Individualized Injuctions and Non-Modification Terms: Challenging “Anti-Reform” Provisions in Arbitration Clauses

BY MYRIAM GILLES, 69 U. Miami L. Rev. 469 (2015).

Introduction: Maybe you’ve heard, the United States Supreme Court has been on a bit of a pro-arbitration tear recently, upholding ever-more draconian dispute resolution clauses inserted in standard-form contracts against all sorts of legal and policy-based challenges. The most recent cases to arrive at the Court have involved class action bans embedded within arbitration clauses, which require the parties to surrender the right to bring a class or representative claim in either the arbitral or judicial fora. In AT&T Mobility v. Concepcion, a divided Court held that the Federal Arbitration Act (“FAA”) preempted the categorical use of state unconscionability doctrine to strike down class action bans in consumer adhesion contracts.More recently, in American Express v. Italian Colors, the same five Justices again ruled that class action bans are broadly enforceable—even where proving the violation of a federal statute in an individual arbitration would be so costly that no rational claimant would undertake it, allowing some federal statutory rights to simply go unvindicated.

With the decisions in Concepcion and Italian Colors, the battle over class action bans in arbitration clauses appears to be over and corporate defendants appear to have won decisive—total—victories. Not surprisingly, scholars (myself included) have been gloomily forecasting the end of class actions and aggregate litigation in the wake of these decisions.Observers also predict that small-value individual claims are unlikely to be arbitrated—and certainly not in sufficient numbers to mirror the deterrent effects of a class action.Further, the individual claims that are brought in arbitration will be straightforward and simple disputes between the parties; “procedurally difficult” claims, to use Professor Jean Sternlight’s nomenclature, cannot realistically be brought by individuals in arbitration.So, by merely adding an arbitration clause (containing a class action ban and an anti-reform provision) to their con- tracts, corporate entities have seemingly won the right to cheaply and easily insulate themselves against many forms of privately-enforced legal liability, and with this, the right to continue engaging in practices that cause widespread harm, unless and until detected by a public enforcer.

But, thus far, the Supreme Court’s rulings have only considered whether class actions for monetary damages may be barred by arbitration clauses requiring individual adjudication.The Justices have not examined the enforceability of arbitration clauses or arbitral rules, which explicitly prohibit claimants from seeking or arbitrators from granting broad injunctive relief in an individual dispute. For example, if an individual small business owner sought to arbitrate its Clayton Act claim against American Express (“Amex”)—its only available option in the wake of Italian Colors—could an arbitrator award injunctive relief in the form of striking down the anti-competitive rules in the merchant’s contract with Amex? Section 16 of the Clayton Antitrust Act authorizes precisely this sort of equitable remedy,and the Supreme Court has long recognized the importance of equitable remedies in the enforcement of antitrust laws.Yet, the Amex arbitration clause explicitly provides that “[t]he Arbitrator shall have no power or authority to alter the Agreement or any of its separate provisions.”

Alternatively, could our intrepid small merchant in an individual arbitration seek a broad injunction against future enforcement of Amex’s anticompetitive rules as against itself and all market participants? After all, equitable remedies available under the antitrust laws are generally intended to be forward-looking and market-wide—i.e., to generate price competition between and amongst business rivals going forward.Individualized injunctions rarely solve the problem of widespread antitrust injury. But here, again, Amex’s arbitration clause expressly bans broad injunctions “on behalf of” or “award[ed] to” merchants beyond the named claimant.

Taken together, these prohibitions and limitations on relief—what I term “anti-reform” provisions—prohibit an individual arbitral claimant from seeking to end a practice, change a rule, or enjoin an act that causes injury to itself and to similarly-situated non-parties. And these sorts of provisions are now cropping up in the standard-form arbitration clauses of many major companies, including cellphone service providers and other consumer-oriented enterprises.Yet, to date, neither the Supreme Court’s FAA decisions nor opinions by the lower federal courts have squarely addressed the question of whether such provisions are enforceable.

Predictably, corporate drafters assert that these sorts of provisions are fully enforceable under the FAA and relevant case law. They argue that atomized, individual injunctions against unlawful conduct remain within the arbitrator’s authority to grant, and that the “no modification” language merely denies the arbitrator the ability to rewrite the underlying agreement.These legal arguments are serious and the stakes are high: if a single claimant could enjoin widespread injurious practices in arbitration, these defendants will have lost the advantages afforded them by the Court’s FAA jurisprudence, which effectively immunizes violative actions from legal review. Moreover, defense-side advocates are deeply discomfited by the idea of arbitrators wielding unchecked authority to issue broad and diverse injunctions in individual arbitrations, given the limited rights of appeal to the courts.As such, questions surrounding the enforceability of anti-reform clauses are just as important to putative defendants as the class action bans they have spent years defending; depending on the context, divesting individual claimants of the power to enjoin or reform a market-wide policy or practice may be even more critical than the threat of monetary liabilities.

Take an extreme but illustrative case: in 2011, three law firms sought to challenge the proposed merger between AT&T Mobility and T-Mobile, alleging it violated the Clayton Act.The firms filed more than 2,000 demands for arbitration on behalf of individual AT&T sub- scribers, each seeking injunctive relief in the form of blocking the merger. If even one of these arbitrations had succeeded, the many, many millions of dollars that AT&T and T-Mobile had invested in this proposed deal would have been undone by just a single subscriber. Not surprisingly, AT&T reacted swiftly and successfully enjoined the arbitrations on the grounds that the injunctive demand exceeded the scope of the subscriber agreement.

This essay is the first to consider the enforceability of anti-reform provisions that are beginning to appear in contemporary arbitration clauses in the wake of the Court’s major pro-arbitration decisions in Concepcion and Italian Colors. I believe, and this essay will seek to show, that these provisions should be held unenforceable, as they render arbitration a farcical and toothless imitation of adjudication. . . . Full Article.

Recommended Citation: Myriam Gilles, Individualized Injunctions and Non-Modification Terms: Challenging “Anti-Reform” Provisions in Arbitration Clauses, 69 U. Miami L. Rev. 469 (2015).

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