My 2016 Arbitration Predictions Report Card: Batting .833 is Really Good!
By George H. Friedman*
Toward the end of last year I authored a blog post, Consumer Arbitration: Five Things to look for in 2016. As I’ve said many times before, one of the nice things about predicting future events is that, while people can disagree with you, they cannot state categorically that you are wrong, unless they claim to be time travelers. Also, it takes dedication and a good memory to wait a long time and then go check to see how the predictions turned out. I, however, was a fan of the late Ed Koch, former mayor of New York City, who constantly would ask “How am I doing?” Channeling Mayor Koch, let’s see how I did. Here were my views on what was coming in 2016, and how they turned out:
- The Arbitration Fairness Act is still DOA; so is the Investor Choice Act
What I wrote: My prior blog posts go through chapter and verse on this one. Suffice it to say these bills would amend the Federal Arbitration Act (“FAA”) to ban predispute arbitration agreements (“PDAAs”) outright in consumer, securities and employment contracts. Both the AFA and ICA were reintroduced this year and have gone nowhere. They will continue going nowhere next year. Or, as Chevy Chase used to say in that old SNL sketch, the AFA and ICA “are still dead.”
Prediction: Quoting myself from a couple of years ago, several attempts were made over the years to amend the FAA to limit or ban use of mandatory arbitration in consumer contracts. These failed when the Republicans controlled the White House and Congress, and have met a similar fate under Democratic control of these institutions as well. For example, in 2009 the Democrats regained the White House and control of both houses of Congress. The capital markets tanked, there were the Madoff and other scandals, and the economy crashed. But the Arbitration Fairness Act didn’t make it out of the House Financial Services Committee, which at the time was chaired by Barney Frank, an avowed critic of mandatory PDAAs in consumer contracts. If it didn’t happen then, it’s not going to happen in 2016 with a Republican-controlled Congress. You can book that one.
What happened: Spot on! These bills have gone nowhere and will die at the end of the year when the 114th Congress expires. Ditto for these other anti-arbitration bills introduced in 2016: The Restoring Statutory Rights Act , the Justice for Telecommunications Consumers Act , and the Justice for Victims of Fraud Act. One for one. Batting 1.000.
- The Consumer Financial Protection Bureau will ban class action waivers and start the process for banning mandatory arbitration in many types of consumer financial contracts
What I wrote: The Dodd-Frank Wall Street Reform and Consumer Protection Act (“ Dodd-Frank”), contains language governing the use of predispute arbitration agreements in consumer financial and investor contracts. Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB”) and charged the new federal agency with studying the use of PDAAs in contracts for consumer financial products and services and addressing PDAAs “if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers…” In March 2015, the CFPB issued its Final Report to Congress, finding that mandatory PDAAs are widely used in contracts for financial goods and services, and that they can be harmful to consumers.
Prediction: I’m betting that the Bureau in 2016 will, after collecting and analyzing consumer arbitration case filing and Awards data, start the process of banning mandatory PDAAs.
What Happened? On May 5th the CFPB released a proposed rule that would: 1) ban class action waivers in predispute arbitration agreements in contracts for consumer financial goods and services; and 2) require regulated financial institutions to file customer claims and awards data with the CFPB, which the Bureau may choose to publish. This will in my opinion permit the Bureau to monitor these cases and, perhaps, decide down the road if further rulemaking to ban pre-dispute arbitration agreements is warranted. The Bureau on November 30th updated its 2017 rulemaking agenda to reveal that it intends to publish a final arbitration rule in February 2017. Two for two. Still batting 1.000.
- The SEC will begin to act on mandatory investor-broker arbitration
What I wrote: During the summer of 2015, FINRA formed a Dispute Resolution Task Force to “suggest strategies to enhance the transparency, impartiality, and efficiency of FINRA’s securities dispute resolution forum.” The Task Force and its subcommittees gathered written comments, held many meetings and issued its Final Report December . Among the 51 recommendations were key ones on explained decisions, a raise for arbitrators, expungements, paper cases and motions to dismiss. The group, however, could not reach a consensus on mandatory predispute arbitration agreements, but they considered the subject. The Task Force identified mandatory arbitration as an important issue, but concluded “the mandatory nature of SRO securities arbitration is a defining characteristic of the process that engenders controversy about its fairness. Despite considerable discussion, however, the task force was not able to reach consensus. It concludes that the debate over mandatory securities arbitration is to a large extent a philosophical or policy question about which thoughtful, informed individuals disagree and which the task force cannot settle.”
What of the SEC, which has supervised securities arbitration for decades and since the 2010 had authority under Dodd-Frank section 921 to ban PDAAs, or limit or impose conditions for their use? After more than half a decade, there has been very little activity.
Prediction: My view is that, at a minimum, the SEC will study the subject (it has since 2010 been accepting comments on mandatory arbitration), and eventually require some changes (impose limits or conditions). How might that transpire? Now that FINRA Task Force has finished its work, I predict SEC will do a study of securities arbitration, building on the Task Force’s recommendations. The significant recommendations in the Final Task Force Report form a nice framework for the Commission to fulfill this part of my prediction from last year: “We’ve studied customer-broker arbitration and we’ve concluded that it’s a fair process. But, you know, these few changes will make it even better.” Just watch.
Prediction: “False start” (football penalty called when an offensive player jumps the gun). While I still think this will happen, it didn’t occur in 2016. Why? There are two as-yet unfilled Commission vacancies (and Chair Mary Jo White announced on November 14th that she will be stepping down as SEC Chair when President Obama’s term ends January 20th). I think staff decided to wait for FINRA to evaluate and act on the Task Force’s recommendation and then do its study. Two for three. Batting .667.
- SCOTUS will continue to rebuke California on its anti-arbitration intransigence
What I wrote: A core element of SCOTUS’ support for PDAAs is the so-called separability doctrine, which holds that, under the FAA, a PDAA is a separate contract from the one in which it is embedded, and must be on “equal footing” with any other contract. Section 2 of the FAA provides that a PDAA must be enforced “save upon such grounds as exist in law or in equity for the revocation of any contract.” The issue of how far states can go in applying the “revocation of any contract” language in section 2 came to a head in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). There, SCOTUS preempted California’s rule of law that a predispute arbitration clause with a class action waiver was an unconscionable contract of adhesion and was unenforceable under California law. Said the Court, “Although [FAA] § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”
After Concepcion, the bottom line on FAA preemption of state law on arbitration was this: consistent with FAA section 2, states may invalidate PDAAs based on laws applicable to contracts in general, if they don’t single out PDAAs for burdensome or negative treatment. Ever since, California’s courts have in my view begrudgingly implemented Concepcion, but have tried to carve out exceptions.
Prediction: SCOTUS will continue to rebuke California on its anti-arbitration intransigence.
What happened: This one was validated before I had a chance to publish my blog post! A year ago, SCOTUS in DIRECTV v. Imburgia, No. 14-462 (Dec. 14, 2015) — a case involving a California court decision — rebuked California over its begrudging acceptance of the supremacy of the Federal Arbitration Act and related Supreme Court rulings. The beginning of Justice Breyer’s Opinion has some rather strong language pointing out that the FAA “is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.”
Also, the Supreme Court granted a Petition for Certiorari in another arbitration-related case from California, MHN Government Services, Inc. v. Zaborowski, No. 14-1458. As described in the Petition for Certiorari, “California law applies one rule of contract severability to contracts in general, and a separate rule of contract severability to agreements to arbitrate. The arbitration-only rule disfavors arbitration and applies even when the agreement contains an express severability clause… The question presented is whether California’s arbitration-only severability rule is preempted by the FAA.” I thought SCOTUS took up Zaborowski because it wanted to settle once and for all two things: 1) the overarching, preemptive reach of the Federal Arbitration Act; and 2) that state courts have to fully embrace SCOTUS’ rulings in this area. I predicted that Zaborowski would be the final nail in the FAA preemption-of-state-anti-arbitration-laws coffin, but the parties ended up settling. Three for four. Batting .750.
- Web-based ADR will continue to become much more prevalent
What I wrote: For this one, I just repeat verbatim what I said a year ago: There’s a great scene in the classic 1967 movie The Graduate where a family friend of new college graduate Ben Braddock (played by Dustin Hoffman) gives some sage advice about the future to young Ben. With great fanfare, he leads up to a one-word prediction: “Plastics!”
Prediction: Here’s my one-word prediction on technology and ADR: “C-ODR” which stands for complete – online dispute resolution services. This is a term developed by Arbitration Resolution Services, Inc., whose Board I chair. On what basis do I make this prediction? The dramatic and rapid advances in technology will make this choice an easy one for consumers, much like Amazon and other web-based entities have challenged brick-and-mortar shopping as the preferred method of commerce. Put differently, why drag yourself to a hearing and wait around for snail-mail when you can accomplish the same things via the cloud in a fraction of the time and cost? At a minimum, I see this as another breakthrough year for web-based ADR. Case administration, from filing to conclusion – including hearings – will be done online, and paper will become passé. It doesn’t take a Nostradamus to see that improving technology will drive this change.
What happened. Spot on. For example, the SEC on November 14th approved FINRA’s proposal mandating use of its online Party Portal for all but pro se customers. As described on the FINRA website, the new rule will “require all parties, except customers who are not represented by an attorney or other person (‘pro se customers’), to use the FINRA Office of Dispute Resolution’s Party Portal (‘Party Portal’) to file initial statements of claim and to file and serve pleadings and other documents on FINRA or any other party. Under the proposed rule change, FINRA would require parties to use the Party Portal to file and serve correspondence relating to discovery requests, but would not permit parties to file documents produced in response to discovery requests through the Party Portal.” The rule will also permit mediation parties to use the portal.
Also, Arbitration Resolution Services had a breakout year, both in terms of cases filed and parties using ARS in their arbitration clause, and the American Arbitration Association continues to expand greatly its online presence. Four for five. Batting .800.
Bonus Prediction: the next President will be….
What I wrote: You really didn’t think I’d be so bold as to predict now the outcome of the presidential election next November, did you? What I had in mind was offering insights on how the President-elect might view arbitration, like “the next President will be supportive/critical/neutral/a blank slate about arbitration…” Check back here after the election for my thoughts on the new President-elect’s views on arbitration.
Prediction: I was certain Trump would win. Ask all the friends, colleagues, and family members who are buying me meals to pay off election wagers.
What happened: Trump won, which augurs well for arbitration. As I blogged right after the election, President-elect Trump believes in arbitration and uses the process. In 2012, he won $5 million in a dispute with a former Miss USA contestant who defamed the pageant, which he owned. Last year, Mr. Trump filed an arbitration claim against NBC after the network cancelled a contract to televise the Miss USA and Miss Universe pageants. He also won an Internet domain name arbitration, back in 2010. And I read in the Indisputably blog that even Mr. Trump’s agreement with campaign volunteers had a PDAA giving the campaign the unilateral right to require arbitration of disputes. Look for Executive Orders expanding use of arbitration by the federal government, and EOs undoing President Obama’s anti-arbitration directives. For example, President Obama in July 2014 signed Executive Order 13673, barring companies with federal contracts valued at over $1 million from mandating arbitration of Title VII or sexual harassment or assault claims. Five for six. Final batting average of .833!
The arbitration world is constantly changing, and will evolve yet again next year. Doubtless there are some things that will happen in 2017 that I just don’t see coming right now. For example, the sudden passing in 2016 of Justice Scalia had very real arbitration implications because some of the major cases involving arbitration were 5-4 decisions. A Clinton victory might have portended a shift away from the Court’s long-standing support of arbitration and the FAA. For example, potential Clinton nominee Senator Elizabeth Warren has been a long-term critic of mandatory arbitration. With Mr. Trump’s election, any Warren nomination is obviously now off the table, as is Judge Merrick Garland’s nomination. While at this point it’s hard to suggest who President-elect Trump will nominate – who may or may not come from the list compiled by candidate Trump – it’s a safe assumption that whoever it is will be supportive of arbitration.
And of course, some of my predictions may not come to pass, at least not yet (example: my 2016 prediction that “SEC will act on mandatory investor-broker arbitration”). We will again compare notes in a year. In the meantime, see you in the future!
*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors and is a Contributing Legal Editor of the Securities Arbitration Commentator. He is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional.
 For an in-depth analysis on what CFPB can and should do, see Friedman, George, What’s a Regulator to do? Mandatory Consumer Arbitration, Dodd-Frank, and the Consumer Financial Protection Bureau, 20:4 ABA Dispute Resolution Magazine 4 (Summer 2014), available at http://www.americanbar.org/publications/dispute_resolution_magazine/2014/summer/what-s-a-regulator-to-do–mandatory-consumer-arbitration–dodd-f.html.
 The National Arbitration and Mediation Committee is finished reviewing the recommendations. Board approval of rule changes comes next, followed by rule filings with the SEC.
 There… I have a 2017 prediction!
 See Friedman, George, “Road Trips” in Consumer Arbitration: there Must be a Better Way (Sep. 15, 2013), available at https://www.arbresolutions.com/road-trips-consumer-arbitration-must-better-way/#.VGo-x_ldX84. [If I were writing that prediction today I would go with my blog post, Thoughts on the Great Blizzard of 2016… and Web-based Dispute Resolution (Jan. 25, 2016), available at https://www.arbresolutions.com/thoughts-on-the-great-blizzard-of-2016-and-web-based-dispute-resolution/.]
 Based on a very limited sampling, Chief Judge Garland seemed to be pro-arbitration