It would have been easy to miss what at the Supreme Court earlier this week in a case about arbitration of employment disputes. But the justices’ unanimous decision in Morgan v. Sundance might have far-reaching implications for employers.
Okay, fine: a fair caution to corporate defendants to make sure to raise the arbitration clause promptly, or risk losing its protection. But the Morgan case should be set against its context. These days, the clauses are ubiquitous — and under fire.
A consumer can’t buy a product or service online without agreeing to one. They’re increasingly common in employment contracts. And nowadays, cases involving arbitration clauses almost always arise from “adhesive” contracts, where the employee who wants the job or the consumer who wants the product has no choice to agree to terms written by the company. The mandatory arbitration clause may be buried deeply in the boilerplate that not even contracts professors read before clicking “I agree”, but it’s still valid, as long as the user is clearly on notice that terms exist and that the click will create a contract. (The user might escape if the notice is too inconspicuous.)
Activists loathe what they consider “discriminatory” provisions that disproportionately harm those of lower income. Critics of binding arbitration argue that it’s bad for both employees and consumers. Others sharply dispute that claim. At minimum, one must concede that the evidence is complex. Although I understand what drives the critics, I myself am a bit of a fence-sitter; I think the clauses have upsides and downsides, and that they exist to solve an actual problem.
In 1924, the legal scholar Edwin W. Patterson coined the term “juridical risk” to refer to the uncertainty over how a court might apply existing law to any given set of facts. If a company can’t predict whether a jury will award $100,000 or $10 million should an accident occur, it’s difficult to decide how much to invest in precautions. Patterson argued that businesses needed legal tools to manage the uncertainty. Over the years, those tools have included everything from explicit warnings to limited warranties.
Since early in the 20th century, another key tool has been a binding arbitration clause, authorized by Congress in the Federal Arbitration Act, which was passed the year after Patterson’s article appeared. When the parties agree to arbitrate their differences, they’re giving up the right to sue. Except in rare circumstances, they’re also giving up their right to appeal the arbitrator’s judgment. In recent years, the Supreme Court has repeatedly held that the act makes clauses barring litigation enforceable — a trend for which the justices have been much criticized.
Once an arbitration clause is understood as a device that manages juridical risk, it’s easy to see that without such a clause the company faces greater uncertainty. That uncertainty, in turn, will likely be priced into the contract: slightly lower wages for the employee, a slightly higher price for consumers. If wages or prices prove too sticky, the company may try to “reprice” other contract terms to provide some protection against the additional risk.
None of this means that mandatory arbitration is good, particularly when buried in the boilerplate. Perhaps the costs of reducing the ubiquity of the clauses are worth bearing. But those costs do exist.
The edifice of mandatory arbitration has stood now for decades, but even before the Court’s decision in Morgan v. Sundance, there had been considerable chipping away. In March, President Biden signed into law a ban on enforcing mandatory arbitration clauses in cases alleging sexual harassment, aligning federal policy with rules already adopted in many states. It’s worth noting that the concern crossed the political spectrum. The tally in the House of Representatives was 335-97; the Senate adopted the measure by voice vote.
Later the same month, the House passed legislation that would bar the clauses in most employment and consumer contracts. Although at the present moment, the bill’s prospects in the Senate seem dim, the wind of change is blowing. It would take a foolish company indeed to ignore the direction of the gusts.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stephen L. Carter is a Bloomberg Opinion columnist. A professor of law at Yale University, he is author, most recently, of “Invisible: The Story of the Black Woman Lawyer Who Took Down America’s Most Powerful Mobster.”
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