• 18 March 2009

The Unconscionability Game: Strategic Judging and the Evolution of Federal Arbitration Law

Aaron-Andrew P. Bruhl - University of Houston Law Center

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In a fairly short period of time, arbitration agreements have migrated beyond their traditional domains, such as commercial transactions between sophisticated business entities, and have come to pervade the contemporary economy. A typical consumer might have agreed, though not necessarily consciously, to arbitrate disputes with his or her credit card issuer, cellular telephone service provider, car dealer, doctor, and employer. The United States Supreme Court has encouraged this transformation through expansive interpretations of the Federal Arbitration Act (FAA), the federal statute that makes agreements to arbitrate future disputes generally enforceable.1  But not all courts have embraced arbitration so fervently, and therefore case law in this area is marked by tension and conflict as courts skeptical of arbitration reach for traditional contract defenses, such as unconscionability, that can help limit the impact of the FAA.  This tension gives rise to what I call the “unconscionability game”—strategic interaction between multiple institutional players with different preferences, played out in the context of arbitration doctrine.

My Article exploring the unconscionability game aims to make three contributions.  To begin with, it can help us understand arbitration law better.  I define arbitration law as the set of rules governing when arbitration agreements are enforceable, as well as the rules allocating decisional authority between courts and arbitrators, federal courts and state courts, and federal law and state law.  In particular, the strategic framework can help us make sense of some otherwise puzzling recent trends in the evolution of allocation rules.  As I will explain, these allocation rules can be understood as tools employed by pro-arbitration courts for indirectly combating what they perceive as overly aggressive use of state-law contract defenses such as unconscionability.

Somewhat more broadly, a second objective of the Article is to increase the visibility of the FAA among those who study federal courts law.  The conflict over the FAA implicates some of the recurring themes in the field, in particular the debates over judicial federalism and parity.  Traditionally, these clashes have been most conspicuous in politically charged domains like habeas corpus and civil rights litigation.2  Certainly these old debates retain vitality there, but today the real frontline may be civil litigation that pits consumers, tort claimants, employees, and other individuals against business interests.  Dissatisfaction in some quarters with how state courts and state law handle these cases has manifested itself through federal legislation such as the Class Action Fairness Act, judicial endorsements of broad readings of federal jurisdiction, Supreme Court review of state courts’ punitive damages awards, and, as we explore here, tensions over the scope of the FAA.  Indeed, the FAA provides a particularly fertile ground for the study of judicial federalism because, as explained further below, it imposes on all courts a federal duty of fidelity to general state contract law, a complex rule of decision that almost invites trouble.

Finally, the Article aims to provide a concrete illustration of certain strategic approaches to judicial decisionmaking.  Increasingly, sophisticated models of judicial behavior are moving beyond claims that judicial ideology and preferences matter.  Those claims may be true, yet doctrine is still relevant.  In fact, doctrine can itself be a strategic tool.  Lower courts can make doctrinal choices that accomplish their policy aims while simultaneously shielding their decisions from review.  In response, higher courts can fashion a new, less pliable doctrine in order to improve monitoring and reduce the opportunity for evasion.  The system is not static but reactive—a game.

With those goals in mind, let us see how the unconscionability game has developed and how it is played.

 
I.
Resistance to the Supreme Court’s Program

The Supreme Court has interpreted the FAA expansively, such that it applies to almost all economic transactions and almost every kind of claim, from common law fraud to employment discrimination.  Its principal provisions apply in both federal and state courts to the exclusion of conflicting state law.3 Regardless of whether the Court’s interpretations were correct, they have served to transform the FAA’s reach.

The Court’s fairly rapid embrace of arbitration was a shock to the legal system, or at least portions of it.  All courts and jurisdictions were suddenly required to enforce predispute arbitration clauses in almost every kind of contract, notwithstanding any state common law or statutory law to the contrary.  But while the Supreme Court can change the law, it cannot necessarily change other courts’ preferences.  Some courts, especially certain state courts, continue to view arbitration with skepticism, most often when it comes to cases involving consumers or employees who have signed nonnegotiated arbitration agreements embedded in standard form contracts.  (Their concerns may or may not be justified, but my aims here are simply explanatory and positive.  I do not here engage with the large literature debating whether arbitration is beneficial for consumers and employees.)

Because Supreme Court doctrine has moved so much faster and further to embrace arbitration than have some other parts of the judicial system, there is a sort of hydraulic pressure in the system that will seek release through whatever channels still exist for invalidating, or at least limiting, arbitration agreements.  The main channel that remains open to courts wary of the increasingly pervasive use of arbitration is the proviso in section 2 of the FAA stating that arbitration agreements must be enforced except “upon such grounds as exist at law or in equity for the revocation of any contract.”4  A state or federal court can invalidate an arbitration agreement under generally applicable state contract principles, such as unconscionability, but only if it uses those principles evenhandedly, treating arbitration agreements like any other contract; discrimination against arbitration is prohibited.5

Demonstrating the potential of the section 2 proviso, the last several years have witnessed a surprising burst of rulings invalidating arbitration clauses as unconscionable, especially in state courts.6  These rulings are surprising because unconscionability is usually regarded as an improbable defense that, despite some venerable precedents that appear in casebooks, rarely succeeds.7 These rulings typically do not attack arbitration per se—after all, arbitration is now favored as a matter of federal policy—but rather focus on details of contract formation or particular aspects of an arbitration clause, such as restrictions on relief, disadvantageous arbitral procedures, or bans on class-wide proceedings.  California was in the vanguard in employing unconscionability and related doctrines to invalidate arbitration clauses, but one can now find such cases in many places.

The newfound popularity of unconscionability is in part explainable by the simple fact that it is one of the few tools still available to courts that wish to limit the impact of arbitration.  But there is more to it than that.  Another of unconscionability’s virtues is that it provides at least the opportunity for furtive manipulation.  After all, unconscionability is a slippery doctrine; it is extremely difficult to tell if a decision invalidating an arbitration agreement on unconscionability grounds obeys the FAA’s rule of impartial treatment.  This difficulty creates room for courts to misapply, or perhaps even manipulate, state contract doctrines so as to nullify arbitration agreements while simultaneously insulating their decisions from effective scrutiny.

To express matters in somewhat more formal terms, a court wishing to strike down an arbitration agreement has a choice of various instruments.  The chosen basis for the decision can affect the likelihood of review and reversal by a higher court, even when holding the decision’s bottom line constant.  Lower court judges realize this, and so they can manipulate their grounds of decision both to advance their preferred outcomes and to make review of their decisions more costly.  This is the essence of the “strategic instruments” approach to judicial behavior.8

In the FAA/unconscionability context, we can posit two competing “decision instruments” for invalidating arbitration agreements.  The first instrument, which is really a collection of slightly different possible rationales, would be a decision of a broad or categorical nature.  Examples include rulings that arbitration agreements abridge the state constitutional right to jury trial, are per se (or presumptively) unconscionable in certain contexts (such as employment), or are inapplicable to certain types of statutory actions (such as consumer protection claims).  The second instrument would be a more contextual ruling to the effect that the particular arbitration agreement at hand is unconscionable (or is adhesive or contravened the nondrafting party’s reasonable expectations, etc.) and so need not be enforced as a matter of generally applicable state contract law.

Although a decision that holds an arbitration clause unconscionable based on a particularized examination of the contract and the circumstances of its formation will have somewhat less precedential impact than would a categorical rule, it has countervailing advantages.  For one, its fact-intensive character makes it opaque to a reviewing court.  When the reviewing court is a federal court, there is the additional difficulty that scrutinizing the ruling may require intimate knowledge of state law.9

Beyond opacity, there is another problem that complicates review, one that springs from the substantive law of the FAA.  Recall that the FAA allows courts to invalidate arbitration agreements on the basis of unconscionability, but only if they use unconscionability evenhandedly rather than discriminating against arbitration.  We are accustomed to seeing federal courts conclude that a state court has erred on some matter of federal law; but suppose a state court quotes the proper federal standards and claims to generate an evenhanded application of unconscionability law that strikes down an arbitration clause.  Rejecting the state court’s holding is tantamount to impugning the state court’s honesty, an act that contravenes the etiquette of judicial federalism.  Thus, review of an unconscionability ruling, particularly one from state court, is expressively difficult in addition to technically difficult.

The fact that unconscionability rulings are relatively insulated from review creates an incentive to use them to evade the FAA’s strictures, but are courts taking advantage of that opportunity?  There is reason to think that some are.  To begin with what we might call circumstantial evidence, there is motive.  As discussed above, some courts are not nearly as enthralled with arbitration as is the Supreme Court.  Whether because they seek to honor state statutes, to follow their constituents’ wishes, or simply because they believe arbitration is bad policy, these courts have cause to oppose it.  Further, some judges have basically admitted that they try to circumvent the FAA, and other judges have accused their colleagues of the same.10  While opportunity, motive, and anecdote might not add up to a conviction, there is also some more systematic evidence that, while limited in several ways, is highly suggestive.  At least two researchers have found that unconscionability challenges to arbitration agreements succeed at abnormally high rates, and they conclude that the reason is that courts apply unconscionability analysis differently in this context.11

In the end, though, producing empirical proof of discrimination, which is extremely difficult, is almost beside the point.  Pro-arbitration courts will evolve doctrine in response to what they believe they are seeing, so the suspicion of manipulation is enough.  And there are at least reasonable grounds for suspicion.

 
II.
Responsive Strategies

I am certainly not the first person to notice the rise of unconscionability challenges to arbitration agreements.  The new popularity of unconscionability and allied doctrines has been aptly described as an attempt, using one of the few tools remaining, to put the brakes on the pro-arbitration trend and to restore some sort of balance.12 There is much truth in that view, but I believe it is incomplete.  Any balance or equilibrium may be only temporary, for pro-arbitration courts will respond to the new tools being used to limit arbitration.  Sophisticated resistance to arbitration is just one side of the story—one move, but not the last.

What responsive moves are available to pro-arbitration courts like the United States Supreme Court?  There is, of course, the direct approach.  The Supreme Court could grant one of the many petitions for certiorari charging discrimination against arbitration and deem the decision below a manipulation of state law that violates the FAA.  No doubt the Supreme Court has the power to do so:  Although it ordinarily does not review questions of state law, here federal law mandates a duty of evenhandedness in applying state law.  But that is why review of such cases is so expressively taxing, for it is tantamount to impugning the lower court’s integrity.  Indeed, to a significant degree the target courts themselves control whether the reviewing court can assume the pose of the polite corrector of good-faith error.  A sophisticated state court—one that sets forth the governing law correctly, expresses the appropriate pro-arbitration sentiments, and the like—can make things very uncomfortable.

Admittedly, such an attack on a state court’s integrity would not be completely unprecedented.  Although we treat state courts as supreme and unreviewable on matters of state law, we also understand that a misapplication or distortion of state law can in some cases defeat federal rights.  So the federal courts can in certain cases test the bona fides of a state law ruling.  But this is the exception, the rare exception, and it has tended to occur during periods—such as the civil rights era—when there was much reason to suspect the integrity of certain courts.  Thus, when Chief Justice Rehnquist cited some of those extraordinary cases in his Bush v. Gore concurrence—in which he concluded that the Florida Supreme Court’s interpretation of its state election laws “distorted them beyond what a fair reading required”13—Justice Ginsburg pointed out the expressive stakes involved:

THE CHIEF JUSTICE’s casual citation of these cases might lead one to believe they are part of a larger collection of cases in which we said that the Constitution impelled us to train a skeptical eye on a state court’s portrayal of state law. . . . [T]his case involves nothing close to the kind of recalcitrance by a state high court that warrants extraordinary action by this Court.  The Florida Supreme Court . . . surely should not be bracketed with state high courts of the Jim Crow South.14

Given the historical connotations, one can see that a Supreme Court decision rejecting a state unconscionability holding as a discriminatory manipulation of state law would find itself in a rather remarkable category.  Issuing such a ruling would arguably reveal something about the Court’s values, and it would not be flattering:  namely, that it thinks state discrimination against arbitration merits the same extraordinary response, in terms of judicial federalism, as discrimination in the Jim Crow South.

The technical and expressive difficulty of attacking perceived manipulation of unconscionability head-on may explain why the Supreme Court—never shy about enforcing its pro-arbitration preferences—has been surprisingly hesitant to take such a case, letting dozens of petitions for certiorari go by, despite the pleas of prominent Supreme Court litigators and pro-business amici demanding action.  The direct approach to policing compliance with the FAA is not the only approach, however.  Another course is to develop new rules about the allocation of decisional authority between various courts or between courts and arbitrators.  Here I will describe just one allocation strategy.

Consider the question of who—court or arbitrator—decides certain types of challenges to arbitration agreements.  There have long been rules about this subject, including the so-called “separability doctrine” associated with the Prima Paint case.15  In that case, one party to a contract dispute claimed that the contract had been formed through fraudulent inducement and thus that the entire contract, including its arbitration clause, was unenforceable.  The Supreme Court decided that the challenge to the contract should be resolved by the arbitrator.  This has come to be known as the separability doctrine because an arbitration clause is regarded as separate from, and not necessarily infected by defects in, the container contract.

For a pro-arbitration court suspecting that judicial manipulation of contract defenses is afoot, one could see why aggressive use of separability and other rules shifting authority to arbitrators would be attractive.  There is no need to question hard-to-scrutinize state-law rulings if one takes away, as a matter of federal law, the authority to issue them in the first place.  The allocation rule is relatively easy to monitor.

There are signs that pro-arbitration courts are following just this strategy.  The Supreme Court has not decided an unconscionability case, but a few of its recent decisions have shifted more decisionmaking authority to arbitrators.  A 2006 case, Buckeye Check Cashing, Inc. v. Cardegna, involved a dispute arising from a payday loan agreement that was allegedly void and even criminally usurious under state law.16  The Florida high court refused to enforce the arbitration clause in the parties’ contract, concluding that the entire contract was a nullity, but the United States Supreme Court reversed and sent the dispute to arbitration.  The Court concluded that it was of no moment that the contract was deemed, as a matter of state law, void ab initio.  The Court’s decision to send the matter to arbitration is quite strange to many people, inasmuch as the decision finds a valid agreement to arbitrate disputes in a null and criminal contract.  But regardless of what one thinks of the outcome, the important point for our purposes is that the Buckeye rule makes these types of cases easy for a federal court to decide in the sense that they only require the application of the federal rule of separability.  No foray into slippery state-law distinctions between voidness, voidability, and other categories is required, for such distinctions are henceforth irrelevant.

The lower federal courts, which lack the luxury of simply denying certiorari, have been forced to deal with unconscionability more directly.  Although the case law on who decides unconscionability challenges is conflicting and continues to develop, there are signs of a trend toward shifting more authority to arbitrators.  The basic point of such cases is simple but powerful:  It is irrelevant that state law deems some limitation on arbitral relief unconscionable if, as a matter of federal law, the arbitrator is supposed to rule on that argument.  Such doctrinal changes are bizarre in some ways, but they do make sense as a way for pro-arbitration courts to ease monitoring of compliance with federal law.

 
III.
A Role for Congress?

My analysis would not be complete without mentioning the potential role of one other player:  Congress.  Congress has the power to rewrite the rules.  Legislation exempting consumer and employment disputes from arbitration would largely eliminate the tensions that generate the unconscionability game, as there is little opposition today to arbitration between sophisticated commercial parties.  Such legislation has been proposed but, in the face of strong opposition from business interests, has not yet progressed far.17

It is unclear whether Congress will ever come off the sidelines, but even if it does not do so, it can still exert an influence.  Just as inferior courts shape their behavior with an eye toward the anticipated responses of superior courts, the Supreme Court might shape its behavior with an eye toward the anticipated responses of its superior.  Sophisticated Justices would want to avoid provoking Congress into amending the FAA in a way that would harm the Court’s long-term pro-arbitration program.  Unconscionability might operate as a sort of safety valve that makes arbitration politically sustainable.  It permits courts, on a case by case basis, to respond to the most compelling inequities.  At the same time, the mere risk of an unconscionability challenge may prevent drafters of arbitration clauses from overreaching too much.  A sophisticated Supreme Court would tend to be careful about closing off this safety valve.

 
IV.
Conclusion

I have attempted to explain recent and ongoing developments in FAA case law as the result of a strategic interaction between various players with divergent preferences regarding arbitration.  As the Supreme Court has shut off most means of resisting arbitration, courts skeptical of arbitration have increasingly turned to unconscionability doctrine.  The flexibility of unconscionability analysis creates the potential for courts that disfavor arbitration to manipulate state law to limit the FAA’s reach.  This potential noncompliance then drives further responses by pro-arbitration courts like the Supreme Court, including development of new doctrines and allocation rules that ease monitoring by shifting authority from state courts to federal courts and from courts to arbitrators.

Although I believe that arbitration law is an increasingly important topic—and, in particular, that it provides a fertile field for the study of many of the problems that have long interested federal courts scholars—my aims in the Article go beyond the FAA in particular.  Few people today deny that judges’ policy preferences affect at least some of their decisions, but doctrine is not irrelevant.  Indeed, preferences and doctrine need not be forces that pull in opposite directions.  Some of the most interesting recent work in the political science of the courts attempts to accommodate sophisticated understandings of doctrine, casting it as not merely a potential constraint on preferences but also a tool for implementing them.  I have hoped to provide a concrete illustration and contextualized elaboration of such a model of judicial behavior, in which emerging doctrinal changes do not reflect only legal considerations, nor just preferences, but rather respond to the ongoing problem of monitoring lower courts.  Further work at this intersection of legal and political analysis should prove fruitful.dingbat

 

Acknowledgments:

Copyright © 2009 New York University Law Review.

Aaron-Andrew P. Bruhl is Assistant Professor, University of Houston Law Center.

This Editorial is based on the following full-length Article:  Aaron-Andrew P. Bruhl, The Unconscionability Game: Strategic Judging and the Evolution of Federal Arbitration Law, 83 N.Y.U. L. REV. 1420 (2008).
Click Here for the Full Article

  1. 9 U.S.C. §§ 1–16 (2006).
  2. See, e.g., Stone v. Powell, 428 U.S. 465, 493 n.35 (1976) (citing parity as justification for restricting availability of habeas relief); Burt Neuborne, The Myth of Parity, 90 HARV. L. REV. 1105 (1977) (discussing parity in context of federal constitutional claims).
  3. See Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996); Southland Corp. v. Keating, 465 U.S. 1, 10–17 (1984).
  4. 9 U.S.C. § 2 (2006).
  5. E.g., Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987).
  6. A full examination of the claims in this paragraph can be found in Part I.C of the full-length version of the Article. Bruhl, supra note 1, at 1436–43.
  7. E.g., 7 Jose M. Perillo, CORBIN ON CONTRACTS § 29.4 (rev. ed. 2002) (“Most claims of unconscionability fail.”).
  8. See generally, e.g., Emerson H. Tiller & Pablo T. Spiller, Strategic Instruments: Legal Structure and Political Games in Administrative Law, 15 J.L. ECON. & ORG. 349 (1999) (developing theoretical model according to which agencies and courts choose decision instruments in order to manipulate costs of review).
  9. When I refer to federal courts, I mean not only the Supreme Court but also the lower federal courts. Although the latter do not review state rulings in a hierarchical sense, they must ensure that state unconscionability decisions cited to them as precedents are compliant with the FAA’s mandate before applying them as rules of decision.
  10. Some of these statements are collected in the full-length version of the Article. See Bruhl, supra note 1, at 1433, 1456 & nn.136–37.
  11. Stephen A. Broome, An Unconscionable Application of the Unconscionability Doctrine: How the California Courts Are Circumventing the Federal Arbitration Act, 3 HASTINGS BUS. L.J. 39, 44–48 (2006); Susan Randall, Judicial Attitudes Toward Arbitration and the Resurgence of Unconscionability, 52 BUFF. L. REV. 185, 194–98 (2004). As explained in the full-length version of the Article, some caveats are in order regarding how much we can conclude from such studies.
  12. Jeffrey W. Stempel, Arbitration, Unconscionability, and Equilibrium: The Return of Unconscionability Analysis as a Counterweight to Arbitration Formalism, 19 OHIO ST. J. ON DISP. RESOL. 757, 765–66 (2004).
  13. 531 U.S. 98, 114–15 (2000) (Rehnquist, C.J., concurring).
  14. Id. at 140–41 (Ginsburg, J., dissenting).
  15. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).
  16. 546 U.S. 440 (2006).
  17. In the 110th Congress, the proposed legislation was the Arbitration Fairness Act of 2007. S. 1782, 110th Cong. (2007); H.R. 3010, 110th Cong. (2007).

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