Legislation Invalidating Arbitration Clauses in Franchise, Employment, Auto Purchase and Lease, and Consumer Agreements Makes Headway in U.S. House of Representatives

One year and three days after its introduction, the so-called “Arbitration Fairness Act of 2007” has advanced in the U.S. House of Representatives. This legislation would, as reported in a prior Legal News Alert: Distribution & Franchise (http://www.foley.com/publications/pub_detail.aspx?pubid=4303), invalidate pre-dispute agreements to arbitrate “franchise,” “consumer,” and “employment” disputes as defined by the statute. On July 15, 2008, the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law (Subcommittee) reported the bill without amendment. At the same time, the Subcommittee reported the so-called “Automobile Arbitration Fairness Act of 2008,” which would invalidate arbitration provisions in motor vehicle consumer sales and lease contracts. The next step is consideration of both bills by the full House Judiciary Committee, which could take place in the very near future. Meanwhile, the Arbitration Fairness Act in particular continues to attract additional co-sponsors in the House of Representatives.

Since 1925, when Congress enacted the Federal Arbitration Act (FAA), contractual provisions requiring binding arbitration of disputes have generally been enforceable See 9 U.S.C. § 2. Indeed, earlier this year, the Supreme Court again confirmed that the FAA preempts inconsistent state law (Preston v. Ferrer, 128 S. Ct. 978 (2008)) and limits the scope of judicial review of arbitration awards (Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S. Ct. 1396 (2008)).¹ In reliance upon the longstanding federal policy in favor of arbitration reflected in the FAA, many manufacturers and franchisors have included arbitration provisions in their standard form contracts with independent distributors, dealers, and franchisees. For such companies, the Arbitration Fairness Act would have major implications² — especially since the legislation would, if enacted, apply retroactively.

The model for the Arbitration Fairness Act appears to have been the Motor Vehicle Franchise Contract Arbitration Fairness Act (MVFCAFA). Enacted in 2002, the MVFCAFA created a narrow exception to the FAA that allows dealers to invalidate arbitration provisions in motor vehicle franchise agreements. 15 U.S.C. § 1226(a)(2). Many automobile dealers, however, still require their customers to arbitrate all claims. That would soon change if — as recommended by the Subcommittee — either the Arbitration Fairness Act, the Automobile Arbitration Fairness Act, or both were to become law.

The Arbitration Fairness Act defines “consumer” broadly enough that it would appear to invalidate arbitration provisions in contracts between dealers and their customers. Any potential doubt on this issue would be removed, however, by the Automobile Arbitration Fairness Act. No matter what an auto purchase or lease agreement might say about arbitration, the Automobile Arbitration Fairness Act would amend federal law so that disputes arising under such contracts “may not be settled by arbitration unless, after such controversy arises, all the parties to such controversy agree in writing to settle such controversy by arbitration.” (emphasis added).

Many companies that include arbitration provisions in their contracts, and many trade associations that represent such companies, have already voiced opposition to both pieces of legislation. Nevertheless, the Arbitration Fairness Act and the Automobile Arbitration Fairness Act continue to attract additional co-sponsors, at least in the House of Representatives.

The House version of the Arbitration Fairness Act, H.R. 3010, was originally introduced by Representative Hank Johnson (D-GA). It now has 102 co-sponsors; 97 Democrats³ and five Republicans.⁴

Its Senate counterpart, S. 1782, had two original sponsors: Senator Russell Feingold (D-WI) and Senator Richard Durbin (D-IL). It now has five co-sponsors, all Democrats: Senators Robert C. Byrd (D-WV), Edward M. Kennedy (D-MA), John F. Kerry (D-MA), Patrick J. Leahy (D-VT), and Sheldon Whitehouse (D-RI).

The Automobile Arbitration Fairness Act, H.R. 5312, was introduced in the House of Representatives by Rep. Linda T. Sanchez (D-CA), and currently has 12 co-sponsors, all Democrats.⁵ It has no Senate counterpart.

Because of the importance of arbitration clauses to many manufacturers and franchisors, Foley’s Distribution & Franchise and Public Affairs Practices will continue to monitor the progress of the Arbitration Fairness Act, the Automobile Fairness Act, and similar legislation.

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¹ These Supreme Court decisions are reported in a prior Legal News Alert: Distribution & Franchise (http://www.foley.com/publications/pub_detail.aspx?pubid=4908).

² These implications are analyzed in a recent article authored by Foley’s Distribution & Franchise Practice. Entitled “Arbitration Fairness Act of 2007: A Trial Lawyer’s Dream, A Client’s Nightmare,” this article appeared in Franchising World, a monthly publication of the International Franchise Association (http://www.foley.com/publications/pub_detail.aspx?pubid=4619).

³ The Democratic co-sponsors of the Arbitration Fairness Act are Reps. Thomas H. Allen (D-ME), Robert E. Andrews (D-NJ), Michael A. Arcuri (D-NY), Brian Baird (D-WA), Tammy Baldwin (D-WI), John Barrow (D-GA), Howard L. Berman (D-CA), Sanford D. Bishop, Jr. (D-GA), Timothy H. Bishop (D-NY), Leonard L. Boswell (D-IA), Robert A. Brady (D-PA), Bruce L. Braley (D-IA), Michael E. Capuano (D-MA), Russ Carnahan (D-MO), Julia Carson (D-IN), Ben Chandler (D-KY), Yvette D. Clarke (D-NY), Emanuel Cleaver (D-MO), Steve Cohen (D-TN), John Conyers, Jr. (D-MI), Joe Courtney (D-CT), Elijah E. Cummings (D-MD), Danny K. Davis (D-IL), Peter A. DeFazio (D-OR), Diana DeGette (D-CO), William D. Delahunt (D-MA), Rosa L. DeLauro (D-CT), Norman D. Dicks (D-WA), Lloyd Doggett (D-TX), Michael F. Doyle (D-PA), Keith Ellison (D-MN), Chaka Fattah (D-PA), Bob Filner (D-CA), Barney Frank (D-MA), Charles A. Gonzalez (D-TX), Al Green (D-TX), Raymond “Gene” Green (D-TX), Raul M. Grijalva (D-AZ), Luis V. Gutierrez (D-IL), Alcee L. Hastings (D-FL), Brian Higgins (D-NY), Michael M. Honda (D-CA), Jay Inslee (D-WA), Jesse L. Jackson, Jr. (D-IL), Sheila Jackson-Lee (D-TX), Eddie Bernice Johnson (D-TX), Paul E. Kanjorski (D-PA), Carolyn C. Kilpatrick (D-MI), Dennis J. Kucinich (D-OH), James R. Langevin (D-RI), Barbara Lee (D-CA), John Lewis (D-GA), David Loebsack (D-IA), Nita M. Lowey (D-NY), Stephen F. Lynch (D-MA), Carolyn B. Maloney (D-NY), Edward J. Markey (D-MA), Doris O. Matsui (D-CA), Carolyn McCarthy (D-NY), Betty McCollum (D-MN), James McGovern (D-MA), Jerry McNerney (D-CA), Brad Miller (D-NC), George Miller (D-CA), John P. Murtha (D-PA), Jerrold Nadler (D-NY), Frank Pallone, Jr. (D-NJ), Ed Pastor (D-AZ), Donald M. Payne (D-NJ), John T. Salazar (D-CO), Linda T. Sanchez (D-CA), John P. Sarbanes (D-MD), Janice D. Schakowsky (D-IL), Allyson Y. Schwartz (D-PA), Robert C. Scott (D-VA), Jose E. Serrano (D-NY), Carol Shea-Porter (D-NH), Brad Sherman (D-CA), Ike Skelton (D-MO), Adam Smith (D-WA), Hilda L. Solis (D-CA), Zachary T. Space (D-OH), Fortney “Pete” Stark (D-CA), Bart Stupak (D-MI), Betty Sutton (D-OH), Bennie G. Thompson (D-MS), John F. Tierney (D-MA), Niki Tsongas (D-MA), Tom Udall (D-NM), Chris Van Hollen (D-MD), Timothy J. Walz (D-MN), Debbie Wasserman Schultz (D-FL), Melvin L. Watt (D-NC), Henry A. Waxman (D-CA), Peter Welch (D-VT), Robert Wexler (D-FL), and Lynn C. Woolsey (D-CA).

⁴ The Republican co-sponsors of the Arbitration Fairness Act are Reps. John T. Doolittle (R-CA), John J. Duncan, Jr. (R-TN), Phil English (R-PA), Steven C. LaTourette (R-OH), and Ted Poe (R-TX).

⁵ The co-sponsors of the Automobile Arbitration Fairness Act are Reps. Bruce L. Braley (D-IA), Steve Cohen (D-TN), John Conyers, Jr. (D-MI), William D. Delahunt (D-MA), Chaka Fattah (D-PA), Henry C. Johnson, Jr. (D-GA), Dennis J. Kucinich (D-OH), Zoe Lofgren (D-CA), Brad Sherman (D-CA), Debbie Wasserman Schultz (D-FL), Melvin L. Watt (D-NC), and Robert Wexler (D-FL). 

Legal News Alert is part of our ongoing commitment to providing up-to-the minute information about pressing concerns or industry issues affecting our distribution and franchise clients and our colleagues.

Please contact the following attorneys for further information about the progress of the legislation: