking, flatly inconsistent with congressional intent in enacting the FAA.”); Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 284 (1995) (Scalia, J., dissenting (“Southland clearly misconstrued the Federal Arbitration Act.”). But note that scholarly opinion is not unanimous: Drahozal himself rejects this majority and the majority of Justices in Allied-Bruce upheld Southland (although not without reluctance). See also Hal Neth, The Federal Arbitration Act and How it Grew, 46-47 (2011) (Master’s thesis, University of Oregon).

[20] Margaret Jane Radin, in Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law (2013), calls this the “gerrymandering of the word ‘agreement’ . . . In this process, consent is degraded to assent, then to fictional or constructive or hypothetical assent, and then further to mere notice . . . until finally we are left with only a fictional or constructive notice of terms.” Id. at 30. The traditional law and economics response to this charge is that consumers can still choose another company’s contract. But this is at best partially true in a world where well over three-quarters of the contracts on offer contain arbitration agreements. See infra note 22 and accompanying text.

[21] Professor Stephen Ware of the University of Kansas School of Law argues that the lack of empirical evidence should, on balance, lead one to believe that savings are passed on to the consumer, since one should default to the predictions of economic theory when faced with a lack of evidence. Stephen J. Ware, The Case for Enforcing Adhesive Arbitration Agreements—with Particular Consideration of Class Actions and Arbitration Fees, 5 J. Am. Arb. L. 251, 256 (2006), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=791807 (“[I]t is inconsistent with basic economics to question the existence of the price reduction.”). This is the sort of reasoning only permissible in law and economics circles.

[22] Theodore Eisenberg, Geoffrey P. Miller, and Emily Sherwin, Arbitration’s Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts, 41 U. Mich. J. L. Reform, 871, 883 (2008). Given that, since 2007, Rent-a-Center, Concepcion, and Italian Colors were decided, it seems likely that these results likely understate the prevalence of arbitration clauses in the contemporary world.

[23] Myriam Gilles and Gary B. Friedman argue that Attorneys General should fill the void that will inevitably be left by the ability of corporations to escape class litigation or arbitration. After Class: Aggregate Litigation in the Wake of AT&T Mobility v. Concepcion, 79 U. Chi. L. Rev. 623 (2012). I set aside this possibility as outside the scope of this short blog post.

[24] Arbitration Fairness Act of 2013, H.R. 1844, 113th Cong. (2013); see H.R. 1844, GovTrack.us (last visited Sept. 14, 2013), http://www.govtrack.us/congress/bills/113/hr1844.

[25] Amalia D. Kessler, Stuck in Arbitration, N.Y. Times (Mar. 6 2012), http://www.nytimes.com/2012/03/07/opinion/stuck-in-arbitration.html.

[26] One reason the AFA is no panacea is that arbitration is not the only sort of clause that businesses sneak into contracts to get out of liability. These other clauses are beyond the scope of this article, but Radin, supra note 20, provides a useful overview of the most egregious.

Toward an Improved Legal Form For Social Enterprise

 

Keren G. Raz

Abstract

Lawyers, policymakers, and social entrepreneurs are engaging in a vigorous debate regarding new legal forms for social enterprise. Some argue that commercial activity in the non-profit sector

English: Enterprise Plaza, the headquarters of...

Photo credit: Wikipedia

is not new and does not require a new legal form; others argue that new legal forms, including the Low-profit Limited Liability Company (L3C) and the Benefit Corporation, can meet the needs of social enterprise; and still others argue that new legal forms are needed. This debate has suffered, however, from a fractured understanding of foundational issues related to the meaning of ―social enterprise‖ and the limitations of existing legal forms in facilitating it. This paper seeks to repair our fractured understanding of social enterprise by (1) clarifying what social enterprises are and how they differ from other organizations; (2) revealing what social enterprises require from a corporate form; (3) explaining how existing corporate structures, including the L3C and the Benefit Corporation, fall short in meeting those requirements; and (4) briefly considering the characteristics of a new legal form for social enterprise that will better facilitate the growth and success of these promising organizations.

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Putting Online Privacy Above the Fold: Building a Social Movement and Creating Corporate Change

Nicole A. Ozer

Abstract

Online privacy issues are now “above the fold,” both literally and figuratively. Consumers, companies, and policymakers increasingly think about collection and control of personal information, and the media prominently highlights these issues. But there is very little scholarship that reflects on the factors that have contributed to this recent increase in attention. And there is a dearth of scholarship that specifically analyzes how privacy advocates have started to face and overcome the challenges typical to building and sustaining any type of social movement, as well as challenges that make collective action around privacy issues particularly difficult, such as informational disparities and behavioral tendencies. This article provides a behind-the-scenes analysis of how recent factors have enabled the privacy community to create the climate necessary for a social movement to start to coalesce—a movement that can keep issues of online privacy above the fold in sustained ways and support real online privacy reform. The article assesses two recent privacy incidents, and it highlights how the privacy community has been able to mobilize—based on these incidents—to move beyond piecemeal responses and start to build a social movement and influence corporate change. Finally, the article identifies remaining obstacles that must be overcome for the movement to be successful and suggests a focus for legal and policy work to meet these challenges.

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Progressive Corporations At Work: The Case of Diversity Programs

Soonhan Kim, Alexandra Kalev, and Frank Dobbin

Abstract

During the civil rights era in the 1960s, the federal government passed a series of measures to end racial and gender discrimination in the workplace. Yet the laws and regulations did not clearly define what constituted illegal discrimination and gave only weak enforcement power to federal agencies. As a result, over the following decades, corporations themselves have defined how they will comply with civil rights law. Human resources managers have created a series of programs designed to improve the status of women and minorities in the workplace, from formalized hiring and promotion procedures to diversity training to mentoring programs. Since firms have made different decisions about which programs to implement, researchers can track firms across time to study the causes and effects of the various programs.

In this article, we review many studies, some of which are our own, to find out what factors lead firms to implement anti-discrimination programs and which of these programs are actually successful at increasing workforce and management diversity. We find that regulatory pressure from the federal government has become less influential in driving firms to adopt diversity programs. Instead, advocacy from groups within the firm and industry culture have played greater roles in recent decades. We also find that some of the most popular equal opportunity programs are not actually the most effective. Formalized hiring and promotion procedures, diversity training, and grievance procedures do not lead to improvements in workforce diversity. We argue that these programs are ineffective because they treat managers as the source of the problem. The programs that do lead to results, such as recruitment initiatives and diversity taskforces, are successful because they engage managers in finding solutions. We also conclude that members of historically disadvantaged groups do not benefit from networking programs, but they do benefit from mentoring programs, which link them directly to managers who can help them advance in their careers.

Our findings have important public policy implications. Despite progress since the civil rights era, women and minorities are still underrepresented in management-level positions. Therefore, it remains as pressing as ever to understand which programs are effective in promoting workplace equality. The conclusions we present here offer guidance for managers deciding which programs to implement, courts awarding injunctive relief in discrimination suits, and agencies enforcing equal opportunity laws.

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