28 November 2005

Getting the Car Keys

One distressingly common issue in litigation of either employment or contract disputes concerns where the case may be heard—and by whom. It should surprise no one that virtually all employment disputes in a union context need to go through an arbitrator; we've pretty much come to assume that "grievance arbitration" means exactly that. In the last couple of decades, employers have imposed arbitration on an increasing proportion of non-union employees, whether because the business is not a union shop or the employees were not eligible for union membership.

This begins to get disturbing when extended to contract actions. Most people fail to understand that virtually any transaction involving an exchange of money for goods or services involves a contract. We don't even need to delve into the depths of whether it is a "consumer transaction" or a "business transaction," with the slightly differing burdens imposed by the Uniform Commercial Code (and common law of contracts), to see the problem. An increasing proportion of contracts—particularly contracts that concern either services or long-term obligations—includes an arbitration clause of some kind. The publishing industry has begun to catch on; the slimier segments thereof (including both "legitimate" and fraudulent vanity presses) caught on a long time ago.

The Supreme Court is hearing arguments on two cases probing the limits of arbitrations clauses this week. One of them concerns a distinction in contract law that has lost much of its force, but may be making a comeback: whether an invalid contract is void or voidable. In Buckeye Check Cashing, the Court must thread its way through precisely this distinction, because whether the underlying contract (one of those "cash advance" transactions) is void or is voidable may have a huge influence on whether any court can hear the matter—as Buckeye's contract includes a particularly onerous arbitration clause that, in effect, would deny all relief without proof of specific fraudulent intent and reasonable (and actual) reliance on deceptive conduct. Further, it costs a lot more to file an arbitration claim than it does to go to a small-claims court.

The other distinction is even more directly about the ability of a company to use an arbitration clause to evade all review of its actions. In Wachovia Bank, the Court will need to decide what "located" means. This concerns arbitration on the facts of the particular case. Wachovia's customer sued the bank in state court in a state in which Wachovia has branches, but neither its headquarters nor its incorporation. Wachovia filed an action in federal court (also in that state) asserting that an arbitration clause in the contract with its customer required arbitration, not a lawsuit. The Supreme Court is hearing the matter because the federal district court refused to enforce the arbitration agreement, and the Fourth Circuit Court of Appeals held that there was no federal jurisdiction anyway. In one sense, this comes down to a technical interpretation of the enabling statute (28 U.S.C. § 1348, which gives expanded jurisdictional access to federal courts to certain banks in certain circumstances) and the concept of "diversity jurisdiction." In other words, it's something that only a civil procedure nerd like me would ordinarily care about. In this context, though, it means something a bit more ominous:

At the risk of pointing out the obvious, allow me to note the irony presented by [the bank]'s claim: Wachovia seeks access to the federal courts in order to prevent its customers from accessing any court, federal or state.

Id. This is merely an extension of the problem presented in Buckeye. It's a rather unpleasant extension, akin to declaring that only one parent may grant permission to use the car if the purpose of using the car is going out on a date. Realistically, there is no appeal from that parental decision; realistically, there is no appeal from the result of an arbitration (which doesn't prevent businesses from expending considerable sums trying to do so).