The arbitration claws: Unconscionability in the securities industry

Boston University Law Review

Volumn 78, Issue 2, 1998, Pages 255-326

  Davis, Kenneth R ^a,b,c,d  

^a FORDHAM UNIVERSITY   (United States)

^b BINGHAMTON UNIVERSITY   (United States)

^c University of California Observatories   (United States)

^d UNIVERSITY OF TOLEDO   (United States)

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[No Author keywords available]

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EID: 18044384099     PISSN: 00068047     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (486)

1. See, e.g., DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 818 (2d Cir. 1997) (confirming an arbitration award erroneously denying attorneys' fees to an age discrimination victim because the claimant could not prove that the arbitration panel intentionally disregarded the provision of the Age Discrimination in Employment Act ("ADEA") that makes mandatory attorneys' fee awards to prevailing claimants).
2. 140 CONG. REC. E1753 (daily ed. Aug. 17, 1994) (statement of Rep. Schroeder). Senator Feingold, the sponsor of the Senate bill to end the mandatory arbitration of employment discrimination claims, urged that "[i]t is simply unfair to require an employee to waive, in advance, his or her statutory right to seek redress in a court of law in exchange for employment or a promotion." 140 CONG. REC. S4266-67 (daily ed. Apr. 13, 1994). In addition, the Equal Employment Opportunity Commission ("EEOC") opposes mandatory employment arbitration, see Richard C. Reuben, Two Agencies Review Forced Arbitration, A.B.A. J., Aug. 1995, at 26; the NLRB is considering whether mandatory employment arbitration is an unfair labor practice, see id.; and two Securities Exchange Commission ("SEC") commissioners have spoken out against this practice, see Daily Lab. Rep. (BNA) 68, d18 (Apr. 9, 1997). The EEOC issued a policy statement in which it expressed opposition to the mandatory arbitration of civil rights claims, noting that "these agreements are imposed by employers because they believe them to be in their interest, and they are made possible by the employer's superior bargaining position." EEOC Notice 915.002 (July 10, 1997). See generally Christine K. Biretta, Comment, Prudential Insurance Company of America v. Lai: The Beginning of the End for Mandatory Arbitration?, 49 RUTGERS L. REV. 595, 596-99 (1997) (discussing the opposition to the mandatory arbitration of federal statutory civil rights claims).
3. 140 CONG. REC. E1753 (daily ed. Aug. 17, 1994) (statement of Rep. Schroeder). Senator Feingold, the sponsor of the Senate bill to end the mandatory arbitration of employment discrimination claims, urged that "[i]t is simply unfair to require an employee to waive, in advance, his or her statutory right to seek redress in a court of law in exchange for employment or a promotion." 140 CONG. REC. S4266-67 (daily ed. Apr. 13, 1994). In addition, the Equal Employment Opportunity Commission ("EEOC") opposes mandatory employment arbitration, see Richard C. Reuben, Two Agencies Review Forced Arbitration, A.B.A. J., Aug. 1995, at 26; the NLRB is considering whether mandatory employment arbitration is an unfair labor practice, see id.; and two Securities Exchange Commission ("SEC") commissioners have spoken out against this practice, see Daily Lab. Rep. (BNA) 68, d18 (Apr. 9, 1997). The EEOC issued a policy statement in which it expressed opposition to the mandatory arbitration of civil rights claims, noting that "these agreements are imposed by employers because they believe them to be in their interest, and they are made possible by the employer's superior bargaining position." EEOC Notice 915.002 (July 10, 1997). See generally Christine K. Biretta, Comment, Prudential Insurance Company of America v. Lai: The Beginning of the End for Mandatory Arbitration?, 49 RUTGERS L. REV. 595, 596-99 (1997) (discussing the opposition to the mandatory arbitration of federal statutory civil rights claims).
4. 140 CONG. REC. E1753 (daily ed. Aug. 17, 1994) (statement of Rep. Schroeder). Senator Feingold, the sponsor of the Senate bill to end the mandatory arbitration of employment discrimination claims, urged that "[i]t is simply unfair to require an employee to waive, in advance, his or her statutory right to seek redress in a court of law in exchange for employment or a promotion." 140 CONG. REC. S4266-67 (daily ed. Apr. 13, 1994). In addition, the Equal Employment Opportunity Commission ("EEOC") opposes mandatory employment arbitration, see Richard C. Reuben, Two Agencies Review Forced Arbitration, A.B.A. J., Aug. 1995, at 26; the NLRB is considering whether mandatory employment arbitration is an unfair labor practice, see id.; and two Securities Exchange Commission ("SEC") commissioners have spoken out against this practice, see Daily Lab. Rep. (BNA) 68, d18 (Apr. 9, 1997). The EEOC issued a policy statement in which it expressed opposition to the mandatory arbitration of civil rights claims, noting that "these agreements are imposed by employers because they believe them to be in their interest, and they are made possible by the employer's superior bargaining position." EEOC Notice 915.002 (July 10, 1997). See generally Christine K. Biretta, Comment, Prudential Insurance Company of America v. Lai: The Beginning of the End for Mandatory Arbitration?, 49 RUTGERS L. REV. 595, 596-99 (1997) (discussing the opposition to the mandatory arbitration of federal statutory civil rights claims).
5. 140 CONG. REC. E1753 (daily ed. Aug. 17, 1994) (statement of Rep. Schroeder). Senator Feingold, the sponsor of the Senate bill to end the mandatory arbitration of employment discrimination claims, urged that "[i]t is simply unfair to require an employee to waive, in advance, his or her statutory right to seek redress in a court of law in exchange for employment or a promotion." 140 CONG. REC. S4266-67 (daily ed. Apr. 13, 1994). In addition, the Equal Employment Opportunity Commission ("EEOC") opposes mandatory employment arbitration, see Richard C. Reuben, Two Agencies Review Forced Arbitration, A.B.A. J., Aug. 1995, at 26; the NLRB is considering whether mandatory employment arbitration is an unfair labor practice, see id.; and two Securities Exchange Commission ("SEC") commissioners have spoken out against this practice, see Daily Lab. Rep. (BNA) 68, d18 (Apr. 9, 1997). The EEOC issued a policy statement in which it expressed opposition to the mandatory arbitration of civil rights claims, noting that "these agreements are imposed by employers because they believe them to be in their interest, and they are made possible by the employer's superior bargaining position." EEOC Notice 915.002 (July 10, 1997). See generally Christine K. Biretta, Comment, Prudential Insurance Company of America v. Lai: The Beginning of the End for Mandatory Arbitration?, 49 RUTGERS L. REV. 595, 596-99 (1997) (discussing the opposition to the mandatory arbitration of federal statutory civil rights claims).
6. See, e.g., Civil Rights Procedures Protection Act of 1997, S. 63, 105th Cong. (1997) (proposing a ban on mandatory arbitration of civil rights claims); H.R. 983, 105th Cong. (1997) (proposing a ban on mandatory arbitration of civil rights claims). The Civil Rights Procedures Protection Act would amend all the major federal civil rights laws to bar mandatory arbitration of claims arising under those acts. See S. 63 (proposing to amend federal civil rights statutes to preclude mandatory arbitration); H.R. 983. For example, § 2 of the Act would amend Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-2 (1994) as follows: Notwithstanding any Federal statute of general applicability that would modify any of the powers and procedures expressly applicable to a claim arising under this title, such powers and procedures shall be the exclusive powers and procedures applicable to such claim unless after such claim arises the claimant voluntarily enters into an agreement to resolve such claim through arbitration or another procedure. S. 63 § 2; H.R. 983 § 2. See Political Pressure Increases to Curb Mandatory Arbitration of Employment Disputes, 8 SEC. ARB. COMMENTATOR, at 9 (Aug. 8, 1997) [hereinafter Political Pressure]; Hope B. Eastman & David M. Rothenstein, The Fate of Mandatory Employment Arbitration Amidst Growing Opposition: A Call for Common Ground, EMPLOYEE REL. L.J. Mar. 22, 1995, at 6-7.
7. See, e.g., Civil Rights Procedures Protection Act of 1997, S. 63, 105th Cong. (1997) (proposing a ban on mandatory arbitration of civil rights claims); H.R. 983, 105th Cong. (1997) (proposing a ban on mandatory arbitration of civil rights claims). The Civil Rights Procedures Protection Act would amend all the major federal civil rights laws to bar mandatory arbitration of claims arising under those acts. See S. 63 (proposing to amend federal civil rights statutes to preclude mandatory arbitration); H.R. 983. For example, § 2 of the Act would amend Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-2 (1994) as follows: Notwithstanding any Federal statute of general applicability that would modify any of the powers and procedures expressly applicable to a claim arising under this title, such powers and procedures shall be the exclusive powers and procedures applicable to such claim unless after such claim arises the claimant voluntarily enters into an agreement to resolve such claim through arbitration or another procedure. S. 63 § 2; H.R. 983 § 2. See Political Pressure Increases to Curb Mandatory Arbitration of Employment Disputes, 8 SEC. ARB. COMMENTATOR, at 9 (Aug. 8, 1997) [hereinafter Political Pressure]; Hope B. Eastman & David M. Rothenstein, The Fate of Mandatory Employment Arbitration Amidst Growing Opposition: A Call for Common Ground, EMPLOYEE REL. L.J. Mar. 22, 1995, at 6-7.
8. Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, the NASD proposes to amend Rule 10201(b) of the NASD Code of Arbitration Procedure to provide that "[a] claim alleging employment discrimination or sexual harassment in violation of a statute is not required to be arbitrated. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose." See Exchange Act Rel. No. 34-39421 (Dec. 10, 1997), 62 Fed. Reg. 66,164 (Dec. 17, 1997) This rule, if approved as expected, will become effective one year after SEC approval. See id. at 13. This proposed rule does not affect other employment claims, nor does if affect the mandatory arbitration of customer claims. See NATIONAL ASS'N OF SECURITIES DEALERS, SECURITIES ARBITRATION REFORM: REPORT OF THE ARBITRATION POLICY TASK FORCE 119 (1996) [hereinafter Ruder Report] (proposing that the NASD continue the practice of mandatory arbitration of employment disputes, including claims arising under federal civil rights laws); id. at 17 (proposing that the NASD continue to allow securities firms to require customers to sign pre-dispute arbitration agreements). One writer questions the Ruder Report's recommendation to continue mandatory arbitration of customer disputes before securities industry SROs. See Joel Seligman, The Quiet Revolution: Securities Arbitration Confronts the Hard Questions, 33 HOUS. L. REV. 327, 344-45 (1996). He proposes instead that brokerage firms give customers the option of arbitrating at a non-industry forum, such as the American Arbitration Association ("AAA"). See id. Anticipating that mandatory customer arbitration will eventually become inescapable, he suggests that firms ultimately adopt a more radical solution, permitting customers to pay for the right to go to court should the need arise. See id. at 345.
9. Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, the NASD proposes to amend Rule 10201(b) of the NASD Code of Arbitration Procedure to provide that "[a] claim alleging employment discrimination or sexual harassment in violation of a statute is not required to be arbitrated. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose." See Exchange Act Rel. No. 34-39421 (Dec. 10, 1997), 62 Fed. Reg. 66,164 (Dec. 17, 1997) This rule, if approved as expected, will become effective one year after SEC approval. See id. at 13. This proposed rule does not affect other employment claims, nor does if affect the mandatory arbitration of customer claims. See NATIONAL ASS'N OF SECURITIES DEALERS, SECURITIES ARBITRATION REFORM: REPORT OF THE ARBITRATION POLICY TASK FORCE 119 (1996) [hereinafter Ruder Report] (proposing that the NASD continue the practice of mandatory arbitration of employment disputes, including claims arising under federal civil rights laws); id. at 17 (proposing that the NASD continue to allow securities firms to require customers to sign pre-dispute arbitration agreements). One writer questions the Ruder Report's recommendation to continue mandatory arbitration of customer disputes before securities industry SROs. See Joel Seligman, The Quiet Revolution: Securities Arbitration Confronts the Hard Questions, 33 HOUS. L. REV. 327, 344-45 (1996). He proposes instead that brokerage firms give customers the option of arbitrating at a non-industry forum, such as the American Arbitration Association ("AAA"). See id. Anticipating that mandatory customer arbitration will eventually become inescapable, he suggests that firms ultimately adopt a more radical solution, permitting customers to pay for the right to go to court should the need arise. See id. at 345.
10. Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, the NASD proposes to amend Rule 10201(b) of the NASD Code of Arbitration Procedure to provide that "[a] claim alleging employment discrimination or sexual harassment in violation of a statute is not required to be arbitrated. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose." See Exchange Act Rel. No. 34-39421 (Dec. 10, 1997), 62 Fed. Reg. 66,164 (Dec. 17, 1997) This rule, if approved as expected, will become effective one year after SEC approval. See id. at 13. This proposed rule does not affect other employment claims, nor does if affect the mandatory arbitration of customer claims. See NATIONAL ASS'N OF SECURITIES DEALERS, SECURITIES ARBITRATION REFORM: REPORT OF THE ARBITRATION POLICY TASK FORCE 119 (1996) [hereinafter Ruder Report] (proposing that the NASD continue the practice of mandatory arbitration of employment disputes, including claims arising under federal civil rights laws); id. at 17 (proposing that the NASD continue to allow securities firms to require customers to sign pre-dispute arbitration agreements). One writer questions the Ruder Report's recommendation to continue mandatory arbitration of customer disputes before securities industry SROs. See Joel Seligman, The Quiet Revolution: Securities Arbitration Confronts the Hard Questions, 33 HOUS. L. REV. 327, 344-45 (1996). He proposes instead that brokerage firms give customers the option of arbitrating at a non-industry forum, such as the American Arbitration Association ("AAA"). See id. Anticipating that mandatory customer arbitration will eventually become inescapable, he suggests that firms ultimately adopt a more radical solution, permitting customers to pay for the right to go to court should the need arise. See id. at 345.
11. Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, the NASD proposes to amend Rule 10201(b) of the NASD Code of Arbitration Procedure to provide that "[a] claim alleging employment discrimination or sexual harassment in violation of a statute is not required to be arbitrated. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose." See Exchange Act Rel. No. 34-39421 (Dec. 10, 1997), 62 Fed. Reg. 66,164 (Dec. 17, 1997) This rule, if approved as expected, will become effective one year after SEC approval. See id. at 13. This proposed rule does not affect other employment claims, nor does if affect the mandatory arbitration of customer claims. See NATIONAL ASS'N OF SECURITIES DEALERS, SECURITIES ARBITRATION REFORM: REPORT OF THE ARBITRATION POLICY TASK FORCE 119 (1996) [hereinafter Ruder Report] (proposing that the NASD continue the practice of mandatory arbitration of employment disputes, including claims arising under federal civil rights laws); id. at 17 (proposing that the NASD continue to allow securities firms to require customers to sign pre-dispute arbitration agreements). One writer questions the Ruder Report's recommendation to continue mandatory arbitration of customer disputes before securities industry SROs. See Joel Seligman, The Quiet Revolution: Securities Arbitration Confronts the Hard Questions, 33 HOUS. L. REV. 327, 344-45 (1996). He proposes instead that brokerage firms give customers the option of arbitrating at a non-industry forum, such as the American Arbitration Association ("AAA"). See id. Anticipating that mandatory customer arbitration will eventually become inescapable, he suggests that firms ultimately adopt a more radical solution, permitting customers to pay for the right to go to court should the need arise. See id. at 345.
12. See, e.g., Plan to End Arbitration of Bias Claims on Wall Street, NEWS DAY (Nassau ed.), Aug. 8, 1997, at A63 (reporting that many brokerage firms, including Smith Barney, responded to the NASD announcement by declaring that they will require mandatory arbitration of employment discrimination claims as a condition of employment). Recently the senior vice president of Smith Barney remarked that brokerage firms will require registered employees, as a condition of employment, to sign broad arbitration agreements. See Eugene V. Clark, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997). At the same meeting, Lorena J. Kern, the senior vice president and associate general counsel for Dean Witter Reynolds, Inc., observed that brokerage firms would be foolish not to require such mandatory arbitration. See Lorena J. Kern, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997); see also John C. Coffee Jr., Sex and the Securities Industry, N.Y.L.J., May 29, 1997, at 1, col. 1 (stating that prior to the announcement of the new NASD policy, broker-dealers were "lobbying intensely for retention of the current system" which requires the arbitration of employment discrimination claims); cf. Mark L. Goldstein & Andrea H. Stempel, Mandatory Arbitration of Employment Disputes, N.Y.L.J., Aug. 21, 1997, at 1 col. 2, 7 col. 2 (speculating that if securities firms mandate arbitration as a condition of employment, courts will support such a requirement).
13. See, e.g., Plan to End Arbitration of Bias Claims on Wall Street, NEWS DAY (Nassau ed.), Aug. 8, 1997, at A63 (reporting that many brokerage firms, including Smith Barney, responded to the NASD announcement by declaring that they will require mandatory arbitration of employment discrimination claims as a condition of employment). Recently the senior vice president of Smith Barney remarked that brokerage firms will require registered employees, as a condition of employment, to sign broad arbitration agreements. See Eugene V. Clark, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997). At the same meeting, Lorena J. Kern, the senior vice president and associate general counsel for Dean Witter Reynolds, Inc., observed that brokerage firms would be foolish not to require such mandatory arbitration. See Lorena J. Kern, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997); see also John C. Coffee Jr., Sex and the Securities Industry, N.Y.L.J., May 29, 1997, at 1, col. 1 (stating that prior to the announcement of the new NASD policy, broker-dealers were "lobbying intensely for retention of the current system" which requires the arbitration of employment discrimination claims); cf. Mark L. Goldstein & Andrea H. Stempel, Mandatory Arbitration of Employment Disputes, N.Y.L.J., Aug. 21, 1997, at 1 col. 2, 7 col. 2 (speculating that if securities firms mandate arbitration as a condition of employment, courts will support such a requirement).
14. See, e.g., Plan to End Arbitration of Bias Claims on Wall Street, NEWS DAY (Nassau ed.), Aug. 8, 1997, at A63 (reporting that many brokerage firms, including Smith Barney, responded to the NASD announcement by declaring that they will require mandatory arbitration of employment discrimination claims as a condition of employment). Recently the senior vice president of Smith Barney remarked that brokerage firms will require registered employees, as a condition of employment, to sign broad arbitration agreements. See Eugene V. Clark, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997). At the same meeting, Lorena J. Kern, the senior vice president and associate general counsel for Dean Witter Reynolds, Inc., observed that brokerage firms would be foolish not to require such mandatory arbitration. See Lorena J. Kern, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997); see also John C. Coffee Jr., Sex and the Securities Industry, N.Y.L.J., May 29, 1997, at 1, col. 1 (stating that prior to the announcement of the new NASD policy, broker-dealers were "lobbying intensely for retention of the current system" which requires the arbitration of employment discrimination claims); cf. Mark L. Goldstein & Andrea H. Stempel, Mandatory Arbitration of Employment Disputes, N.Y.L.J., Aug. 21, 1997, at 1 col. 2, 7 col. 2 (speculating that if securities firms mandate arbitration as a condition of employment, courts will support such a requirement).
15. See, e.g., Plan to End Arbitration of Bias Claims on Wall Street, NEWS DAY (Nassau ed.), Aug. 8, 1997, at A63 (reporting that many brokerage firms, including Smith Barney, responded to the NASD announcement by declaring that they will require mandatory arbitration of employment discrimination claims as a condition of employment). Recently the senior vice president of Smith Barney remarked that brokerage firms will require registered employees, as a condition of employment, to sign broad arbitration agreements. See Eugene V. Clark, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997). At the same meeting, Lorena J. Kern, the senior vice president and associate general counsel for Dean Witter Reynolds, Inc., observed that brokerage firms would be foolish not to require such mandatory arbitration. See Lorena J. Kern, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997); see also John C. Coffee Jr., Sex and the Securities Industry, N.Y.L.J., May 29, 1997, at 1, col. 1 (stating that prior to the announcement of the new NASD policy, broker-dealers were "lobbying intensely for retention of the current system" which requires the arbitration of employment discrimination claims); cf. Mark L. Goldstein & Andrea H. Stempel, Mandatory Arbitration of Employment Disputes, N.Y.L.J., Aug. 21, 1997, at 1 col. 2, 7 col. 2 (speculating that if securities firms mandate arbitration as a condition of employment, courts will support such a requirement).
16. See, e.g., Plan to End Arbitration of Bias Claims on Wall Street, NEWS DAY (Nassau ed.), Aug. 8, 1997, at A63 (reporting that many brokerage firms, including Smith Barney, responded to the NASD announcement by declaring that they will require mandatory arbitration of employment discrimination claims as a condition of employment). Recently the senior vice president of Smith Barney remarked that brokerage firms will require registered employees, as a condition of employment, to sign broad arbitration agreements. See Eugene V. Clark, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997). At the same meeting, Lorena J. Kern, the senior vice president and associate general counsel for Dean Witter Reynolds, Inc., observed that brokerage firms would be foolish not to require such mandatory arbitration. See Lorena J. Kern, Remarks at Meeting of the New York City Association of the Bar (Nov. 10, 1997); see also John C. Coffee Jr., Sex and the Securities Industry, N.Y.L.J., May 29, 1997, at 1, col. 1 (stating that prior to the announcement of the new NASD policy, broker-dealers were "lobbying intensely for retention of the current system" which requires the arbitration of employment discrimination claims); cf. Mark L. Goldstein & Andrea H. Stempel, Mandatory Arbitration of Employment Disputes, N.Y.L.J., Aug. 21, 1997, at 1 col. 2, 7 col. 2 (speculating that if securities firms mandate arbitration as a condition of employment, courts will support such a requirement).
17. See Infra notes 225-251 and accompanying text (discussing attempts at using unconscionability as a defense to mandatory arbitration clauses in customer and employee contracts in the securities industry).
18. See infra Part II (discussing unconscionability).
19. See infra notes 233-251 and accompanying text (discussing cases that have rejected the unconscionability argument).
20. See infra notes 242-251 and accompanying text (discussing rejecting courts' reasoning for not accepting the unconscionability defense).
21. See infra notes 242-251 and accompanying text (discussing rejecting courts' reasoning for not accepting the unconscionability defense).
22. See infra notes 252-275 and accompanying text (discussing the substantive inadequacies of arbitration); infra notes 239-44 and accompanying text (discussing courts' procedural fairness findings).
23. See infra notes 276-294 and accompanying text (discussing the arbitrator's ability to ignore applicable law).
24. See infra notes 19-28 and accompanying text (discussing English arbitration cases).
25. See FRANCES KELLOR, AMERICAN ARBITRATION 10-11 (1948) (cheering the New York statute as a "foundation stone[ ]" of what would soon become "wide flung systems of arbitration"); Stephen J. Ware, Employment Arbitration and Voluntary Consent, 25 HOFSTRA L. REV. 83, 89 (1996) (noting that New York was the first state to enact legislation making pre-dispute arbitration agreements specifically enforceable); see also 1 IAN R. MACNEIL ET AL., FEDERAL ARBITRATION LAW § 5.4.1. (1994) (tracing the history of early arbitration statutes). Ironically, even before enactment of the New York statute, England had long abandoned its hostility toward arbitration. See KELLOR, supra, at 14 (noting that English law permitted pre-dispute arbitration).
26. See FRANCES KELLOR, AMERICAN ARBITRATION 10-11 (1948) (cheering the New York statute as a "foundation stone[ ]" of what would soon become "wide flung systems of arbitration"); Stephen J. Ware, Employment Arbitration and Voluntary Consent, 25 HOFSTRA L. REV. 83, 89 (1996) (noting that New York was the first state to enact legislation making pre-dispute arbitration agreements specifically enforceable); see also 1 IAN R. MACNEIL ET AL., FEDERAL ARBITRATION LAW § 5.4.1. (1994) (tracing the history of early arbitration statutes). Ironically, even before enactment of the New York statute, England had long abandoned its hostility toward arbitration. See KELLOR, supra, at 14 (noting that English law permitted pre-dispute arbitration).
27. See FRANCES KELLOR, AMERICAN ARBITRATION 10-11 (1948) (cheering the New York statute as a "foundation stone[ ]" of what would soon become "wide flung systems of arbitration"); Stephen J. Ware, Employment Arbitration and Voluntary Consent, 25 HOFSTRA L. REV. 83, 89 (1996) (noting that New York was the first state to enact legislation making pre-dispute arbitration agreements specifically enforceable); see also 1 IAN R. MACNEIL ET AL., FEDERAL ARBITRATION LAW § 5.4.1. (1994) (tracing the history of early arbitration statutes). Ironically, even before enactment of the New York statute, England had long abandoned its hostility toward arbitration. See KELLOR, supra, at 14 (noting that English law permitted pre-dispute arbitration).
28. See Federal Arbitration Act, ch. 213, §§ 1-15, 43 Stat. 883 (1925) (codified as amended at 9 U.S.C. §§ 1-16 (1994)). States around the country, including Arizona, California, Connecticut, Louisiana, Massachusetts, Michigan, New Hampshire, New Jersey, Ohio, Oregon, Pennsylvania, Rhode Island, Washington, and Wisconsin, soon adopted similar pro-arbitration legislation. See KELLOR, supra note 14, at 11 n.6 (discussing the widespread influence of New York's arbitration law).
29. Professor Stempel notes that Congress passed the FAA simply to reverse the policy of denying the enforcement of voluntary arbitration agreements. See Jeffrey W. Stempel, Bootstrapping and Slouching Toward Gomorrah: Arbitral Infatuation and the Decline of Consent, 62 BROOK. L. REV. 1381, 1401 (1996) (discussing the function and effect of the FAA). He recognizes that the Supreme Court, in its zeal to promote arbitration policy, has perverted that very policy by enforcing arbitration clauses even when voluntary consent rests on nothing more than fiction. See id. at 1386 ("In its rush to empower arbitration, the Court has overlooked traditional bedrock values of our legal system: consent, unconscionability, disclosure, fairness and federalism.")
30. 482 U.S. 483 (1987).
31. 517 U.S. 681 (1996).
32. 95 Eng. Rep. 532 (K.B. 1746).
33. See id. In Scott v. Avery, 10 Eng. Rep. 1121, 1128-31 (V.H.C.L. 1856), the Court acknowledged the ouster of jurisdiction doctrine, see id., but circumvented its application. Because the Court characterized the arbitration as merely fixing the amount owed on an insurance policy rather than as determining the applicability of the policy, the submission to arbitration was merely a condition precedent to a subsequent judicial proceeding to enforce the award. See id. at 1121, 1128-31 (analyzing the arbitration agreement).
34. See, e.g., Clapham v Hingham, 130 Eng. Rep. 36, 37 (C.P. 1822) (stating that a party may revoke an agreement to arbitrate "at any time until an award is made"); Leo Kanowitz, Alternative Dispute Resolution and the Public Interest: The Arbitration Experience, 38 HASTINGS L.J. 239, 252 (1987) (commenting that, under the ouster-of-jurisdiction doctrine, courts denied specific enforcement of pre-dispute arbitration agreements and refused to stay judicial proceedings commenced in violation of such arbitration agreements, but enforced final arbitration awards); see generally 1 GABRIEL M. WILNER, DOMKE ON COMMERCIAL ARBITRATION § 301 (rev. ed. 1996) (reviewing the history of the ouster-of-jurisdiction doctrine).
35. See, e.g., Clapham v Hingham, 130 Eng. Rep. 36, 37 (C.P. 1822) (stating that a party may revoke an agreement to arbitrate "at any time until an award is made"); Leo Kanowitz, Alternative Dispute Resolution and the Public Interest: The Arbitration Experience, 38 HASTINGS L.J. 239, 252 (1987) (commenting that, under the ouster-of-jurisdiction doctrine, courts denied specific enforcement of pre-dispute arbitration agreements and refused to stay judicial proceedings commenced in violation of such arbitration agreements, but enforced final arbitration awards); see generally 1 GABRIEL M. WILNER, DOMKE ON COMMERCIAL ARBITRATION § 301 (rev. ed. 1996) (reviewing the history of the ouster-of-jurisdiction doctrine).
36. See, e.g., Kanowitz, supra note 21, at 252 (acknowledging that English courts would enforce arbitration awards made by an arbitration panel, though they would permit parties to revoke the arbitration agreement until the arbitrator issued an award); WILNER, supra note 21, § 301 (reviewing the history of the ouster-of-jurisdiction doctrine).
37. See, e.g., Scott, 10 Eng. Rep. at 1128-30 (acknowledging the vitality of the ouster-of-jurisdiction doctrine without discussing the reasoning or justification for the doctrine).
38. See, e.g., Arbitration of Interstate Commercial Disputes, Joint Hearings on S. 1005 and H.R. 696 Before the Joint Comm. of Subcomms. on the Judiciary, 68th Cong. 15 (1924) (statement of Julius Cohen, arbitration scholar): [T]he fundamental reason for [the ouster of jurisdiction doctrine], when you dig into the history of it - the real fundamental cause was that at the time this rule was made people were not able to take care of themselves in making contracts, and the stronger men could take advantage of the weaker, and the courts had to come in and protect them. And the courts said, "If you let the people sign away their rights, the powerful people will come in and take away the rights of the weaker ones." See also Robert L. Hale, Law Making By Unofficial Minorities, 20 COLUM. L. REV. 451, 453 (1920), remarking: Some imperfect apprehension of the fact that there is an element of coercion in these [arbitration] agreements may account for the feeling of some of the judges that it is bad policy to force a man to give up a "right" to resort to the courts for a determination of the merits of the controversy [;] Paul L. Sayre, Development of Commercial Arbitration Law, 37 YALE L.J. 595, 611 (1928) (suggesting that the doctrine protected parties who had not negotiated the agreement "on a basis of equality, and one of the parties [was] able to dictate almost his own terms to the other. The other party might well [have been] forced into an arrangement for arbitration which would [have been] inadequate to protect his rights"); Stempel, supra note 16, at 1419 (arguing that judicial interpretation of the FAA has "negated the enacting Congress' concern that the Act not lead to enforcement of arbitration agreements through contracts of adhesion").
39. See, e.g., Arbitration of Interstate Commercial Disputes, Joint Hearings on S. 1005 and H.R. 696 Before the Joint Comm. of Subcomms. on the Judiciary, 68th Cong. 15 (1924) (statement of Julius Cohen, arbitration scholar): [T]he fundamental reason for [the ouster of jurisdiction doctrine], when you dig into the history of it - the real fundamental cause was that at the time this rule was made people were not able to take care of themselves in making contracts, and the stronger men could take advantage of the weaker, and the courts had to come in and protect them. And the courts said, "If you let the people sign away their rights, the powerful people will come in and take away the rights of the weaker ones." See also Robert L. Hale, Law Making By Unofficial Minorities, 20 COLUM. L. REV. 451, 453 (1920), remarking: Some imperfect apprehension of the fact that there is an element of coercion in these [arbitration] agreements may account for the feeling of some of the judges that it is bad policy to force a man to give up a "right" to resort to the courts for a determination of the merits of the controversy [;] Paul L. Sayre, Development of Commercial Arbitration Law, 37 YALE L.J. 595, 611 (1928) (suggesting that the doctrine protected parties who had not negotiated the agreement "on a basis of equality, and one of the parties [was] able to dictate almost his own terms to the other. The other party might well [have been] forced into an arrangement for arbitration which would [have been] inadequate to protect his rights"); Stempel, supra note 16, at 1419 (arguing that judicial interpretation of the FAA has "negated the enacting Congress' concern that the Act not lead to enforcement of arbitration agreements through contracts of adhesion").
40. See, e.g., Arbitration of Interstate Commercial Disputes, Joint Hearings on S. 1005 and H.R. 696 Before the Joint Comm. of Subcomms. on the Judiciary, 68th Cong. 15 (1924) (statement of Julius Cohen, arbitration scholar): [T]he fundamental reason for [the ouster of jurisdiction doctrine], when you dig into the history of it - the real fundamental cause was that at the time this rule was made people were not able to take care of themselves in making contracts, and the stronger men could take advantage of the weaker, and the courts had to come in and protect them. And the courts said, "If you let the people sign away their rights, the powerful people will come in and take away the rights of the weaker ones." See also Robert L. Hale, Law Making By Unofficial Minorities, 20 COLUM. L. REV. 451, 453 (1920), remarking: Some imperfect apprehension of the fact that there is an element of coercion in these [arbitration] agreements may account for the feeling of some of the judges that it is bad policy to force a man to give up a "right" to resort to the courts for a determination of the merits of the controversy [;] Paul L. Sayre, Development of Commercial Arbitration Law, 37 YALE L.J. 595, 611 (1928) (suggesting that the doctrine protected parties who had not negotiated the agreement "on a basis of equality, and one of the parties [was] able to dictate almost his own terms to the other. The other party might well [have been] forced into an arrangement for arbitration which would [have been] inadequate to protect his rights"); Stempel, supra note 16, at 1419 (arguing that judicial interpretation of the FAA has "negated the enacting Congress' concern that the Act not lead to enforcement of arbitration agreements through contracts of adhesion").
41. 48 S.E. 696 (Ga. 1904). Parsons agreed to convey a parcel of real property to Ambros, who, in turn, agreed to convey to Parsons an easement for the use of another parcel. See id. at 697. They agreed to have a panel of three appraisers (arbitrators) determine the value of the two parcels. See id. After the appraisers rendered a decision, the parties, by mutual consent, had the determination set aside. See id. A second appraisal followed. See id. Dissatisfied with the arbitrators second effort, Parsons successfully attacked the appraisal in court. See id. One of the three arbitrators then died. See id. Shortly thereafter. Parsons revoked, not only the arbitration agreement, but also the underlying contract to sell land. See id. The court held the arbitration agreement revocable but required Parsons to convey the property. See id. at 698.
42. Id. at 697.
43. See infra Part II (discussing the doctrine of unconscionability and contracts of adhesion).
44. Scott v. Avery, 10 Eng. Rep, 1121, 1129 (V.H.C.L. 1856).
45. 87 U.S. (1 Wall.) 445 (1874).
46. Id. at 451.
47. See, e.g., United States Asphalt Ref. Co. v. Trinidad Lake Petroleum Co., 222 F. Supp. 1006, 1007-1011 (S.D.N.Y. 1915); see generally Kenneth R. Davis, When Ignorance of the Law Is No Excuse: Judicial Review of Arbitration Awards, 45 BUFF. L. REV. 49, 60-61 (1997) (discussing various explanations for and criticisms of the ouster-of-jurisdiction doctrine). Condemnation of the doctrine, however, is not unanimous. See, e.g., Heinrich Kronstein, Business Arbitration - Instrument of Private Government, 54 YALE L.J. 36, 62 n. 128-29, 63 (1944) (justifying the outcome of Vynior's Case, 77 Eng. Rep. 595, 597-601 (1906), which refused to enforce an arbitration agreement, on the basis of prevailing English law which provided that parties to an arbitration agreements post a bond, and if a party repudiated such an agreement, the aggrieved party would have a cause of action on the bond); see also Sayre, supra note 24, at 611 (defending the doctrine as preventing unconscionable arbitration agreements).
48. See, e.g., United States Asphalt Ref. Co. v. Trinidad Lake Petroleum Co., 222 F. Supp. 1006, 1007-1011 (S.D.N.Y. 1915); see generally Kenneth R. Davis, When Ignorance of the Law Is No Excuse: Judicial Review of Arbitration Awards, 45 BUFF. L. REV. 49, 60-61 (1997) (discussing various explanations for and criticisms of the ouster-of-jurisdiction doctrine). Condemnation of the doctrine, however, is not unanimous. See, e.g., Heinrich Kronstein, Business Arbitration - Instrument of Private Government, 54 YALE L.J. 36, 62 n. 128-29, 63 (1944) (justifying the outcome of Vynior's Case, 77 Eng. Rep. 595, 597-601 (1906), which refused to enforce an arbitration agreement, on the basis of prevailing English law which provided that parties to an arbitration agreements post a bond, and if a party repudiated such an agreement, the aggrieved party would have a cause of action on the bond); see also Sayre, supra note 24, at 611 (defending the doctrine as preventing unconscionable arbitration agreements).
49. H.R. REP. NO. 68-96, at 1 (1924).
50. 126 F.2d 978 (2d Cir. 1942).
51. Id. at 984.
52. Id.
53. Scott v. Avery, 25 L.J.Ex. 308, 313 (H.L. 1856) (attributing the ouster-of-jurisdiction doctrine to avaricious judges whose income depended on fees collected for issuing legal process); Clinton W. Francis, The Structure of Judicial Administration and the Development of Contract Law in Seventeenth Century England, 83 COLUM. L. REV. 35, 45 (1983) (noting that English judges had "strong economic incentives to muster all the legal business they could, since their income depended on the volume of litigation and their salaries were paid only sporadically").
54. See Federal Arbitration Act, ch. 213, §§ 1-15, 43 Stat. 883 (1925) (codified as amended at 9 U.S.C. §§ 1-16 (1994)).
55. 9 U.S.C. § 2 (1994). Section 2 of the FAA provides that "[a] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction. . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Id. A Congressman supporting the FAA explained to the House of Representatives that the FAA "creates no new legislation, grants no new rights, except a remedy to enforce an agreement in commercial contracts and in admiralty contracts." 65 CONG. REC. 1931 (1924). The section does not elevate arbitration agreements to a status above other contracts; it "make[s] arbitration agreements as enforceable as other contracts, but not more so." Prima Paint Corp. v. Flood & Conklin Mfg., 388 U.S. 395, 404 n.12 (1967) (emphasis added).
56. Sales and Contracts to Sell in Interstate and Foreign Commerce, and Federal Commercial Arbitration: Hearings on S. 4213 and S. 4214 Before the Subcomm. of the Comm. on the Judiciary, 67th Cong. 6 (1923) (statement of Sen. Walsh) [hereinafter FAA Hearings].
57. H.R. REP. NO. 68-96, at 1 (1924); see also Doctor's Assocs., Inc. v. Casarotto, 517 U.S., 681, 688 (1996) (emphasizing that "the very purpose of the [Federal Arbitration] Act was to 'ensur[e] that private agreements to arbitrate are enforced according to their terms'"); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1996) (noting that "arbitration is simply a matter of contract between the parties; it is a way to resolve those disputes - but only those disputes - that the parties have agreed to submit to arbitration"); see also Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 275 (1995) (noting the FAA's purpose to treat an arbitration provision just like any other contract provision); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991) (noting that the FAA "place[d] arbitration agreements upon the same footing as other contracts"); Dean Witter Reynolds Inc. V. Byrd, 470 U.S. 213, 219-220, 220 n.6 (1984) (noting that the FAA merely made arbitration agreements enforceable like any other contract); Scherk v. Alberto-Culver Co., 417 U.S. 506, 511 (1974) (same).
58. Prima Paint, 388 U.S. at 404 n.12.
59. 346 U.S. 427 (1953).
60. Securities Act of 1933, 15 U.S.C. § 12(2) (1994).
61. See Wilko, 346 U.S. at 428-38. In Wilko, a customer opened a margin account with a brokerage firm. See id. at 429. The form account agreement contained an arbitration clause. See id. Charging that the firm had fraudulently induced him to purchase stock, the customer commenced an action in federal district court alleging a violation of § 12(2) of the Securities Act. See id. The firm moved to stay the action based on the arbitration clause. See id. Denying the motion, the District Court held pre-dispute agreements inconsistent with the Securities Act. See id. at 430. After a divided Court of Appeals reversed, see id., the Supreme Court held that pre-dispute agreements to arbitrate § 12(2) claims violate public policy, see id. at 438.
62. Id. at 438.
63. Id.
64. See id. at 427; see also The Securities Act of 1933, 15 U.S.C. § 77n (1994) ("Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter or of the rules and regulations of the Commission shall be void.").
65. See Wilko, 346 U.S. at 427 (discussing the inadequacies of arbitration).
66. See id., 346 U.S. at 435 (noting that the Securities Act's "effectiveness in application is lessened in arbitration as compared to judicial proceedings").
67. See id. at 436.
68. Justice Frankfurter, writing for himself and Justice Minton, dissented. See id. at 439 (Frankfurter, J., dissenting). He conceded that the majority would be correct in denying the arbitrability of § 12(2) claims if the courts had no effective method to review arbitral awards. See id. He disagreed with the majority, however, that errors of law in awards were beyond judicial oversight. See id. at 440. In his view, § 10 of the FAA provided an adequate basis for vacating an erroneous award. See id. Although he did not specify a particular subsection, presumably he was referring to § 10(a)(4) of the FAA. See 9 U.S.C. § 10(a)(4) (1994) (permitting vacatur when arbitrators exceed their authority).
69. See Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 480 (1989) (noting that "judicial hostility to arbitration" pervaded Wilko).
70. See id. at 481-82, 487.
71. 388 U.S. 395 (1966).
72. See id. at 398. Flood & Conklin entered into a six-year consulting agreement with Prima Paint after selling its paint business to Prima. See id. at 397. The agreement contained an arbitration clause. See id. at 398. Asserting that Flood & Conklin had fraudulently concealed its insolvency and imminent bankruptcy from Prima, Prima withheld payments due Flood & Conklin under the consulting agreement. See id. To recover these funds, Flood & Conklin served notice of its intention to arbitrate. See id. In response, Prima Paint filed suit in federal district court alleging fraud in the inducement. See id.
73. See id. at 402.
74. See id. at 403-404.
75. See id. at 403 (quoting FAA, 9 U.S.C. § 4 (1994)).
76. See id. at 404.
77. See id. at 403-04; see also Rojas v. TK Communications, Inc., 87 F.3d 745, 749 (5th Cir. 1996) (ordering that the arbitrator decide the validity of the unconscionability defense as a result of applying the separability doctrine to an allegedly unconscionable agreement to arbitrate a Title VII claim); Satarino v. A.G. Edwards & Sons, Inc., 941 F. Supp. 609, 613 (N.D. Tex. 1996) (permitting the arbitrator to decide the validity of an unconscionability defense in a case involving claims arising under the Americans with Disabilities Act and the Family Medical Leave Act). Most federal courts, however, decide unconscionability issues, rather than directing such issues to arbitration. See e.g., Dean Witter Reynolds, Inc. v. Sanchez Espada, 959 F. Supp. 73, 79 (D. Puerto Rico 1997) (noting that courts determine arbitrability questions); infra Part III.B (discussing SRO employment arbitration); infra Part V (discussing SRO customer arbitration).
78. Prima Paint, 388 U.S. at 404. Joined by Justices Douglas and Stewart, Justice Black dissented. See id. at 407 (Black, J., dissenting). Arguing persuasively against the separability doctrine, he first cited the language of § 2, which provides that a written agreement to arbitrate is valid "save upon such grounds as exist at law or in equity for the revocation of any contract." Id. at 412 (quoting FAA, 9 U.S.C. § 2 (1994)). Next, he cited the language of § 3, which provides that "[i]f any suit . . . be brought. . . upon any issue referable to arbitration . . . the court . . . upon being satisfied that the issue involved in such suit. . . is referable to arbitration . . . shall . . . stay the trial of the action until such arbitration has been had . . . ." Id. (quoting FAA, 9 U.S.C. § 3). Reading these two sections together, Justice Black concluded that the court, not the arbitrator, decides threshold issues of arbitrability. See id. Fraud in the inducement is one such issue. See id. Justice Black also argued that the separability doctrine offends the purpose of the FAA to place arbitration agreements on the same footing as other contracts. See id. When one challenges a contract for fraud, he reasoned, one attacks the entire contract, not "tidbits." See id. All clauses in the contract, including the arbitration clause, fall if Flood & Conklin fraudulently induced the contract. See id. at 423-24. For example, the consulting agreement contained a covenant not to compete. See id. at 397. No one would argue that the noncompete covenant would survive a declaration that Flood & Conklin fraudulently induced the consulting agreement. See id. at 424. Justice Black correctly concluded that "[u]nder this test, all of Prima Paint's promises were part of one inseparable contract." Id. See also Ware, supra note 14, at 135 (urging the Supreme Court to overrule Prima Paint, and, in the absence of such judicial action, proposing that Congress amend the FAA to overrule the separability doctrine).
79. 460 U.S. 1 (1982).
80. See id. at 6-8, 29. In Moses H. Cone, Mercury and Moses H. Cone Memorial Hospital entered into an agreement for the construction of additions to the hospital building. See id. at 4. The agreement included an arbitration clause. See id. Claiming that the hospital had increased the costs of construction by delaying the project, Mercury sought additional payment from the hospital. See id. at 6. Denying liability, the hospital filed an action in North Carolina state court seeking a declaratory judgment defeating Mercury's claims, and the hospital obtained an ex parte injunction forbidding Mercury from taking any steps to arbitrate the dispute. See id. at 7. After convincing the court to vacate the injunction, Mercury filed an action in federal district court seeking to stay the state court action and to compel arbitration. See id.
81. Id. at 24. The hospital pointed out that it had two related disputes: the first with Mercury concerning Mercury's claim for costs occasioned by the hospital's alleged delays, and the second with the architect on the project for indemnification should the hospital lose to Mercury. See id. at 19. Since the hospital had no arbitration agreement with the architect, see id. at 19-20, the hospital argued that if the court compelled the arbitration of Mercury's claim, the related dispute against the architect would have to proceed in court, see id. at 20. The court rejected the hospital's argument. See id. The court observed that the FAA "requires piecemeal resolution when necessary to give effect to an arbitration agreement." Id. at 20.
82. Id. at 24-25.
83. 417 U.S. 506 (1973).
84. 15 U.S.C. § 10(b) (1994).
85. See id. at 513.
86. See id.
87. See id. at 515. In Scherk, Albert-Culver agreed to purchase Scherk's toiletry business, including certain trademark rights. See id. at 508. The agreement contained an arbitration clause. See id. Nearly one year after the closing of the transaction, Alberto-Culver learned that some of these trademarks were encumbered. See id. at 509. Alberto-Culver instituted a federal court action alleging that fraudulent misrepresentations concerning the trademarks violated § 10(b) of the Securities Act. See id. Scherk moved to dismiss the action for lack of personal and subject matter jurisdiction and on forum non conveniens grounds. See id. It also moved to stay the action based on the arbitration agreement. See id.
88. See id.
89. Id. at 516. Justice Douglas, writing for a four-judge minority, dissented. See id. at 521. He found the transnational elements in Scherk no basis to distinguish that case from Wilko. See id. at 528-32. The same procedural deficiencies of arbitration exposed in Wilko applied equally in the international arena. See id. at 532. He noted that arbitrators may not be trained in the law and need not explain the reasons for their decisions. See id. He also expressed concern that incomplete arbitral records, along with the limited scope of judicial review of arbitral awards, insulated legal error from correction. See id. at 532. Justice Douglas feared that, if the courts enforced transnational arbitration agreements, American companies would lose the protection of United States securities law. See id. at 529, 533.
90. 473 U.S. 614 (1985).
91. See id. at 616, 640. In Mitsubishi, Soler, a Puerto Rican corporation, entered into a business arrangement with a joint venture comprised of Chrysler International, a Swiss corporation, and Mitsubishi, a Japanese corporation. See id. at 616-17. The arrangement provided that Soler would receive Mitsubishi-manufactured vehicles for sale. See id. at 617. The sales agreement between the parties contained an arbitration clause. See id. When Soler's sales slackened, Mitsubishi withheld a substantial shipment of vehicles to Soler. See id. at 618. Mitsubishi then sought an order in district court compelling Soler to arbitrate disputes arising under the sales agreement. See id. at 618-19. Soler counterclaimed under § 1 of the Sherman Act, alleging that Mitsubishi and Chrysler International had conspired to divide markets in restraint of trade. See id. at 619-20. Recognizing the policy favoring arbitration, see id. at 625-27, the Court cited Scherk for the proposition that "concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes" required enforcement of the arbitration agreement, see id. at 629. The Court reserved decision on whether American Safety Equipment Corp. v. J. P. Maguire & Co., 391 F.2d 821 (2d Cir. 1968), which precluded the arbitration of antitrust claims in domestic cases, retained its vitality after Mitsubishi. See Mitsubishi, 473 U.S. at 628-29. It nevertheless expressed skepticism about "certain aspects of the American Safety doctrine." See id. at 632. This "skepticism," however, eviscerated the rationale of American Safety, see id. at 632-37, and revealed the widening schism between Wilko's public policy defense and the Court's infatuation with arbitration.
92. See Mitsubishi, 473 U.S. at 627.
93. Id. at 626. Justice Stevens, in a dissenting opinion in which Justice Brennan joined, argued that antitrust claims should not be arbitrable as a matter of public policy. See id. at 654 (Stevens, J., dissenting). He emphasized that civil litigants alleging antitrust claims function as "private attorneys general," see id. at 655 (quoting American Safety Equipment Corp., 391 F.2d at 826-27), protecting the public from antitrust violations that may injure countless people, see id. at 655, and affect the national economy and world markets, see id. at 657. Resolving disputes with such potentially widespread impact should not be left to privately selected decisionmakers whose awards are essentially unreviewable. See id. at 656-57.
94. 482 U.S. 220 (1987).
95. See id. at 222. The McMahons, individually and as trustee for pension and profit-sharing plans, were customers of Shearson/American Express ("Shearson"), a brokerage house. See id. at 622-23. Shearson required the McMahons to sign account agreements containing arbitration clauses. See id. at 223. Complaining of fraudulent misstatements, material omissions, and excessive trading, the McMahons brought an action in federal district court against Shearson and the account representative assigned to them. See id. The action alleged violations of § 10(b) of the Exchange Act and RICO. See id. Shearson and the account representative responded by moving in the district court action to compel arbitration. See id. at 223.
96. Id. at 227; see also Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1994).
97. See McMahon, 482 U.S. at 227; see also 15 U.S.C. § 78cc(a) ("[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of [the Exchange Act].").
98. See McMahon, 482 U.S. at 228.
99. See id.
100. See id.
101. See id. at 229.
102. See Securities Act of 1933, 15 U.S.C. § 77/(2)(1994) (placing the burden of proving scienter on the offeror or seller).
103. The Wilko Court held claims under § 12(2) of the Securities Act non-arbitrable as a matter of public policy. See Wilko, 346 U.S. at 438. To justify this holding, the Wilko Court explained that "[section] 12(2) created a special right to recover for misrepresentation which differs substantially from the common-law action in that the seller is made to assume the burden of proving lack of scienter." Id. at 431. The Securities Act empowers victims of securities fraud to pursue that "special right" in any court, state or federal. See id. Depriving litigants of that "special right," the Court concluded, would violate the nowaiver provisions of the Act. See id. at 434-35.
104. McMahon, 82 U.S. at 232.
105. See infra notes 225-232 and accompanying text (discussing SRO arbitration rules).
106. McMahon, 82 U.S. at 232.
107. Justice Blackmun, joined by Justices Brennan and Marshall, argued that precedent is not binding on arbitrators, and that arbitration associations discourage arbitrators from explaining their decisions. See id. at 259. He lamented the narrow scope of judicial review limited to procedural improprieties and manifest disregard of the law. See id.
108. See infra notes 305-326 and accompanying text (discussing the manifest disregard test).
109. Swift Industries v. Botany Industries, 466 F.2d 1125, 1133-34 (3d Cir. 1972), represents a rare case of a court vacating an arbitration award under the manifest disregard standard. In Swift, however, the court misapplied the test. Using the manifest disregard standard, the Third Circuit vacated a surety bond that the arbitrator required Botany to post on grounds that the arbitrator lacked authority to grant such relief. See id. Because the arbitrator had not manifestly disregarded the law but had exceeded his authority, the court should have based its conclusion on § 10(4). See FAA, 9 U.S.C. § 10(4) (1994).
110. See, e.g., Advest, Inc. v. McCarthy, 914 F.2d 6, 10 (1st Cir. 1990) (confirming award misapplying appropriate damage rule because the correct result was not glaringly obvious); Federated Department Stores, Inc. v. J.V.B. Indus., 894 F.2d 862, 866 (6th Cir. 1990) (stating that a mere error of law is insufficient grounds to vacate an arbitration award); Clemons v. Dean Witter Reynolds, Inc., 708 F. Supp. 62, 63 (S.D.N.Y. 1989) (upholding misinterpretation of Kentucky Blue Sky law because the error was unintentional); see also 1 MACNEIL, supra note 14, § 40.7.2.5, at 40:92 (objecting to manifest disregard standard because it hinges on state of mind of arbitrators rather than on seriousness of their errors); Richard E. Speidel, Arbitration of Statutory Rights Under the Federal Arbitration Act: The Case for Reform, 4 OHIO ST. J. ON DISP. RES. 157, 198 (1989) (criticizing the manifest disregard standard because its requirement of intentional error renders it ineffective and because arbitrators can hide their mistakes by declining to write opinions explaining their decisions); Brett F. Randall, Comment, The History, Application, and Policy of the Judicially Created Standards of Review for Arbitration Awards, 1992 B.Y.U. L. REV. 759, 760 (1992) (faulting the manifest disregard standard for allowing arbitrators to shield their errors from review); id. at 783 (proposing that courts eliminate the requirement that errors appear expressly in the record).
111. See, e.g., Advest, Inc. v. McCarthy, 914 F.2d 6, 10 (1st Cir. 1990) (confirming award misapplying appropriate damage rule because the correct result was not glaringly obvious); Federated Department Stores, Inc. v. J.V.B. Indus.,
112. 490 U.S. 477, 481 (1988) (noting that Wilko no longer accords with judicial arbitration policy).
113. Id. at 480 (citing Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 985 (2d Cir. 1942).
114. Id. at 481.
115. 465 U.S. 1 (1983).
116. See id. at 16 (holding that the California law violated the Supremacy Clause); see also CAL. CORP. CODE ANN. § 31512 (West 1977) ("Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law or any rule or order hereunder is void.").
117. Chief Justice Burger has written several articles praising arbitration. See, e.g., Warren E. Burger, Using Arbitration To Achieve Justice, 40 ARB. J. 3, 5 (1985) (commending arbitration as a method for coping with the "mass neurosis" that drives people to litigate even the most minor disputes); Warren E. Burger, Isn't There a Better Way?, 68 A.B.A. J. 274, 276 (1982) (advocating the use of arbitration to alleviate the "litigation explosion").
118. Chief Justice Burger has written several articles praising arbitration. See, e.g., Warren E. Burger, Using Arbitration To Achieve Justice, 40 ARB. J. 3, 5 (1985) (commending arbitration as a method for coping with the "mass neurosis" that drives people to litigate even the most minor disputes); Warren E. Burger, Isn't There a Better Way?, 68 A.B.A. J. 274, 276 (1982) (advocating the use of arbitration to alleviate the "litigation explosion").
119. Southland Corp., 465 U.S. at 10.
120. See id. at 21-36 (discussing the legislative history and application of the FAA).
121. Id. at 22 (quoting FAA, 9 U.S.C. § 3 (1994)); see also FAA, 9 U.S.C. § 3 (1994) ("If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration . . . the court. . . shall on application of one of the parties stay the trial of the action until such arbitration had been had in accordance with the terms of the agreement . . . .").
122. Southland Corp., 465 U.S. at 22 (quoting FAA, 9 U.S.C. § 3 (1994)); see also FAA, 9 U.S.C. § 3 (1994) (providing that an aggrieved party "may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter . . . for an order directing that such arbitration proceed in the manner provided for in such agreement . . . .")
123. Southland Corp., 465 U.S. at 25 (quoting Arbitration of Interstate Commercial Disputes: Joint Hearings on S. 1005 and H.R. 646 Before the Subcomms on the Judiciary, 68th Cong., 1st Sess., 17, 38 (1924) (statement of Mr. Cohen, American Bar Association)). See also H.R. REP. NO. 68-96, at 1 (1924) ("Whether an agreement to arbitrate shall be enforced or not is a question of procedure."). One month after Congress passed the FAA, the American Bar Association Committee that drafted the Act wrote: The statute establishes a procedure in the Federal courts for the enforcement of arbitration agreements. . . . A Federal statute providing for the enforcement of arbitration agreements does relate solely to procedure of the Federal courts . . . . [W]hether or not an arbitration agreement is to be enforced is a question of the law of procedure and is determined by the law of the jurisdiction wherein the remedy is sought. That the enforcement of arbitration agreements is within the law of procedure as distinguished from substantive law is well settled by the decisions of our courts. Southland Corp., 465 U.S. at 26 (quoting Committee on Commerce, Trade and Commercial Law, The United States Arbitration Law and Its Application, 11 A.B.A. J. 153, 154-55 (1925)).
124. Southland Corp., 465 U.S. at 22. Justice O'Connor believed that the majority was "impelled by an understandable desire to encourage the use of arbitration, but [that the majority] utterly fail[ed] to recognize the clear congressional intent underlying the FAA," id. at 22-23, and that "Congress intended to require federal, not state, courts to respect arbitration agreements," id. at 23.
125. 489 U.S. 468 (1988).
126. See id. at 470.
127. See id. at 471.
128. See id.
129. See id. at 473.
130. Id. at 476 (stressing that the FAA does not create special rules for arbitration agreements.) After noting that the FAA does not foreclose the use of rules differing from those in the statute, see id. at 477-79, the court added that "such a result would be quite inimical to the FAA's primary purpose of ensuring that private agreements to arbitrate are enforced according to their terms. Arbitration under the Act is a matter of consent, not coercion, and the parties are generally permitted to structure their agreements as they see fit," id. at 479.
131. Id. at 478.
132. 514 U.S. 52 (1995).
133. Garrity v. Lyle Stuart, Inc., 353 N.E.2d 793 (N.Y. 1976), is the leading case declaring that public policy forbids arbitrators from awarding punitive damages. In Garrity, an author sued her publisher in state court for breach of contract and various intentional torts. See id. at 794. The publisher successfully moved to stay the action based on an arbitration clause. See id. The issue on appeal was whether the arbitrator had the authority to award punitive damages. See id. Chief Judge Breitel, writing for a 4-3 majority, announced that New York public policy does not allow arbitrators to award such relief, even when the parties expressly agree to empower the arbitrators to grant such relief. See id. Judge Breitel reasoned that punishing wrongdoers is a state function, and if arbitrators were to award punitive damages they would be trespassing on a province of the state: "The evil of permitting an arbitrator whose selection is often restricted or manipulatable by the party in a superior bargaining position, to award punitive damages is that it displaces the court and the jury, and therefore the State, as the engine for imposing a social sanction." Id. at 796. The limited scope of judicial review aggravated Judge Breitel's fear that arbitrators might render biased awards. See id. at 797. Judge Gabrielli dissented, arguing that the policy favoring arbitration implies the availability of punitive damages in arbitration. See id. at 799 (Gabrielli, J., dissenting). He argued that the New York Court of Appeals had recently sustained a treble damages arbitral award. Since treble damages awards are penal, he could see no distinction between an award of treble damages and an award of punitive damages. See id. For a further discussion of Garrity, see Kenneth R. Davis, A Proposed Framework for Reviewing Punitive Damages Awards of Commercial Arbitrators, 58 ALB. L. REV. 55, 62-65 (1994) (discussing Garrity and the reaction of the courts of states other than New York to it); Thomas J. Stipanowich, Punitive Damages in Arbitration, Garrity v. Lyle Stuart, Inc. Reconsidered, 66 B.U. L. REV. 953, 989 (1956), condemning Garrity as "an anomaly, frustrating the goals of fairness and finality that are the essence of arbitration and undermining the valuable role that punitive damages play in deterring fraudulent or malicious conduct."
134. Garrity v. Lyle Stuart, Inc., 353 N.E.2d 793 (N.Y. 1976), is the leading case declaring that public policy forbids arbitrators from awarding punitive damages. In Garrity, an author sued her publisher in state court for breach of contract and various intentional torts. See id. at 794. The publisher successfully moved to stay the action based on an arbitration clause. See id. The issue on appeal was whether the arbitrator had the authority to award punitive damages. See id. Chief Judge Breitel, writing for a 4-3 majority, announced that New York public policy does not allow arbitrators to award such relief, even when the parties expressly agree to empower the arbitrators to grant such relief. See id. Judge Breitel reasoned that punishing wrongdoers is a state function, and if arbitrators were to award punitive damages they would be trespassing on a province of the state: "The evil of permitting an arbitrator whose selection is often restricted or manipulatable by the party in a superior bargaining position, to award punitive damages is that it displaces the court and the jury, and therefore the State, as the engine for imposing a social sanction." Id. at 796. The limited scope of judicial review aggravated Judge Breitel's fear that arbitrators might render biased awards. See id. at 797. Judge Gabrielli dissented, arguing that the policy favoring arbitration implies the availability of punitive damages in arbitration. See id. at 799 (Gabrielli, J., dissenting). He argued that the New York Court of Appeals had recently sustained a treble damages arbitral award. Since treble damages awards are penal, he could see no distinction between an award of treble damages and an award of punitive damages. See id. For a further discussion of Garrity, see Kenneth R. Davis, A Proposed Framework for Reviewing Punitive Damages Awards of Commercial Arbitrators, 58 ALB. L. REV. 55, 62-65 (1994) (discussing Garrity and the reaction of the courts of states other than New York to it); Thomas J. Stipanowich, Punitive Damages in Arbitration, Garrity v. Lyle Stuart, Inc. Reconsidered, 66 B.U. L. REV. 953, 989 (1956), condemning Garrity as "an anomaly, frustrating the goals of fairness and finality that are the essence of arbitration and undermining the valuable role that punitive damages play in deterring fraudulent or malicious conduct."
135. See Mastrobuono, 514 U.S. at 54. Sometimes a contract with an arbitration clause also includes a choice-of-law clause. The Mastrobuono issue arises when the law of the chosen state bans punitive arbitral awards. See, e.g., Shaw v. Kuhnel Assoc., 698 P.2d 880, 882 (N.M. 1985) (refusing to permit arbitrators to award punitive damages); United States Fidelity & Guaranty Co. v. DeFluiter, 456 N.E.2d 429, 432 (Ind. Ct. App. 1983) (barring punitive awards from commercial arbitration); Garrity, 353 N.E.2d at 796 (refusing to permit arbitrators to award punitive damages because to allow such awards would pose a "trap for the unwary"); but see, e.g., Complete Interiors, Inc. v. Behan, 558 So.2d 48, 50-51 (Fla. Dist. Ct. App. 1990) (holding that arbitrators may award punitive damages only if the agreement confers such power on them); Sarkenstein v. Merrill Lynch Pierce Fenner & Smith, Inc., 572 F. Supp. 189, 191-92 (M.D. Fla. 1983) (ruling under Florida law that arbitrators may award punitive damages unless the arbitration agreement specifies otherwise). Invoking the federal policy favoring arbitration, most federal courts, even before Mastrobuono had permitted punitive arbitration awards. See, e.g., Lee v. Chica, 983 F.2d 883, 887 (8th Cir. 1993) (confirming a punitive award in a securities law matter in which choice-of-law provisions incorporated American Arbitration Association ("AAA") rules permitting arbitrators to grant punitive damages); Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1062-63 (9th Cir. 1991) (denying a motion to vacate a punitive award in a matter involving breach of contract and fraud under AAA rules permitting arbitrators to award "any remedy or relief"); Raytheon Co. v. Automated Business Systems, Inc., 882 F.2d 6, 10-12 (1st Cir. 1989) (upholding punitive award in dispute involving the breach of an exclusive dealership agreement arbitrated under AAA rules); Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1387-88 (11th Cir. 1988) (sustaining a punitive award in a securities case in which parties had agreed to arbitrate under AAA rules); Willoughby Roofing & Supply Co. v. Kajima Int'l, 598 F. Supp. 353, 357 (N.D. Ala. 1984), aff'd per curiam, 776 F.2d 269 (11th Cir. 1985) (confirming a punitive award in a construction case arbitrated under AAA rules); but see Barbier v. Shearson Lehman Button Inc., 948 F.2d 117 (2d Cir. 1991) (holding in a securities case that the FAA does not preempt the effect of a choice-of-law clause prohibiting punitive damages). See also Kenneth R. Davis, Protected Right or Sacred Rite: The Paradox, of Federal Arbitration Policy, 45 DE PAUL L. REV. 65, 84 (1995) (stating that federal policy preempts state law that prevents matters from going to arbitration, but does not preempt state public policy limitations on punitive remedies); Stephen J. Ware, Punitive Damages in Arbitration: Contracting Out of Government's Role in Punishment and Federal Preemption of State Law, 63 FORDHAM L. REV. 529, 548 (1994) (asserting that the FAA forbids any state law limitation on the scope of arbitrable issues and that the FAA therefore preempts the Garrity rule when a choice-of-law provision incorporates the Garrity rule into a contract).
136. See Mastrobuono, 514 U.S. at 54. Sometimes a contract with an arbitration clause also includes a choice-of-law clause. The Mastrobuono issue arises when the law of the chosen state bans punitive arbitral awards. See, e.g., Shaw v. Kuhnel Assoc., 698 P.2d 880, 882 (N.M. 1985) (refusing to permit arbitrators to award punitive damages); United States Fidelity & Guaranty Co. v. DeFluiter, 456 N.E.2d 429, 432 (Ind. Ct. App. 1983) (barring punitive awards from commercial arbitration); Garrity, 353 N.E.2d at 796 (refusing to permit arbitrators to award punitive damages because to allow such awards would pose a "trap for the unwary"); but see, e.g., Complete Interiors, Inc. v. Behan, 558 So.2d 48, 50-51 (Fla. Dist. Ct. App. 1990) (holding that arbitrators may award punitive damages only if the agreement confers such power on them); Sarkenstein v. Merrill Lynch Pierce Fenner & Smith, Inc., 572 F. Supp. 189, 191-92 (M.D. Fla. 1983) (ruling under Florida law that arbitrators may award punitive damages unless the arbitration agreement specifies otherwise). Invoking the federal policy favoring arbitration, most federal courts, even before Mastrobuono had permitted punitive arbitration awards. See, e.g., Lee v. Chica, 983 F.2d 883, 887 (8th Cir. 1993) (confirming a punitive award in a securities law matter in which choice-of-law provisions incorporated American Arbitration Association ("AAA") rules permitting arbitrators to grant punitive damages); Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1062-63 (9th Cir. 1991) (denying a motion to vacate a punitive award in a matter involving breach of contract and fraud under AAA rules permitting arbitrators to award "any remedy or relief"); Raytheon Co. v. Automated Business Systems, Inc., 882 F.2d 6, 10-12 (1st Cir. 1989) (upholding punitive award in dispute involving the breach of an exclusive dealership agreement arbitrated under AAA rules); Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1387-88 (11th Cir. 1988) (sustaining a punitive award in a securities case in which parties had agreed to arbitrate under AAA rules); Willoughby Roofing & Supply Co. v. Kajima Int'l, 598 F. Supp. 353, 357 (N.D. Ala. 1984), aff'd per curiam, 776 F.2d 269 (11th Cir. 1985) (confirming a punitive award in a construction case arbitrated under AAA rules); but see Barbier v. Shearson Lehman Button Inc., 948 F.2d 117 (2d Cir. 1991) (holding in a securities case that the FAA does not preempt the effect of a choice-of-law clause prohibiting punitive damages). See also Kenneth R. Davis, Protected Right or Sacred Rite: The Paradox, of Federal Arbitration Policy, 45 DE PAUL L. REV. 65, 84 (1995) (stating that federal policy preempts state law that prevents matters from going to arbitration, but does not preempt state public policy limitations on punitive remedies); Stephen J. Ware, Punitive Damages in Arbitration: Contracting Out of Government's Role in Punishment and Federal Preemption of State Law, 63 FORDHAM L. REV. 529, 548 (1994) (asserting that the FAA forbids any state law limitation on the scope of arbitrable issues and that the FAA therefore preempts the Garrity rule when a choice-of-law provision incorporates the Garrity rule into a contract).
137. See Mastrobuono, 514 U.S. at 54.
138. See id. at 54.
139. Id. at 61 (citing NASD Code of Arbitration Proc. ¶ 3741(e) (1993)). This NASD rule is similar to the AAA rule critical to the rulings in Todd, Bonar, and other federal cases that sustained punitive arbitral awards despite the applicability of the Garrity rule through operation of a choice-of-law clause. See Heather J. Haase, In Defense of Parties' Rights to Limit Arbitral Awards Under the Federal Arbitration Act: Mastrobuono v. Shearson Lehman Button, Inc., 31 WAKE FOREST L. REV. 309, 333 (1996) (noting that though neither NASD nor AAA rules directly address the availability of punitive damages, courts permit punitive award damages under both rules); see also supra note 115 (citing cases sustaining punitive arbitration awards).
140. See Mastrobuono, 514 U.S. at 61 (relying in part on NASD manual for arbitrators that stated that "arbitrators can consider punitive damages as a remedy").
141. See Garrity, 353 N.E.2d at 794 (holding that "an arbitral award which imposes punitive damages should be vacated").
142. Mastrobuono, 514 U.S. at 62.
143. See id.
144. See id. at 63. The Court also applied the rule of contra proferentum: when rules of interpretation fail to resolve an ambiguity in a contract, the ambiguity should be resolved against the party who drafted the agreement. See id.; see also Ralph J. Mooney, The New Conceptualism in Contract Law, 74 OR. L. REV. 1131, 1168 (1995) (noting that contra proferentum is a rule of contract construction applicable only if interpretive rules fail to clarify the meaning of an ambiguous contract); RESTATEMENT (SECOND) OF CONTRACTS § 206 (1979) (commenting that the drafting party is more likely to protect his interests than those of the other party and that ambiguities should therefore be construed against the drafting party). The Mastrobuono Court should not have applied this rule at all, since the Garrity rule, incorporated into the agreement by the choice-of-law clause, provided the clearest expression of the parties contractual intent. See Davis, supra note 115, at 82 (criticizing the Mastrobuono Court's application of contra proferentum); see also ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 559, at 527 (1952) (characterizing the rule as one of last resort).
145. See id. at 63. The Court also applied the rule of contra proferentum: when rules of interpretation fail to resolve an ambiguity in a contract, the ambiguity should be resolved against the party who drafted the agreement. See id.; see also Ralph J. Mooney, The New Conceptualism in Contract Law, 74 OR. L. REV. 1131, 1168 (1995) (noting that contra proferentum is a rule of contract construction applicable only if interpretive rules fail to clarify the meaning of an ambiguous contract); RESTATEMENT (SECOND) OF CONTRACTS § 206 (1979) (commenting that the drafting party is more likely to protect his interests than those of the other party and that ambiguities should therefore be construed against the drafting party). The Mastrobuono Court should not have applied this rule at all, since the Garrity rule, incorporated into the agreement by the choice-of-law clause, provided the clearest expression of the parties contractual intent. See Davis, supra note 115, at 82 (criticizing the Mastrobuono Court's application of contra proferentum); see also ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 559, at 527 (1952) (characterizing the rule as one of last resort).
146. See Mastrobuono, 514 U.S. at 63-64.
147. Justice Thomas, in a dissenting opinion, recognized that the majority had engaged in faulty contract analysis. See id. at 71 (Thomas, J., dissenting). He stated: My examination of the Client Agreement, the choice-of-law provision, the NASD Code of Procedure, and the SICA manual demonstrates that the parties made their intent clear, but not in the way divined by the majority. New York law specifically precludes arbitrators from awarding punitive damages, and it should be clear that there is no "conflict," as the majority puts it, between the New York law and the NASD rules. The choice-of-law provision speaks directly to the issue, while the NASD Code is silent. Giving effect to every provision of the contract requires us to honor the parties' intent, as indicated in the text of the agreement, to preclude the award of punitive damages by arbitrators. Id.
148. Id. at 57.
149. 517 U.S. at 681 (1996). See Stephen J. Ware, Arbitration and Unconscionability After Doctor's Assocs, Inc. v. Casarotto, 31 WAKE FOREST L. REV. 1001, 1034 (1996) (applauding the Doctor's Associates decision for preventing state law from imposing harsher standards of unconscionability and other defenses on arbitration agreements as compared to other contracts).
150. See Doctor's Assocs., Inc., 517 U.S. at 686-688 (stating that courts may not consider consequences unique to arbitration agreements in determining the enforceability of arbitration agreements); see infra Part IV (discussing the preemption of state unconscionability laws).
151. See, e.g., Railroad v. Lockwood, U.S. (1 Wall.) 357, 381-82 (1873) (refusing to enforce a clause in the agreement of a common carrier exculpating it from liability resulting from its own negligence based on the "inequality of the parties, the compulsion under which the customer is placed, and the obligation of the carrier to the public"); JOHN D. CALAMARI & JOSEPH M. PERILLO, THE LAW OF CONTRACTS § 9-38, at 318 (2d ed.) (commenting that "[t]he concept of unconscionability has deep roots in our legal system, both in law and equity, but primarily in equity").
152. 161 A.2d 69 (N.J. 1960).
153. See id. at 86 (asserting that such contracts "resemble a law rather than a meeting of the minds").
154. See id. at 73, 75.
155. See id. at 76.
156. See id. at 84. Defending against Mrs. Henningsen's implied warranty claim, Chrysler, the manufacturer of the car, argued that, since Bloomfield was an independent franchisee and not an agent of Chrysler, vertical privity of contract shielded Chrysler from liability. See id. at 80. The court rejected the privity argument, finding that the manufacturer should bear responsibility for the safety of its products, particularly because modern marketing and advertising practices induce customers to buy cars without determining product fitness. See id. at 83.
157. Id. at 86 (noting that the weaker party, the buyer, is not in the position to seek better or different terms).
158. See id. at 87 (pointing out that since all car manufacturers disclaim liability, they have no incentive to produce safe cars).
159. See id. (noting that virtually all car manufacturers, including General Motors, Ford, Chrysler and American Motors, thrust this standard disclaimer on customers, and that dealers had no authority to alter the disclaimer's terms if a customer objected).
160. Id. at 87. The court similarly held the disclaimer ineffective to relieve the dealer, Bloomfield Motors, of liability for breach of the implied warranty of merchantability. See id. at 96-97. The court's pronouncement that the disclaimer violated public policy shows the overlap between unconscionable contracts and contracts that violate public policy, both of which are unenforceable. See, e.g., Henrioulle v. Marin Ventures, Inc., 573 P.2d 465, 468 (Cal. 1978) (en banc) (combining adhesion and public policy analyses to declare an exculpatory clause in a residential lease unenforceable); see also CALAMARI & PERILLO, supra note 129, § 9-44, at 339 (noting that the Henningsen disclaimer violated public policy and was therefore void as a matter of law).
161. 350 F.2d 445 (D.C. Cir. 1965).
162. See id. at 447.
163. Id. (emphasis omitted).
164. Id. at 449. Because the case arose before the District of Columbia had adopted the Uniform Commercial Code, the Code's unconscionability provision did not apply. See id. at 448. The court, however, invoked the common law prohibition against unconscionable agreements. See id. at 449. It believed that by adopting U.C.C. § 2-302, Congress demonstrated its approval of the common law rule. See id. at 449.
165. Id.
166. Id. Because the lower courts had not considered unconscionability, the D.C. Circuit remanded the case for findings on the issue. See id. at 450. Although agreeing with the result of the case, one scholar "quibbles" with the premise that the Williams contracts were substantively unconscionable. See Arthur A. Leff, Unconscionability and the Code, 115 U. PA. L. REV. 485, 554-56 (questioning the substantive unconscionability of the Williams contracts); but see Robert Braucher, The Unconscionable Contract or Term, 31 U. PITT. L. REV. 337, 343 (1970)) (arguing that default terms such as those contained in the Williams contracts should be per se unconscionable). Leff discerns two possible rationales supporting unconscionability and finds both unpersuasive. See Leff, supra, at 554-56. The first rationale is that the default provisions were unconscionable. See id. at 554. He argues, however, that since most states permit such provisions, they may not be viewed as a radical departure from accepted business practice. See id. at 554-55. The alternative rationale is that selling "luxury" items such as stereos to poor people, who may not be able to meet their payments, renders the entire contract unconscionable. See id. at 555. Leff characterizes this rationale as resting on paternalism and untenable class distinctions. See id. at 555-56.
167. Id. Because the lower courts had not considered unconscionability, the D.C. Circuit remanded the case for findings on the issue. See id. at 450. Although agreeing with the result of the case, one scholar "quibbles" with the premise that the Williams contracts were substantively unconscionable. See Arthur A. Leff, Unconscionability and the Code, 115 U. PA. L. REV. 485, 554-56 (questioning the substantive unconscionability of the Williams contracts); but see Robert Braucher, The Unconscionable Contract or Term, 31 U. PITT. L. REV. 337, 343 (1970)) (arguing that default terms such as those contained in the Williams contracts should be per se unconscionable). Leff discerns two possible rationales supporting unconscionability and finds both unpersuasive. See Leff, supra, at 554-56. The first rationale is that the default provisions were unconscionable. See id. at 554. He argues, however, that since most states permit such provisions, they may not be viewed as a radical departure from accepted business practice. See id. at 554-55. The alternative rationale is that selling "luxury" items such as stereos to poor people, who may not be able to meet their payments, renders the entire contract unconscionable. See id. at 555. Leff characterizes this rationale as resting on paternalism and untenable class distinctions. See id. at 555-56.
168. See Williams, 350 F.2d at 449.
169. See id.; CALAMARI & PERILLO, supra note 129, § 9-44, at 338-340 (noting that the rationale underlying many cases striking unconscionable contracts is that the assent of the party in the weaker bargaining position was not voluntary); see also KARL N. LLEWELLYN, THE COMMON LAW TRADITION 370-71 (1960) (suggesting that, rather than focusing on assent to boilerplate clauses, the courts should view the "dickered" terms as the basis of the agreement, and should infer a blanket assent to non-dickered terms as long as such terms do not contradict dickered terms and are not unreasonable or indecent). Professor Speidel believes that searching for assent in standardized consumer contracts is misguided. See Richard E. Speidel, Unconscionability, Assent and Consumer Protection, 31 U. PITT. L. REV. 359, 374-75 (1970). He argues that cases should not turn on disclosure and choice, neither of which may be germane to determining the fairness of adhesion contracts that snare low-income consumers. See id. at 375. He proposes, therefore, that courts discard the element of assent from unconscionability analysis and that instead the consumer have the initial burden of proving a prima facie case. See id. A consumer would have to prove that a term in the agreement substantially impaired the value the contract would otherwise have provided. See id. at 368. Once the consumer has met this burden, the seller would then have the opportunity to rebut the plaintiff's case by showing that the challenged terms were commercially reasonable. See id. at 368-69.
170. See id.; CALAMARI & PERILLO, supra note 129, § 9-44, at 338-340 (noting that the rationale underlying many cases striking unconscionable contracts is that the assent of the party in the weaker bargaining position was not voluntary); see also KARL N. LLEWELLYN, THE COMMON LAW TRADITION 370-71 (1960) (suggesting that, rather than focusing on assent to boilerplate clauses, the courts should view the "dickered" terms as the basis of the agreement, and should infer a blanket assent to non-dickered terms as long as such terms do not contradict dickered terms and are not unreasonable or indecent). Professor Speidel believes that searching for assent in standardized consumer contracts is misguided. See Richard E. Speidel, Unconscionability, Assent and Consumer Protection, 31 U. PITT. L. REV. 359, 374-75 (1970). He argues that cases should not turn on disclosure and choice, neither of which may be germane to determining the fairness of adhesion contracts that snare low-income consumers. See id. at 375. He proposes, therefore, that courts discard the element of assent from unconscionability analysis and that instead the consumer have the initial burden of proving a prima facie case. See id. A consumer would have to prove that a term in the agreement substantially impaired the value the contract would otherwise have provided. See id. at 368. Once the consumer has met this burden, the seller would then have the opportunity to rebut the plaintiff's case by showing that the challenged terms were commercially reasonable. See id. at 368-69.
171. Williams, 350 F.2d at 450; see also LLEWELLYN supra note 146, at 371 (urging courts not to enforce terms that are "manifestly unreasonable and unfair"); Speidel, supra note 146, at 369 (suggesting that courts refuse to enforce terms shown to be commercially reasonable).
172. See id. (suggesting that the court examine the terms "in light of the general commercial background and the commercial needs of the particular trade or case") Because the trial court had not considered whether the agreements were unconscionable, the D.C. Circuit remanded the case to the district court for a determination of unconscionability. See id.
173. In Henningsen, the court found the fact that all manufacturers disclaimed warranties "inimicable to the public welfare." Henningsen v. Bloomfield Motors, Inc., 161 A.2d 69, 87 (N.J. 1960).
174. See infra Parts III-V. (discussing mandatory arbitration in the securities industry and its effects on customers and employees).
175. U.C.C. § 2-302 provides: If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. (2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable, the parties shall be afforded a reasonable opportunity to present evidence as to the commercial setting, purpose, and effect to aid the court in making the determination. U.C.C. § 2-302 (1972).
176. Leff, supra note 143, at 487. Professor Leff grouped contract defenses into two categories. See id. The first group relates to objections to the "process of contracting" including fraud and duress. The second category relates to the "resulting contract," including illegality. See id. Professor Leff refers to the first group of defenses as indicating procedural unconscionability and to the second group as indicating substantive unconscionability. See id.
177. 476 F. Supp. 104 (S.D. Miss. 1979).
178. See id. at 105.
179. See id. at 106.
180. See id.
181. Id. at 106, 111.
182. See id. at 106, 111 (noting that the Holyfields were liable for the entire lease amount regardless of what happened to the herd); see also John E. Murray Jr., Unconscionability; Unconscionability, 31 U. PITT. L. REV. 1, 25 (1969) (proposing that courts determine the unconscionability of a term by analyzing whether the term, "if enforced, will create hardship for the party against whom it operates").
183. See Holyfield, 476 F. Supp. at 107.
184. See id.
185. See id. at 109.
186. See id. at 110.
187. See id.
188. See id.
189. See id.
190. See id.
191. See id.
192. See id. at 111. The Holyfields' "unstable financial position" and the "take-it-or-leave-it" lease evidenced the gross imbalance in bargaining power. See id.
193. See id. The level of sophistication of the weaker party is a recurrent factor in judicial determinations of unconscionability. For example, in Frostifresh Corp. v. Reyoso, 274 N.Y.S.2d 757, 757-60 (Dist. Ct. Nassau Co. 1966), rev'd as to damages, 281 N.Y.S.2d 964, 965 (N.Y. App. Term 1967), Spanish-speaking customers signed an installment agreement to purchase a refrigerator at a grossly inflated price. See Frostifresh, 274 N.Y.S.2d at 759. The court held the contract unconscionable, stating that "[d]efendants were handicapped by lack of knowledge as to the commercial situation and the nature and terms of the contract which was submitted in a language foreign to them." Id.
194. See Holyfield, 476 F. Supp. at 111.
195. Id. at 110 (citation omitted).
196. Id.
197. See id. at 111. The court noted that these disparities result in "too hard a bargain for a court of conscience to assist." Id.
198. See id.
199. See, e.g., Gregory R. Kim, Comment, Graham v. Scissor-Tail, Inc.: Unconscionability of Presumptively Biased Arbitration Clauses Within Adhesion Contracts, 70 CAL. L. REV. 1014, 1020 (1982) (noting that courts base findings of unconscionability on procedural unconscionability, substantive unconscionability, or a combination of both); see also Richard Craswell, Property Rules and Liability Rules in Unconscionability and Related Doctrines, 60 U. CHI. L. REV. 1, 17 (1993) (suggesting that procedural unconscionability is sufficient under a property rule, but substantive and procedural unconscionability are required under a liability rule).
200. See, e.g., Gregory R. Kim, Comment, Graham v. Scissor-Tail, Inc.: Unconscionability of Presumptively Biased Arbitration Clauses Within Adhesion Contracts, 70 CAL. L. REV. 1014, 1020 (1982) (noting that courts base findings of unconscionability on procedural unconscionability, substantive unconscionability, or a combination of both); see also Richard Craswell, Property Rules and Liability Rules in Unconscionability and Related Doctrines, 60 U. CHI. L. REV. 1, 17 (1993) (suggesting that procedural unconscionability is sufficient under a property rule, but substantive and procedural unconscionability are required under a liability rule).
201. See, e.g., Sosa v. Paulus, 924 P.2d 357, 363 (Utah 1997) (holding that procedural unconscionability, if extreme, will nullify contract term which is not substatively unconscionable); Kim, supra note 175, at 1020.
202. See In re Elkins-Dell Mfg., 253 F. Supp. 864, 871 (E.D. Pa. 1966) (referring to adhesion contracts as a "variety" of unconscionable contracts); LAWRENCE A. CUNNINGHAM & ARTHUR J. JACOBSON, CORBIN ON CONTRACTS § 559B (Supp. 1997) (observing that, although the doctrines overlap, the unconscionability doctrine is broader than the adhesion doctrine, since negotiated contracts may be unconscionable).
203. See Bank of Indiana v. Holyfield, 476 F. Supp. 104, 108 (S.D. Miss. 1979) (declining to enforce oppressive terms of lease against dairy farmers); Henrioulle v. Marin Ventures, Inc., 573 P.2d 465, 468 (Cal. 1978) (refusing to enforce a clause in a residential lease exculpating a landlord from liability for negligence, when the landlord obtained the clause by exerting superior bargaining power); Wheeler v. St. Joseph Hosp., 133 Cal. Rptr. 775, 783 (Cal. Ct. App. 1976) (explaining that "[t]he distinctive feature of a contract of adhesion is that the weaker party has no realistic choice as to its terms"); Friedrich Kessler, Contracts of Adhesion: Some Thoughts About Freedom of Contract, 43 COLUM. L. REV. 629, 632 (1943) (stating that parties in strong bargaining positions often impose standardized contracts on weaker parties); Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 HARV. L. REV. 1173, 1264-65 (1983) (noting that adhesion contracts are standard form contracts resulting from unequal bargaining power) .
204. See Bank of Indiana v. Holyfield, 476 F. Supp. 104, 108 (S.D. Miss. 1979) (declining to enforce oppressive terms of lease against dairy farmers); Henrioulle v. Marin Ventures, Inc., 573 P.2d 465, 468 (Cal. 1978) (refusing to enforce a clause in a residential lease exculpating a landlord from liability for negligence, when the landlord obtained the clause by exerting superior bargaining power); Wheeler v. St. Joseph Hosp., 133 Cal. Rptr. 775, 783 (Cal. Ct. App. 1976) (explaining that "[t]he distinctive feature of a contract of adhesion is that the weaker party has no realistic choice as to its terms"); Friedrich Kessler, Contracts of Adhesion: Some Thoughts About Freedom of Contract, 43 COLUM. L. REV. 629, 632 (1943) (stating that parties in strong bargaining positions often impose standardized contracts on weaker parties); Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 HARV. L. REV. 1173, 1264-65 (1983) (noting that adhesion contracts are standard form contracts resulting from unequal bargaining power) .
205. Holyfield, 476 F. Supp. at 108 (quoting RESTATEMENT (SECOND) OF CONFLICTS § 203, cmt.b).
206. See Wheeler, 133 Cal. Rptr. at 797 (Gardner, J., dissenting) ("Almost every written commercial transaction, except one hammered out by two lawyers representing two individuals of equal bargaining power, is in a broad sense, a contract of adhesion"); David W. Slawson, Standard Form Contract and Democratic Control, 84 HARV. L. REV. 529, 529 (1971) (surmising that form contracts account for 99% of all contracts); Kessler, supra note 178, at 631 (stating that mass production and distribution made standardized contracts inevitable); Todd D. Rakoff, Contracts of Adhesion: An Essay, 96 HARV. L. REV. 1173, 1176 (1983) (arguing that "the use of standard form contracts grows from the organization and practices of the large, hierarchical firms that set the tone of modern commerce").
207. See Wheeler, 133 Cal. Rptr. at 797 (Gardner, J., dissenting) ("Almost every written commercial transaction, except one hammered out by two lawyers representing two individuals of equal bargaining power, is in a broad sense, a contract of adhesion"); David W. Slawson, Standard Form Contract and Democratic Control, 84 HARV. L. REV. 529, 529 (1971) (surmising that form contracts account for 99% of all contracts); Kessler, supra note 178, at 631 (stating that mass production and distribution made standardized contracts inevitable); Todd D. Rakoff, Contracts of Adhesion: An Essay, 96 HARV. L. REV. 1173, 1176 (1983) (arguing that "the use of standard form contracts grows from the organization and practices of the large, hierarchical firms that set the tone of modern commerce").
208. In Finstad v. Steiger Tractor, Inc., 301 N.W.2d 392 (N.D. 1981), the trial court granted an insurer summary judgment based on the insured's failure to satisfy a contractual notice of claim provision. See id. at 394. On appeal, the Supreme Court of North Dakota observed that since insurance contracts are not negotiated, courts must scrutinize terms that would deprive insureds of benefits. See id. at 398. Therefore, the insured's breach of the notice of claim provision should result in the loss of benefits only if the insurer suffered appreciable prejudice as a result of the breach. See id. The lower court had not considered this issue, so the North Dakota Supreme Court remanded the case. See id. Another court has characterized insurance policies as adhesion contracts. See Corgatelli v. Globe Accident Life & Accident Ins. Co., 533 P.2d 737, 740 (Idaho 1975) (declaring that most insurance policies are contracts of adhesion).
209. See, e.g., Slawson, supra note 180, at 552 (noting that standardized contracts reduce the costs of drafting, performing, and enforcing contracts).
210. See LLEWELLYN, supra note 146, at 362 (commenting that standardized terms reflect the accumulation of experience, minimize legal risk, reduce counsel fees, and fit the needs of business engaging in mass contracting); Kessler, supra note 178, at 631 (noting that "uniformity of terms of contracts typically recurring in a business enterprise is an important factor in the exact calculation of risk"); Slawson, supra note 180, at 552 (remarking that the insurance industry could not function without standardized policies that lend predictability to the risks assumed); see also LLEWELLYN, supra note 146, at 362 (suggesting that standardized contracts reduce corporate costs and consequently result in lower prices).
211. See Kessler, supra note 178, at 631-32 (discussing a corporation's legal exposure). As examples of corporate efforts to limit liability through form agreements, Kessler points to clauses limiting implied warranties and excluding the right to receive damages. See id. at 632.
212. See, e.g., Kim, supra note 175, at 1019-20 (noting that "[a] contract may be procedurally unconscionable but nonetheless enforceable"); Murray, supra note 158, at 24 (suggesting that procedural unconscionability alone should not undo an agreement unless the victimized party suffered an unfair risk allocation); Slawson, supra note 180, at 566 (arguing that few, if any, standard form agreements are bona fide contracts because such agreements lack mutual assent, but arguing nevertheless that "contracts" of adhesion should be enforced when in the public interest).
213. 434 N.E.2d 59 (Ill. App. 1982).
214. See id. at 60.
215. See id. at 60-61.
216. See id. at 61.
217. See id.
218. See id. at 61-62.
219. See id. at 62.
220. See id. at 62-63.
221. See id.
222. See id. at 63. See also Texlon Corp. v. Hoffman, 720 F. Supp. 657 (N.D. Ill. 1989) (holding that boilerplate language in a contract of adhesion professing the employee's comprehension of oppressive contractual terms does not ameliorate unconscionability of overbroad non-competition clause).
223. See Henson, 434 N.E.2d at 63.
224. See id.
225. 240 N.W.2d 710 (Mich. 1976).
226. See id. at 712.
227. Id. at 716. In North Dakota ex. rel. Hagen v. Bismarck Tire Ctr., Inc., 234 N.W.2d 224 (N.D. 1975), Bismarck, without negotiation, unilaterally instituted a vacation policy requiring employees to give three weeks notice of vacation plans. See id. at 225. An employee who quit his job without giving three weeks notice demanded accrued vacation pay. See id. Bismarck argued that the employee had lost his right to vacation pay because he had failed to give the requisite notice. See id. Holding that the new vacation policy was a contract of adhesion, see id., the court refused to enforce the policy, which it characterized as a forfeiture, see id. at 226.
228. Woodward, 240 N.W.2d at 716. This observation applies equally to mandatory arbitration agreements. Surrendering the right to have claims decided according to law and public policy arguably curtails employee rights more significantly than foregoing the right to work within a specified geographical area.
229. 407 U.S. 1 (1972).
230. See id. at 2.
231. See id. at 2-3.
232. See id.
233. See id. at 3-4.
234. See id. at 2-6.
235. See id. at 7-9 (discussing choice-of-forum clauses when the chosen forum is outside the United States). Reminiscent of the historic judicial opposition to arbitration, courts objected to forum-selection clauses on the ground that such provisions ousted the court of jurisdiction. See, e.g., Nashua River Paper Co. v. Hammermill Paper Co., 111 N.E. 678, 680-81 (Mass. 1916) (finding a forum-selection clause unenforceable because a court's jurisdiction is prescribed by law, and the parties cannot affect jurisdiction); Benson v. Eastern Bldg. & Loan Ass'n., 66 N.E. 627 (N.Y. 1903) (finding a forum-selection clause ineffective, and stating that the court's jurisdiction "can neither be added to nor subtracted from by the agreement of the parties").
236. See Bremen, 407 U.S. at 12. In Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991), the Supreme Court upheld a forum-selection clause printed on a cruise ship ticket. See Carnival Cruise Lines, Inc., 499 U.S. at 585-98. The clause said that any dispute between the cruise line and passengers would be adjudicated in Florida state court. See id. at 587-88. Recognizing that passengers are unlikely to negotiate the terms on a ticket, see id. at 593, the court nevertheless upheld the forum-selection clause, see id. at 597. The court cited the special interests that the cruise line had in insisting on such a clause. See id. at 593. First, the cruise line carries passengers from many locales, and it might face litigation in numerous forums. See id. Second, such a clause dispels confusion over where claims should be decided, sparing litigants the cost of pre-trial motions. See id. At 593-94. Finally, the Court suggested that the forum-selection clause translates into cheaper ticket prices because it reduces the cruise line's litigation expenses. See id. at 594.
237. Bremen, 407 U.S. at 10; see also id. at 12 n.14 (finding no "overweening bargaining power").
238. Bank of Indiana v. Holyfield, 476 F. Supp 104 (S.D. Miss. 1979).
239. See id. at 108.
240. See id.
241. See id. at 108-09.
242. 645 P.2d 1192 (Cal. 1982), rev'd in part on other grounds sub nom. Southland Corp. v. Keating, 465 U.S. 1 (1984).
243. See id. at 1195.
244. See id.
245. See id. at 1196.
246. See id. at 1196-98; see also Doctor's Assocs., Inc. v. Stuart, 85 F.3d 975, 980 (2d Cir. 1996) (rejecting the argument that a mandatory arbitration clause in the franchise agreement was unconscionable). When the facts supporting unconscionability are compelling, state courts sometimes refuse enforcement despite federal arbitration policy. In Wheeler v. Joseph Hosp., 133 Cal. Rptr. 775 (Cal. Ct. App. 1977), the court refused to enforce an arbitration agreement in a hospital admission form because the clause was too subtle for a layman to understand, Wheeler, 133 Cal. Rptr. at 785, particularly under the stress of being admitted to a hospital, see id. at 786. Notably, the arbitration clause was optional; that is, the patient, upon admission, was permitted to reject the arbitration clause. See id. at 779 n.2. Confronting similar facts, the Supreme Court of Utah reached the same result. See Sosa v. Paulus, 924 P.2d 357, 363 (Utah 1997). Although finding no substantive unconscionability, the court would not excuse the egregious procedural unconscionability of thrusting an arbitration agreement on a patient about to undergo surgery. See id. at 363; see also Graham v. Scissor-Tail, Inc., 623 P.2d 165 (Cal. 1981) (holding a mandatory arbitration clause unconscionable because of the potential partiality of the particular arbitral forum); but see Madden v. Kaiser Foundation Hosps., 552 P.2d 1178, 1185 (Cal. 1976) (finding mandatory arbitration not unconscionable unless it is oppressive or frustrates the reasonable expectations of the weaker party).
247. See Keating, 645 P.2d at 1197 (noting "two judicially imposed limitations . . . on judicial enforcement"). Using the term "oppressive" or "unconscionable" is redundant. An oppressive term is unconscionable.
248. Id. at 1198.
249. See id. at 1207.
250. See id. at 1198 (stating conclusively that both the provision and the procedures fell within the reasonable expectations of the franchisees); see also infra Part III.F (discussing the doctrine of reasonable expectations).
251. See infra Parts III.C, D and E (discussing basic rights that claimants may forfeit when relegated to SRO-arbitration).
252. See Securities Exchange Act of 1934, 15 U.S.C. § 78o(b)(8) (1994), which provides: It shall be unlawful for any registered broker or dealer to effect any transaction in, or induce or attempt to induce the purchase or sale of any security . . . unless such broker or dealer is a member of a securities association registered pursuant to section 78o-3 of this title or effects transactions in securities solely on a national securities exchange of which it is a member.
253. See, e.g., 2 NEW YORK STOCK EXCHANGE GUIDE (CCH) ¶ 2345(a) (1984), providing: No member or member organization shall permit any natural person to perform regularly the duties customarily performed by (i) a registered representative, (ii) a Securities lending representative, (iii) a securities trader or (iv) a direct supervisor of (i), (ii) or (iii) above, unless such person shall have been registered with, qualified by and is acceptable to the Exchange.
254. The SEC has oversight authority to regulate SROs. See 15 U.S.C. § 78s. This authority encompasses rule changes and requires SROs to file proposed rule changes with the SEC. See id. § 78s(b)(1). All rule changes must receive SEC approval to be effective. See id. § 78s(b)(2). The SEC even has the authority unilaterally to change the rules of SROs. See id. § 78s(c).
255. See, e.g., NYSE RULES, Rule ¶ 2347 (requiring employees to file a Form U-4).
256. See Exchange Act Rel. No. 37407 (July 5, 1997), 61 Fed. Reg. 36,595 (July 11, 1996) ("I agree to arbitrate any dispute, claim, or controversy that may arise between me and my firm or a customer or any other person, that is required to be arbitrated under the rules, Constitutions, or by-laws of the organizations with which I register. . .")
257. See, e.g., NAT'L ASS'N. OF SEC. DEALERS, CODE OF ARBITRATION PROCEDURE, Rule 10101 (1996) ("This code of arbitration is prescribed and adopted . . . for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the Association, or arising out of the employment or termination of employment of associated person(s) with any member. . ."); NEW YORK STOCK EXCHANGE, ARBITRATION RULES, Rule 600(a) (1996) ("Any dispute claim or controversy between a customer or non-member and a member, allied member, member organization and/or associated person in connection with his activities as an associated person shall be arbitrated. . ."); CONSTITUTION OF THE NEW YORK STOCK EXCHANGE, Art. XI, § 1, providing: Any controversy between parties who are members, allied members or member organizations and any controversy between a member, allied member or member organization and any other person arising out of the business of such member, allied member or member organization . . . shall at the instance of any such party, be submitted for arbitration.
258. See supra notes 177-185 and accompanying text (discussing adhesion contracts).
259. See, e.g., Sosa v. Paulus, 924 P.2d 357, 363 (Utah 1997) (holding that extreme procedural unconscionability may render a contract unenforceable even absent substantive unconscionability). In Hoffman v. Aaron Kamhi, Inc., 927 F. Supp. 640, 643 (S.D.N.Y. 1996), the court refused to find that an arbitration clause in an employment agreement is per se unconscionable. See id. at 643. The court commented that the employee had not shown "pressure tactics, fraud, or other means of coercion to extract the employee's promise to arbitrate." Id. Under the Hoffman test, the inescapable requirement of arbitration in the securities industry is unconscionable.
260. Some courts confuse adhesion contracts with unconscionable contracts. Compare Beauchamp v. Great West Life Assurance Co., 918 F. Supp. 1091, 1098 (E.D. Mich. 1996) (declining to characterize Form U-4 as a contract of adhesion), Cherry v. Wertheim Schroder & Co., 868 F. Supp. 830, 836 (D.S.C. 1994) (holding that the Form U-4 arbitration clause does not constitute a contract of adhesion because no fraud or coercion was involved), Rust v. Drexel Firestone, Inc., 352 F. Supp. 715, 717 (1972) (holding that the Form U-4 arbitration clause does not constitute a contract of adhesion because the employee did not sign under duress), and Barrowclough v. Kidder, Peabody & Co., 752 F.2d 923, 937 (3d Cir. 1985) (declining to hold mandatory securities arbitration clauses unenforceable because the industry imposes such clauses on all securities employees), with Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 97 Cal. Rptr. 811, 813 (Cal. App. 1971) (assuming that Form U-4 is a contract of adhesion, but nevertheless finding the agreement within the parties' expectations and therefore not unconscionable).
261. 500 U.S. 20 (1991).
262. See id. at 35. The federal courts have extended this holding to arbitration of claims arising under Title VII of the 1964 Civil Rights Act. See, e.g., Patterson v. Tenet Healthcare, Inc., 113 F.3d 832, 837 (8th Cir. 1997) (agreeing with "post-Gilmer decisions . . . rul[ing] that Title VII claims . . . are subject to individual consensual agreements to arbitrate); Cole v. Burns Int'l Security Servs., 105 F.3d 1465, 1482 (D.C. Cir. 1997) (finding arbitration an effective means of redress); Austin v. Owens-Brockway Glass Container, Inc., 78 F.3d 875, 880 (4th Cir. 1996) (supporting arbitration as an alternative forum, not depriving litigants of any rights); Prudential Ins. Co. of America v. Lai, 42 F.3d 1299, 1303 (9th Cir. 1994) (acknowledging Gilmer's endorsement of employee arbitration of statutory claims); Bender v. A.G. Edwards & Sons, Inc., 971 F.2d 698, 700 (11th Cir. 1992) (reasoning that the Gilmer Court's analysis of a claim under the ADEA analogizes to a claim under Title VII); Mago v. Shearson Lehman Hutton, Inc., 956 F.2d 932, 935 (9th Cir. 1992) (stating that Congress did not intend to preclude arbitration of claims under Title VII); Alford v. Dean Witter Reynolds, Inc., 939 F.2d 229, 229-30 (5th Cir. 1991) (following Gilmer in holding Title VII claims arbitrable under the FAA). But see Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, 1998 U.S. Dist. LEXIS 877 (D. Mass. Jan. 26, 1998) (finding "structural bias" in NYSE arbitration and therefore not requiring the arbitration of a gender discrimination claim brought under Title VII). The reasoning of Gilmer also reaches ERISA claims. See, e.g., Pritzer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1116 (3d Cir. 1993) (citing Gilmer and "the trend in recent Supreme Court cases . . . that agreements to arbitrate . . . ERISA claims under the FAA may be upheld"); cf. Bevere v. Oppenheimer & Co., 862 F. Supp. 1243, 1247 (D.N.J. 1994) (holding ERISA claims arbitrable but not citing Gilmer); Bird v. Shearson Lehman/American Express, Inc., 926 F.2d 116, 120 (2d Cir. 1991) (holding ERISA claims arbitrable but not citing Gilmer). Claims arising under the Americans With Disabilities Act also are arbitrable. See Miller v. Public Storage Management, Inc., 121 F.3d 215, 218 (5th Cir. 1997) (holding ADA claims arbitrable).
263. See Gilmer, 500 U.S. at 24-26 (discussing pro-arbitration cases); see also supra Part I A-D (discussing the development of federal policy favoring arbitration).
264. See id. at 30. The Court cited three New York Stock Exchange Rules to support its trust in SRO arbitration. See id. Rule 608 requires the Exchange to inform disputing parties of the employment history of prospective arbitrators and that the parties be permitted to inquire further into the backgrounds of prospective arbitrators. See id.; see also 2 N.Y.S.E. Guide (CCH) ¶ 2608, at 4314 (1991). Rule 609 permits each party one peremptory challenge and unlimited challenges for cause. See Gilmer, 500 U.S. at 30; see also 2 N.Y.S.E. Guide (CCH) ¶ 2609, at 4315 (1991). Finally, Rule 610 requires arbitrators to disclose "any circumstances which might preclude [them] from rendering an impartial and objective determination." Gilmer, 500 U.S. at 30; see also 2 N.Y.S.E. Guide (CCH) ¶ 2610, at 4315 (1991). The Court also relied on § 10(b) of the FAA, which empowers courts to vacate awards "[w]here there was evident partiality or corruption in the arbitrators." Gilmer, 500 U.S. at 30 (quoting FAA, 9 U.S.C. §§ 10(b)(1)-(2) (1994)).
265. See id. at 30-32. The Gilmer Court noted that New York Stock Exchange Rule 619, though not as permissive as federal discovery rules, allows for document disclosure, depositions, subpoenas, and information requests. See id. at 31. In addition, the Court doubted that age discrimination claims require more discovery than RICO claims or antitrust claims, for which the Court had previously held SRO-discovery procedures adequate. See id.
266. See id. at 32-33 (discussing characteristics of adhesion contracts).
267. Id. at 33. (citing Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989) and Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987).
268. See supra notes 185-214 and accompanying text (discussing the enforceability of adhesion contracts).
269. Gilmer, 500 U.S. 33 (rejecting the oppression argument); see also Haluska v. RAF Fin. Corp., 875 F. Supp. 825, 828 (N.D. Ga. 1994) (denying the unconscionability argument of a securities representative who was an "experienced businessman"). The Gilmer Court declined to announce a general rule for claims alleging "unequal bargaining power," commenting that such claims are best decided on a case-by-case basis. Gilmer, 500 U.S. at 33; see also Robert J. Lewton, Comment, Are Mandatory, Binding Arbitration Requirements A Viable Solution for Employers Seeking to Avoid Litigating Statutory Employment Discrimination Claims, 59 ALB. L. REV. 991, 1019-20 (1996) (advising employers that Gilmer has not foreclosed unconscionability claims).
270. Unconscionable contracts are not cleansed of their taint merely because the victim understood the terms of the contract or because the victim was
271. See supra notes 185-214 and accompanying text (discussing the enforceability of adhesion contracts).
272. See FAA Hearings, supra note 39, at 9 (statement of Senator Walsh), quoted in Gilmer at 39. Based partly on this legislative history. Justice Stevens argued in dissent that § 1 of the FAA excludes employment contracts. 500 U.S. at 36. Section 1 provides in part: "nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." 9 U.S.C. § 1 (1994). The majority declined to reach the issue because Gilmer had not raised it, and Form U-4 is not an employment contract but is rather a registration application between brokerage employees and the exchanges. 500 U.S. at 25 n.2. Justice Stevens, however, believed that the issue of whether the FAA applied was antecedent to the exclusion issue and was therefore "fairly subsumed" in the issues in the case. Id. at 37 (quoting Teague v. Lane, 489 U.S. 288, 300 (1989)). Turning to the substantive issue, Justice Stevens also argued that Form U-4 is an employment agreement because it establishes conditions of employment. Id. at 40. Most courts addressing the issue have applied the § 1 exclusion only to workers involved in moving goods in interstate commerce. See, e.g., Patterson v. Tenet Healthcare, Inc., 113 F.3d 832, 835 (8th Cir. 1997); Great Western Mortgage Corp. v. Peacock, 110 F.3d 222, 227 (3d Cir. 1997); Rojas v. TK Communications, Inc., 87 F.3d 745, 748 (5th Cir. 1996); Asplundh Tree Co. v. Bates, 71 F.3d 592, 601 (6th Cir. 1995); Miller Brewing Co. v. Brewery Workers Local Union 95, 739 F.2d 1159, 1162 (7th Cir. 1984); Erving v. Virginia Squires Basketball Club, 468 F.2d 1064, 1069 (2d Cir. 1972); Dickstein v. Dupont, 443 F.2d 783, 785 (1st Cir. 1971); Tenney Engineering, Inc. v. United Elec., Radio & Mach. Workers, 207 F.2d 450, 452 (3d Cir. 1953); Golenia v. Bob Baker Toyota, 915 F. Supp. 201, 204 (S.D. Cal. 1996). But see United Elec., Radio & Mach. Workers v. Miller Metal Prods., Inc., 215 F.2d 221, 224 (4th Cir. 1954); Comment, Developments in the Law: Employment Discrimination, 109 HARV. L. REV. 1568, 1676 (1996) (disagreeing with federal courts that apply the § 1 exclusion only to workers engaged in transporting goods in interstate commerce); FAA Hearings, supra note 39, at 9 (1923), noting that "the FAA is not intended [to] be an act referring to labor disputes, at all. It is purely an act to give the merchants the right or privilege of sitting down and agreeing with each other as to what their damages are, if they want to do it." In Cole v. Burns International Security Services, 105 F.3d 1465, 1470 (D.C. Cir. 1997), the court relied on canons of statutory construction to reach this result. See Cole, 103 F.3d at 1470-71. The Court invoked the rule that an interpretation of a statute should not render any of the words in the statute surplusage. See id. at 1470. By reading the phrase "any other class of workers" to apply to all employees, the reference to "seamen [and] railroad employees" would be redundant. See id. The court also relied on the rule of ejusdem generis, which limits the meaning of a general term following specific terms to matters similar to the specific terms. Thus, the specific reference to "seamen [and] railroad employees" qualifies the general reference to "any other class of workers." Id. Professor Stempel agrees that courts should interpret the employment contract exclusion broadly. See Jeffrey W. Stempel, Reconsidering the Employment Contract Exclusion in Section 1 of the Federal Arbitration Act: Correcting the Judiciary's Failure of Statutory Vision, 1991 J. DISP. RES. 259, 299 (1991). Among numerous arguments, he points out that "[t]he broader reading of the employment exception prevents the Act from making arbitration contracts more equal than others and also protects a relatively weak party, the individual employee, from being bound by clauses in contracts whose consensual nature is highly suspect." Id. at 299 (discussing the proper interpretation of § 1 of the FAA).
273. See FAA Hearings, supra note 39, at 9 (statement of Senator Walsh), quoted in Gilmer at 39. Based partly on this legislative history. Justice Stevens argued in dissent that § 1 of the FAA excludes employment contracts. 500 U.S. at 36. Section 1 provides in part: "nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." 9 U.S.C. § 1 (1994). The majority declined to reach the issue because Gilmer had not raised it, and Form U-4 is not an employment contract but is rather a registration application between brokerage employees and the exchanges. 500 U.S. at 25 n.2. Justice Stevens, however, believed that the issue of whether the FAA applied was antecedent to the exclusion issue and was therefore "fairly subsumed" in the issues in the case. Id. at 37 (quoting Teague v. Lane, 489 U.S. 288, 300 (1989)). Turning to the substantive issue, Justice Stevens also argued that Form U-4 is an employment agreement because it establishes conditions of employment. Id. at 40. Most courts addressing the issue have applied the § 1 exclusion only to workers involved in moving goods in interstate commerce. See, e.g., Patterson v. Tenet Healthcare, Inc., 113 F.3d 832, 835 (8th Cir. 1997); Great Western Mortgage Corp. v. Peacock, 110 F.3d 222, 227 (3d Cir. 1997); Rojas v. TK Communications, Inc., 87 F.3d 745, 748 (5th Cir. 1996); Asplundh Tree Co. v. Bates, 71 F.3d 592, 601 (6th Cir. 1995); Miller Brewing Co. v. Brewery Workers Local Union 95, 739 F.2d 1159, 1162 (7th Cir. 1984); Erving v. Virginia Squires Basketball Club, 468 F.2d 1064, 1069 (2d Cir. 1972); Dickstein v. Dupont, 443 F.2d 783, 785 (1st Cir. 1971); Tenney Engineering, Inc. v. United Elec., Radio & Mach. Workers, 207 F.2d 450, 452 (3d Cir. 1953); Golenia v. Bob Baker Toyota, 915 F. Supp. 201, 204 (S.D. Cal. 1996). But see United Elec., Radio & Mach. Workers v. Miller Metal Prods., Inc., 215 F.2d 221, 224 (4th Cir. 1954); Comment, Developments in the Law: Employment Discrimination, 109 HARV. L. REV. 1568, 1676 (1996) (disagreeing with federal courts that apply the § 1 exclusion only to workers engaged in transporting goods in interstate commerce); FAA Hearings, supra note 39, at 9 (1923), noting that "the FAA is not intended [to] be an act referring to labor disputes, at all. It is purely an act to give the merchants the right or privilege of sitting down and agreeing with each other as to what their damages are, if they want to do it." In Cole v. Burns International Security Services, 105 F.3d 1465, 1470 (D.C. Cir. 1997), the court relied on canons of statutory construction to reach this result. See Cole, 103 F.3d at 1470-71. The Court invoked the rule that an interpretation of a statute should not render any of the words in the statute surplusage. See id. at 1470. By reading the phrase "any other class of workers" to apply to all employees, the reference to "seamen [and] railroad employees" would be redundant. See id. The court also relied on the rule of ejusdem generis, which limits the meaning of a general term following specific terms to matters similar to the specific terms. Thus, the specific reference to "seamen [and] railroad employees" qualifies the general reference to "any other class of workers." Id. Professor Stempel agrees that courts should interpret the employment contract exclusion broadly. See Jeffrey W. Stempel, Reconsidering the Employment Contract Exclusion in Section 1 of the Federal Arbitration Act: Correcting the Judiciary's Failure of Statutory Vision, 1991 J. DISP. RES. 259, 299 (1991). Among numerous arguments, he points out that "[t]he broader reading of the employment exception prevents the Act from making arbitration contracts more equal than others and also protects a relatively weak party, the individual employee, from being bound by clauses in contracts whose consensual nature is highly suspect." Id. at 299 (discussing the proper interpretation of § 1 of the FAA).
274. See supra note 242(discussing cases rejecting unconscionability argument); see also Jonathan E. Breckenridge, Note, Bargaining Unfairness and Agreements to Arbitrate: Judicial and Legislative Application of Contract Defenses to Arbitration Agreements, 1991 ANN. SURVEY OF AM. L. 925, 979 (observing that courts applying state law have been more receptive to arguments that arbitration agreements are unconscionable than have courts applying federal law).
275. See supra notes 239-44 (citing courts that have sustained this argument); but see Stempel, supra note 16, at 1430 ("No matter how rational the regulatory framework, no matter how fair arbitration may be in practice, it should never become a virtually inescapable default method of dispute resolution. Only those who have meaningfully consented to arbitration should be required to arbitrate.").
276. See, e.g., PaineWebber v. Bahr, No. 94-36026. 1996 U.S. App. LEXIS 25314 (9th Cir. Sept. 24, 1996).
277. See id. at *7.
278. Id. The position that Bahr's success as an account representative defeats the unconscionability argument is similar to the "experienced businessman" argument that beguiled the Supreme Court in Gilmer. See Gilmer v. Interstate Johnson/Lane Corp., 500 U.S. 20, 33 (1991) (noting that although courts should consider the possibility of fraud and "overwhelming economic power" in deciding whether to enforce an arbitration clause, Gilmer, "an experienced businessman," did not appear to be a victim of unequal bargaining power).
279. See PaineWebber, 1996 U.S. App. LEXIS 25314, at *7.
280. See, e.g., Gilmer, 500 U.S. at 31-32.
281. See U.S. CONST. amends. V and XIV § 2.
282. See U.S. CONST. amend. VII ("In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of common law."); Beacon Theaters, Inc. v. Westover, 359 U.S. 500, 510 (1958) (characterizing the constitutional right to a trial by jury in a civil case as inviolate); see also Stempel, supra note 16, at 1392 (arguing that claims should be arbitrable only when the parties have consented to waive the Seventh Amendment right to a jury trial, but recognizing that courts overlook this "axiom" of fairness).
283. But see Constantine N. Katsoris, The Level Playing Field, 17 FORDHAM URB. L.J. 419, 430 (1990) (arguing that fairness and efficiency are not mutually exclusive).
284. See 9 U.S.C. § 10c (providing that arbitrators may not engage in "misbehavior that prejudices the rights of a party"; Yasuda Fire & Marine Ins. Co. v. Continental Casualty Co., 37 F.3d 345, 353 (7th Cir. 1994) (stating that "[c]ourts have required arbitration panels . . . to afford the parties a funadamentally fair hearing prior to awarding relief); R.M. Perez & Assocs. v. Welch, 960 F.2d 534, 540 (5th Cir. 1992) (reviewing a district court's confirmation of an arbitration award to decide if the arbitration was fundamentally unfair); Forsythe Int'l, S.A. v. Gibbs Oil Co., 915 F.2d 1017, 1020 (5th Cir. 1990) (testing an arbitration award against the standard of fundamental fairness); Grovner v. Georgia Pac. Corp., 625 F.2d 1289, 1290 (5th Cir. 1980) (noting that, although arbitration does not provide all the procedural "niceties" of litigation, it must afford the parties "a fundamentally fair hearing"); Spiedel, supra note 146, at 195 (interpreting the FAA to guarantee a fundamentally fair hearing); see generally 1 MACNEIL ET AL., supra note 14, § 32.3.1 (reviewing cases that require fundamentally fair arbitration proceedings); Michael P. O'Mullan, Seeking Consistency in Judicial Review of Securities Arbitration: An Analysis of the Manifest Disregard of the Law Standard, 64 FORDHAM L. REV. 1121, 1123 (1995) (reading the FAA to limit judicial review to issues of procedural unfairness).
285. The issue whether due process applies to SRO arbitration divides into two components: customer arbitration and employee arbitration. The weight of authority suggests that, despite the regulatory role of the SEC, SRO-customer arbitration does not involve state action. See, e.g., Davis v. Prudential Securities, Inc., 59 F.3d 1186, 1191-92 (11th Cir. 1995) (holding in a customer arbitration case that "the state action element of a due process claim is absent in private arbitration cases"). Accordingly, SRO-customer arbitration need not comply with the rigors of due process. Mandatory arbitration of SRO-employment disputes arguably constitutes state action because the SEC has approved mandatory arbitration. See Ware, supra note 14, at 154-55 (urging that such arbitration involves state action because it arises out of an occupational licensing scheme regulated by the SEC, a state actor); Edward Brunet, Arbitration and Constitutional Rights, 71 N.C.L. REV. 81, 114-117 (1992) (contending that the FAA confers due process rights on arbitrating parties); cf. Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132, 139 (6th Cir. 1996) (assuming without deciding that due process applies in SRO-employment arbitration); but see Cremin v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 957 F. Supp 1460, 1466-67 (N.D. Ill. 1997) (reasoning that government approval or regulation of private conduct does not transform private conduct to state action); See generally Kenneth R. Davis, Due Process Right to Judicial Review of Arbitral Punitive Damages Awards, 32 AM. BUS. L.J. 583, 612-13 (1995) (arguing that commerical arbitration, because of its private characteristics, does not generally involve state action and therefore need not conform to due process requirements).
286. The issue whether due process applies to SRO arbitration divides into two components: customer arbitration and employee arbitration. The weight of authority suggests that, despite the regulatory role of the SEC, SRO-customer arbitration does not involve state action. See, e.g., Davis v. Prudential Securities, Inc., 59 F.3d 1186, 1191-92 (11th Cir. 1995) (holding in a customer arbitration case that "the state action element of a due process claim is absent in private arbitration cases"). Accordingly, SRO-customer arbitration need not comply with the rigors of due process. Mandatory arbitration of SRO-employment disputes arguably constitutes state action because the SEC has approved mandatory arbitration. See Ware, supra note 14, at 154-55 (urging that such arbitration involves state action because it arises out of an occupational licensing scheme regulated by the SEC, a state actor); Edward Brunet, Arbitration and Constitutional Rights, 71 N.C.L. REV. 81, 114-117 (1992) (contending that the FAA confers due process rights on arbitrating parties); cf. Glennon v. Dean Witter Reynolds, Inc., 83 F.3d 132, 139 (6th Cir. 1996) (assuming without deciding that due process applies in SRO-employment arbitration); but see Cremin v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 957 F. Supp 1460, 1466-67 (N.D. Ill. 1997) (reasoning that government approval or regulation of private conduct does not transform private conduct to state action); See generally Kenneth R. Davis, Due Process Right to Judicial Review of Arbitral Punitive Damages Awards, 32 AM. BUS. L.J. 583, 612-13 (1995) (arguing that commerical arbitration, because of its private characteristics, does not generally involve state action and therefore need not conform to due process requirements).
287. See infra Part III.D (discussing an arbitrator's duty to follow controlling law).
288. See Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 259 (1987) (Blackmun, J., concurring in part and dissenting in part) (remarking that SROs discourage arbitrators from providing written reasons for their decisions); Lynn Katzler, Should Mandatory Written Opinions Be Required in All Securities Arbitrations? The Practical and Legal Implications to the Securities Industry, 45 AM. U. L. REV. 151, 156 (1995) (noting that SROs do not encourage arbitrators to explain awards and that arbitrators ordinarily refrain from providing any explanation); Jessica T. Martin, Advanced Micro Devices v. Intel Corp. and Judicial Review of Commercial Arbitration Awards: When Does a Remedy "Exceed" Arbitral Power?, 46 HASTINGS L.J. 1907, 1918 (1995) (commenting that courts must guess at why arbitrators decide as they do); Peter M. Mundheim, The Desirability of Punitive Damages in Securities Arbitration: Challenges Facing the Industry Regulators in the Wake of Mastrobuono, 144 U. PA. L. REV. 197, 202 (1995) (reporting that few securities arbitration awards contain a rationale for the decision); cf. ROBERT COULSON, BUSINESS ARBITRATION: WHAT YOU NEED TO KNOW 29 (1986) (stating that the AAA does not require arbitrators to provide written explanations for their decisions, and that doing so may "identify targets for the losing party to attack").
289. See Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 259 (1987) (Blackmun, J., concurring in part and dissenting in part) (remarking that SROs discourage arbitrators from providing written reasons for their decisions); Lynn Katzler, Should Mandatory Written Opinions Be Required in All Securities Arbitrations? The Practical and Legal Implications to the Securities Industry, 45 AM. U. L. REV. 151, 156 (1995) (noting that SROs do not encourage arbitrators to explain awards and that arbitrators ordinarily refrain from providing any explanation); Jessica T. Martin, Advanced Micro Devices v. Intel Corp. and Judicial Review of Commercial Arbitration Awards: When Does a Remedy "Exceed" Arbitral Power?, 46 HASTINGS L.J. 1907, 1918 (1995) (commenting that courts must guess at why arbitrators decide as they do); Peter M. Mundheim, The Desirability of Punitive Damages in Securities Arbitration: Challenges Facing the Industry Regulators in the Wake of Mastrobuono, 144 U. PA. L. REV. 197, 202 (1995) (reporting that few securities arbitration awards contain a rationale for the decision); cf. ROBERT COULSON, BUSINESS ARBITRATION: WHAT YOU NEED TO KNOW 29 (1986) (stating that the AAA does not require arbitrators to provide written explanations for their decisions, and that doing so may "identify targets for the losing party to attack").
290. See Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 259 (1987) (Blackmun, J., concurring in part and dissenting in part) (remarking that SROs discourage arbitrators from providing written reasons for their decisions); Lynn Katzler, Should Mandatory Written Opinions Be Required in All Securities Arbitrations? The Practical and Legal Implications to the Securities Industry, 45 AM. U. L. REV. 151, 156 (1995) (noting that SROs do not encourage arbitrators to explain awards and that arbitrators ordinarily refrain from providing any explanation); Jessica T. Martin, Advanced Micro Devices v. Intel Corp. and Judicial Review of Commercial Arbitration Awards: When Does a Remedy "Exceed" Arbitral Power?, 46 HASTINGS L.J. 1907, 1918 (1995) (commenting that courts must guess at why arbitrators decide as they do); Peter M. Mundheim, The Desirability of Punitive Damages in Securities Arbitration: Challenges Facing the Industry Regulators in the Wake of Mastrobuono, 144 U. PA. L. REV. 197, 202 (1995) (reporting that few securities arbitration awards contain a rationale for the decision); cf. ROBERT COULSON, BUSINESS ARBITRATION: WHAT YOU NEED TO KNOW 29 (1986) (stating that the AAA does not require arbitrators to provide written explanations for their decisions, and that doing so may "identify targets for the losing party to attack").
291. See Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 259 (1987) (Blackmun, J., concurring in part and dissenting in part) (remarking that SROs discourage arbitrators from providing written reasons for their decisions); Lynn Katzler, Should Mandatory Written Opinions Be Required in All Securities Arbitrations? The Practical and Legal Implications to the Securities Industry, 45 AM. U. L. REV. 151, 156 (1995) (noting that SROs do not encourage arbitrators to explain awards and that arbitrators ordinarily refrain from providing any explanation); Jessica T. Martin, Advanced Micro Devices v. Intel Corp. and Judicial Review of Commercial Arbitration Awards: When Does a Remedy "Exceed" Arbitral Power?, 46 HASTINGS L.J. 1907, 1918 (1995) (commenting that courts must guess at why arbitrators decide as they do); Peter M. Mundheim, The Desirability of Punitive Damages in Securities Arbitration: Challenges Facing the Industry Regulators in the Wake of Mastrobuono, 144 U. PA. L. REV. 197, 202 (1995) (reporting that few securities arbitration awards contain a rationale for the decision); cf. ROBERT COULSON, BUSINESS ARBITRATION: WHAT YOU NEED TO KNOW 29 (1986) (stating that the AAA does not require arbitrators to provide written explanations for their decisions, and that doing so may "identify targets for the losing party to attack").
292. See, e.g., D.H. Overmyer v. Frick Co., 405 U.S. 174, 187 (1972) (upholding a waiver of due process rights in a civil case because Overmyer "voluntarily, intelligently, and knowingly" waived those rights); Aetna Ins. Co. v. Kennedy, 301 U.S. 389, 393 (1937) (recognizing that a party may waive the Seventh Amendment right to a jury trial); see also Fuentes v. Shevin, 407 U.S. 67, 94 (1972) (suggesting that criminal standard for waiving due process applies in civil cases); Brady v. United States, 397 U.S. 742, 748 (1970) (holding in criminal case that due process may be waived if the defendant knowingly and intelligently relinquished his rights).
293. See Mitsubishi v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 633 (1984), noting that "streamlined proceedings and expeditious results" often prompt parties to agree to arbitrate. The Court continued: [A]daptability and access to expertise are hallmarks of arbitration. The anticipated subject matter of the dispute may be taken into account when the arbitrators are appointed, and arbitral rules typically provide for the participation of experts either employed by the parties or appointed by the tribunal. Id.; Martin, supra note 259, at 1907 (praising arbitration for its "flexibility, efficiency, and finality"); Stewart E. Sterk, Enforceability of Agreements to Arbitrate: An Examination of the Public Policy Defense, 2 CARDOZO L. REV. 481, 482 (1981) (commending arbitration for being an "effective and efficient mechanism for resolving disputes").
294. See supra notes 228-232 and accompanying text (explaining that all brokers must register with an SRO and all SROs require brokers to sign Form U-4, which contains a clause mandating arbitration of employment disputes).
295. 957 F. Supp. 1460 (N.D. Ill. 1997). See also Desiderio v. National Assoc. of Sec. Dealers, 2 F.Supp.2d 516 (S.D.N.Y. 1998) (rejecting constitutional objections to mandatory arbitration).
296. See Cremin, 957 F. Supp. at 1464.
297. See id. at 1474.
298. See id. at 1470.
299. See id. at 1465.
300. See id. at 1470 (exaggerating that "every" court has rejected the suggestion that Form U-4 is a contract of adhesion).
301. See id. at 1470-71 (noting that the court cannot violate rights waived by a party). Suits by employees against employers for violations of federal civil rights law do not carry the constitutional right to a jury trial, because the relief sought, typically backpay, is equitable rather than legal. See, e.g., Wade v. Orange County Sheriff's Office, 844 F.2d 951, 953 (2d Cir. 1988) (denying the constitutional right to a jury trial in Title VII case); Wilson v. City of Aliceville, 779 F.2d 631, 635 (11th Cir. 1986) (holding that there is no Seventh Amendment right to a trial by jury of a Title VII claim). The Cremin court erroneously assumed that this constitutional right does attach to such claims, but the court held that Cremin had waived the constitutional right to a jury trial by agreeing to arbitrate. See Cremin, 957 F. Supp. at 1470-71. See also 42 U.S.C. § 1981(c) (establishing the statutory right to a jury trial in a Title VII case).
302. See, e.g., Webb v. Investacorp, Inc., 89 F.3d 252, 259 (5th Cir. 1996) (noting that both parties forfeited access to the courts); Madden v. Kaiser Foundation Hosps., 552 P.2d 1178, 1186 (Cal. 1976) (stating that mandatory arbitration does not oppress the weaker party); but c.f. Graham v. Scissor-Tail, Inc., 623 P.2d 165, 177 (Cal. 1981) (declaring a mandatory arbitration agreement unconscionable because the particular arbitral forum was biased in favor of the party in the stronger position).
303. 89 F.3d 252 (5th Cir. 1996).
304. Id. at 259 (evaluating the Webbs' unconscionability argument); see also Rust v. Drexel Burnham Lambert Inc., 352 F. Supp. 715, 717 (S.D.N.Y. 1972) (upholding a mandatory arbitration clause, because "the defendant, no less than the plaintiff, gave up its right to a judicial forum"); Golenia v. Bob Baker Toyota, 915 F. Supp. 201, 204 (S.D. Cal. 1996) (stressing in dispute between car dealer and salesman that "the [arbitration] clause applies equally to both parties"). The court was not moved by the Webbs' argument that the arbitration agreement required them to pay Investacorp's litigation costs. See Webb, 89 F.3d at 259. The Webbs had to bear the consequences of an unfavorable bargain they had freely entered. See id. (noting that "the fact that the bargain is a hard one does not entitle a party to recission").
305. Webb, 89 F.3d at 259 (5th Cir. 1996).
306. 476 F. Supp. 104 (S.D. Miss. 1979).
307. See id. at 108 (noting the Holyfields' lack of knowledge of the risk of out-of-state litigation).
308. See infra notes 280-85 and accompanying text (discussing the potential injustices that may result from giving arbitrators free reign).
309. SECURITIES INDUSTRY CONFERENCE ON ARBITRATION, THE ARBITRATOR'S MANUAL 27-28 (Oct. 1996). Arbitrators do not have to follow the law unless the arbitration agreement directs them to do so. Generally, they may enforce their own sense of justice. See, e.g., Lentine v. Fundaro, 278 N.E.2d 633, 635 (N.Y. 1972) (stating that "arbitrators are not bound by the principles of substantive law or the rules of evidence"); 1 WILNER, supra note 21, 25:01 at 391 (noting that "arbitrators need not follow . . . [the] law when discussing issues unless they are commanded to do so by the tenets of the arbitration agreement"); Soia Mentschikoff, Commercial Arbitration, 61 COLUM. L. REV. 846, 867 (1961) (noting that arbitrators "must make their own selection of the most appropriate norms for the particular dispute"); but see Davis, supra note 31, at 124-26 (arguing that when a claimant asserts a federal statutory claim, the arbitrators must apply the appropriate federal statute). See also infra notes 286-94 and accompanying text (discussing Supreme Court cases holding that arbitrators must apply the statutory law under which a claimant seeks redress).
310. SECURITIES INDUSTRY CONFERENCE ON ARBITRATION, THE ARBITRATOR'S MANUAL 27-28 (Oct. 1996). Arbitrators do not have to follow the law unless the arbitration agreement directs them to do so. Generally, they may enforce their own sense of justice. See, e.g., Lentine v. Fundaro, 278 N.E.2d 633, 635 (N.Y. 1972) (stating that "arbitrators are not bound by the principles of substantive law or the rules of evidence"); 1 WILNER, supra note 21, 25:01 at 391 (noting that "arbitrators need not follow . . . [the] law when discussing issues unless they are commanded to do so by the tenets of the arbitration agreement"); Soia Mentschikoff, Commercial Arbitration, 61 COLUM. L. REV. 846, 867 (1961) (noting that arbitrators "must make their own selection of the most appropriate norms for the particular dispute"); but see Davis, supra note 31, at 124-26 (arguing that when a claimant asserts a federal statutory claim, the arbitrators must apply the appropriate federal statute). See also infra notes 286-94 and accompanying text (discussing Supreme Court cases holding that arbitrators must apply the statutory law under which a claimant seeks redress).
311. THE ARBITRATOR'S MANUAL, supra note 276, at 28 ("[I]f an arbitrator manifestly disregards the law, an award may be vacated."); id. at 31 (noting "manifest disregard" as a ground for vacating arbitration awards).
312. See infra notes 305-26 and accompanying text (discussing the manifest disregard standard).
313. See McKennon v. Nashville Banner Publishing Co., 513 U.S. 352, 357 (1995) (noting that the ADEA is "part of an ongoing congressional effort to eradicate discrimination in the workplace, [and] reflects a societal condemnation of invidious bias in employment decisions"); United States Postal Serv. Bd. of Governors v. Aikens, 460 U.S. 711 (1983) ("The prohibition against discrimination contained in the Civil Rights Act of 1964 reflects an important national policy."); McDonnell Douglas Corp. v. Green, 411 U.S. 792, 800 (1973) ("[T]he language of Title VII makes plain the purpose of Congress to assure equality of employment opportunities and to eliminate those discriminatory practices and devices which have fostered radically stratified job environments to the disadvantage of minority citizens.").
314. See, e.g., Edward Brunet, Questioning the Quality of Alternate Dispute Resolution, 62 TUL. L. REV. 1 (1987) (asserting that arbitration leads to the breakdown of legal norms; Harry T. Edwards, Alternative Dispute Resolution: Panacea or Anathema?, 99 HARV. L. REV. 668, 677 (1986) (noting the conflict between "national public values reflected in rules of law and nonlegal values that might be addressed in alternative dispute resolution"); Owen M. Fiss, Comment, Against Settlement, 93 YALE L.J. 1073, 1085 (1984) (arguing that settlement, and presumably arbitration, thwart the judicial function of interpreting and applying the Constitution and other law); Kronstein, supra note 31, at 66 (warning that widespread arbitration may disrupt "social coordination"). Such concerns exaggerate the risks of alternative dispute resolution. People have settled, mediated, and arbitrated disputes since the dawn of conflict. See KELLOR, supra note 14, at 3 (recounting the myth in which Paris decided whether Juno, Pallas Athena, or Venus was the most beautiful). These alternatives to litigation resolve the majority of disputes. See Kanowitz, supra note 21, at 242 (commenting on the pervasiveness of settlement and alternative dispute resolution). Despite the pervasive use of alternative dispute resolution, courts and legislatures continue to develop and refine an ever-expanding body of law, and parties flood the courthouse to vindicate the rights these laws afford. The proliferation of both law and lawsuits shows that alternative dispute resolution does not threaten legal norms.
315. See, e.g., Edward Brunet, Questioning the Quality of Alternate Dispute Resolution, 62 TUL. L. REV. 1 (1987) (asserting that arbitration leads to the breakdown of legal norms; Harry T. Edwards, Alternative Dispute Resolution: Panacea or Anathema?, 99 HARV. L. REV. 668, 677 (1986) (noting the conflict between "national public values reflected in rules of law and nonlegal values that might be addressed in alternative dispute resolution"); Owen M. Fiss, Comment, Against Settlement, 93 YALE L.J. 1073, 1085 (1984) (arguing that settlement, and presumably arbitration, thwart the judicial function of interpreting and applying the Constitution and other law); Kronstein, supra note 31, at 66 (warning that widespread arbitration may disrupt "social coordination"). Such concerns exaggerate the risks of alternative dispute resolution. People have settled, mediated, and arbitrated disputes since the dawn of conflict. See KELLOR, supra note 14, at 3 (recounting the myth in which Paris decided whether Juno, Pallas Athena, or Venus was the most beautiful). These alternatives to litigation resolve the majority of disputes. See Kanowitz, supra note 21, at 242 (commenting on the pervasiveness of settlement and alternative dispute resolution). Despite the pervasive use of alternative dispute resolution, courts and legislatures continue to develop and refine an ever-expanding body of law, and parties flood the courthouse to vindicate the rights these laws afford. The proliferation of both law and lawsuits shows that alternative dispute resolution does not threaten legal norms.
316. See, e.g., Edward Brunet, Questioning the Quality of Alternate Dispute Resolution, 62 TUL. L. REV. 1 (1987) (asserting that arbitration leads to the breakdown of legal norms; Harry T. Edwards, Alternative Dispute Resolution: Panacea or Anathema?, 99 HARV. L. REV. 668, 677 (1986) (noting the conflict between "national public values reflected in rules of law and nonlegal values that might be addressed in alternative dispute resolution"); Owen M. Fiss, Comment, Against Settlement, 93 YALE L.J. 1073, 1085 (1984) (arguing that settlement, and presumably arbitration, thwart the judicial function of interpreting and applying the Constitution and other law); Kronstein, supra note 31, at 66 (warning that widespread arbitration may disrupt "social coordination"). Such concerns exaggerate the risks of alternative dispute resolution. People have settled, mediated, and arbitrated disputes since the dawn of conflict. See KELLOR, supra note 14, at 3 (recounting the myth in which Paris decided whether Juno, Pallas Athena, or Venus was the most beautiful). These alternatives to litigation resolve the majority of disputes. See Kanowitz, supra note 21, at 242 (commenting on the pervasiveness of settlement and alternative dispute resolution). Despite the pervasive use of alternative dispute resolution, courts and legislatures continue to develop and refine an ever-expanding body of law, and parties flood the courthouse to vindicate the rights these laws afford. The proliferation of both law and lawsuits shows that alternative dispute resolution does not threaten legal norms.
317. See Political Pressure, supra note 3, at 9 (Aug. 8, 1997) (noting that the securities industry requires over 500,000 workers to sign arbitration agreements).
318. See, e.g., Anderson v. Gus Mayer Boston Store, 924 F. Supp. 763, 774-75 n.24 & 25 (E.D. Texas 1996) (stating that AIDS is a per se disability within the meaning of the ADA); D.B. v. Bloom, Madison Dental Centre, 896 F. Supp. 166, 170 (D.N.J. 1995) (holding that a person "by virtue of his HIV status [is] a person with a disability" under the ADA); H.R. REP. NO. 101-485, at 18 n.18 (1990), reprinted in 1990 U.S.C.C.A.N. 267, 445-51 ("[P]ersons infected with the Human Immunodeficiency Virus are considered to have an impairment that substantially limits a major life activity," and therefore they fall within the ADA's protection); 28 C.F.R. § 36,104(l)(iii) (1996) (listing both symptomatic and asymptomatic HIV as protected by the ADA).
319. See Harris v. Forklift Sys., Inc., 510 U.S. 17, 22 (1993) (holding that a sexual harassment claim does not require proof of psychological injury).
320. See McKennon, 513 U.S. at 361-62 (holding that after-acquired evidence of employee misconduct may not defeat a civil rights claim, but rather may mitigate damages); see generally Kenneth R. Davis, The After-Acquired Evidence Doctrine: A Dubious Defense in Employment Discrimination Cases, 22 PEPP. L. REV. 365 (1995).
321. Wilko v. Swan, 346 U.S. 427, 434 (1953).
322. 473 U.S. 614 (1985).
323. Id. at 637. The Court dismissed the argument that American businesses, compelled to arbitrate, might lose the protection of American antitrust law, stating that a reviewing U.S. district court would assure that "enforcement of the antitrust law has been addressed." Id. at 638.
324. 482 U.S. 220 (1986).
325. See id. at 231-32.
326. Id. at 232.
327. 490 U.S. 477 (1988).
328. Id. at 486. In Rodriguez de Quijas, the Court overruled Wilko, which had held Securities Act claims non-arbitrable. See id. at 484. The petitioners requested that the Court apply this new rule prospectively, not to the current case. See id. The Court refused, finding that the petitioners would suffer no prejudice from the application of the new rule because arbitration would not affect their rights adversely. See id. at 484-85.
329. See infra Part II.E (discussing standards of judicial review of arbitration awards).
330. FAA, 9 U.S.C. § 10(a)(1) (1984).
331. Id. § 10(a)(2).
332. See id. § 10(a)(3).
333. Id. § 10(a)(4).
334. See 1 MACNEIL, ET AL., supra note 14, § 40.5.1.3 at 40:37 (questioning the courts' hesitancy to acknowledge that § 10(a)(4) of the FAA - the exceeding-their-powers standard of review - empowers arbitrators to review awards at least for certain substantive errors).
335. See, e.g., Federated Dept. Stores, Inc. v. J.V.B. Ind., 894 F.2d 862, 866 (6th Cir. 1990) (holding an arbitral error in interpreting a contract not remediable under § 10(a)(4) of the FAA); Davis v. Chevy Chase Financial Ltd., 667 F.2d 160, 165 (D.C. Cir. 1981) (noting that the "exceeded authority" ground cannot justify substituting "a judicial resolution of a dispute for an arbitral one"); Kanuth v. Prescott, Ball & Turben, Inc., 949 F.2d 1175, 1180 & n.10 (D.C. Cir. 1991) (citing eight cases that interpret "exceeding powers" ground as limited to cases in which arbitrators lacked authority under the arbitration agreement to award a particular remedy); Stephen L. Hayford, Law in Disarray: Judicial Standards for Vacating of Commercial Arbitration Awards, 30 GA. L. REV. 731, 752-55 (1996) (discussing the exceeding-their-powers standard of review and concluding that the standard does not grant the courts the authority to vacate awards for substantive legal error); cf. Martin, supra note 259, at 1915 (noting that California arbitration law does not permit the vacatur of an award on the ground that it is legally erroneous); see Davis, supra note 31, at 87-88 (discussing the narrowness of most courts' interpretations of § 10(a)(4) of the FAA).
336. See infra notes 305-26 and accompanying text.
337. See infra notes 327-32 and accompanying text.
338. See infra notes 333-37 and accompanying text.
339. See infra notes 338-40 and accompanying text.
340. See Wilko v. Swan, 346 U.S. 427, 436 (1953) (noting the courts' limited power to vacate an arbitration award).
341. Id.
342. Id. at 436-37.
343. Compare Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465, 1487 (D.C. Cir. 1997) (stating that the manifest disregard standard must be "sufficiently rigorous to ensure that arbitrators have properly interpreted and applied statutory law"), with Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 418, 422 (6th Cir. 1995) (defining manifest disregard as "patently contrary to established legal precedents"), Advest, Inc. v. McCarthy, 914 F.2d 9, 10 (1st Cir. 1990) (interpreting manifest disregard to apply to errors where the law was "clear and the arbitrators' award so irreconcilable with it that the panel must have disregarded the law and embarked on a flight of fancy"), Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir 1986) (holding that the manifest disregard standard permits vacatur only when the arbitrators know the governing law but intentionally disregard it), Johnston Umon & Co. v. Smith, 886 F. Supp. 54, 56 (D.D.C. 1995) (applying the manifest disregard standard when arbitrators reveal in the award that they are intentionally ignoring governing law).
344. Most circuit courts have adopted the Bobker manifest disregard test. See, e.g., Flexible Mfg. Sys. Pty. Ltd. V. Super Products Corp., 86 F.3d 96, 100 (7th Cir. 1996); Tanonia Mining Co. v. Local 1269, UnitedMine Workers, 896 F.2d 745, 749 (3d Cir. 1990); Jenkins v. Prudential-Bache Sec., Inc., 847 F.2d 631, 634 (10th Cir. 1988); Kanuth v. Prescott, Ball & Turbin, Inc., 949 F.2d 1175, 1182 (D.C. Cir. 1991). But see Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465, 1487 (D.C. Cir. 1997) (broadening the manifest disregard test to empower courts to vacate awards that erroneously interpret federal statutory law).
345. See Brunet, supra note 281, at 28 (disapproving of the manifest disregard test because it is too narrow to effect vacaturs except in rare cases); Randall, supra note 93, at 768 (lambasting the manifest disregard standard as promoting "disregard of the applicable law" and because it permits its own circumvention since arbitrators may decline to write opinions explaining their reasoning). Proponents of arbitration have criticized the manifest disregard test for injecting cost and delay into the arbitral process. See e.g., Brad A. Galbraith, Vacatur of Commercial Arbitration Awards in Federal Court: Contemplating the Use and Utility of the "Manifest Disregard" of the Law Standard, 27 IND. L. REV. 241, 259 (1993) (faulting the manifest disregard test for encouraging lengthy and expensive court proceedings contrary to the FAA and the intent of the parties); O'Mullan, supra note 256, at 1135 (opposing the manifest disregard test because it results in futile and costly motions to vacate); Marta B. Varela, Arbitration and the Doctrine of Manifest Disregard, 49 DISP. RESOL. J. 64, 66-67 (June 1994) (suggesting that the manifest disregard test threatens the efficiency of arbitration because it spurs pointless challenges to awards). See Davis, supra note 31, at 98-101 (summarizing the arguments against the manifest disregard test, and concluding that the most significant objection to the test is that it frustrates the contractual intent of the arbitrating parties to have the arbitrators correctly apply the law of decision the parties chose).
346. See Brunet, supra note 281, at 28 (disapproving of the manifest disregard test because it is too narrow to effect vacaturs except in rare cases); Randall, supra note 93, at 768 (lambasting the manifest disregard standard as promoting "disregard of the applicable law" and because it permits its own circumvention since arbitrators may decline to write opinions explaining their reasoning). Proponents of arbitration have criticized the manifest disregard test for injecting cost and delay into the arbitral process. See e.g., Brad A. Galbraith, Vacatur of Commercial Arbitration Awards in Federal Court: Contemplating the Use and Utility of the "Manifest Disregard" of the Law Standard, 27 IND. L. REV. 241, 259 (1993) (faulting the manifest disregard test for encouraging lengthy and expensive court proceedings contrary to the FAA and the intent of the parties); O'Mullan, supra note 256, at 1135 (opposing the manifest disregard test because it results in futile and costly motions to vacate); Marta B. Varela, Arbitration and the Doctrine of Manifest Disregard, 49 DISP. RESOL. J. 64, 66-67 (June 1994) (suggesting that the manifest disregard test threatens the efficiency of arbitration because it spurs pointless challenges to awards). See Davis, supra note 31, at 98-101 (summarizing the arguments against the manifest disregard test, and concluding that the most significant objection to the test is that it frustrates the contractual intent of the arbitrating parties to have the arbitrators correctly apply the law of decision the parties chose).
347. 808 F.2d 930 (2d Cir. 1986).
348. See id. at 933.
349. Id.
350. Id.
351. See id. at 34-37.
352. See, e.g., R.M. Perez & Associates, Inc. v. Welch, 960 F.2d 534, 539-40 (5th Cir. 1992) (rejecting manifest disregard test because FAA prescribes the only standards of review); Robbins v. Day, 954 F.2d 679, 684 (11th Cir. 1992) (refusing to adopt manifest disregard standard); Marshall v. Green Giant Co., 942 F.2d 539, 550 (8th Cir. 1991) (refraining from deciding whether to adopt manifest disregard standard in part because the Supreme Court overruled Wilko, the case that established the manifest disregard test in dicta).
353. Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997) (adopting Bobker standard); Health Servs. Management Corp. v. Hughes, 975 F.2d 1253, 1267 (7th Cir. 1992) (defining manifest disregard as "deliberately disregarding what [arbitrators] know to be the law in order to reach the result they did"); Eichleay Corp. v. Int'l Ass'n of Bridge Workers, 944 F.2d 1047, 1055-56 (3d Cir. 1991) (noting manifest disregard as a standard for vacatur of an arbitration award); Kanuth v. Prescott, Ball & Turben, Inc., 949 F.2d 1175, 1182 (D.C. Cir. 1991) (stating that manifest disregard of the law means understanding and correctly stating the law and then proceeding to ignore it); Todd Shipyard Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1060 (9th Cir. 1991) (acknowledging the manifest disregard standard for vacating arbitration awards); Upshur Coals Corp. v. United Mine Workers of America, Dist. 31, 933 F.2d 225, 229 (4th Cir. 1991) (same); Federated Dept. Stores, Inc., v. J.V.B. Indus., 894 F.2d 862, 866 (6th Cir. 1990) (same); Jenkins v. Prudential-Bache Sec., Inc., 847 F.2d 631, 634 (10th Cir. 1988) (same).
354. See, e.g., ARBITRATOR'S MANUAL, supra note 277, at 31-32 (noting that "an arbitrator is not required to give a reason for the arbitral decision").
355. 121 F.3d 818 (2d Cir. 1997).
356. See id. at 823; see also ADEA, 29 U.S.C. § 626(b) (1994) (providing that the court shall award the successful claimant attorneys' fees and costs).
357. See DiRussa, 121 F.3d at 823. The plaintiff could not prove intentional disregard because the arbitrators did not explain why they refused to grant fees and costs. See id. The court noted that the arbitrators' error would have constituted manifest disregard if DiRussa's attorneys had informed them of the ADEA's rule governing the award of counsel fees. See id. In DeGaetano v. Smith Barney, Inc., 983 F. Supp. 459 (S.D.N.Y. 1997), plaintiff's Title VII claim prevailed and his lawyers brought an analogous fee provision under Title VII to the attention of the arbitrators who nevertheless denied the application for attorneys' fees. See id. at 464. Citing DiRussa, the court vacated the award under the manifest disregard standard. See id.
358. 473 U.S. 614 (1985).
359. Id. at 638.
360. 482 U.S. 220 (1987).
361. Id. at 232.
362. See supra notes 305-26 and accompanying text (discussing various interpretations of the manifest disregard test). It is noteworthy that the Court in First Options of Chicago, Inc., v. Kaplan, 514 U.S. 938 (1995), confirmed in passing the continued existence of the manifest disregard test without addressing the diversity of judicial interpretation (or misinterpretation) of it or clarifying the appropriate manifest disregard standard. See First Options of Chicago, Inc., 514 U.S. at 942.
363. Sargent v. Paine Webber, Jackson & Curtis, Ltd., 674 F. Supp. 920, 922 (D.D.C. 1987); Todd Shipyard Corp. v. Cunard Line, Inc., 943 F.2d 1056, 1060 (9th Cir. 1991) (affirming the award because it was not totally irrational); French v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 784 F.2d 902, 906 (9th Cir. 1986) (confirming an award in the absence of irrationality); Swift Indus, v. Botany Indus., 466 F.2d 1125, 1135 (3d Cir. 1972) (vacating an award for lack of rationality); Prudential-Bache Sec., Inc. v. Corporale, 664 F. Supp. 72, 74-75 (S.D.N.Y. 1987) (confirming an award found to have a rational basis); Lentin v. Fundaro, 278 N.E.2d 633, 635 (N.Y. 1972) (holding that, under New York law, a court will vacate a "completely irrational" award (citing National Cash Register Co. v. Wilson, 171 N.E.2d 302, 305 (N.Y. 1960)); cf. Advest, Inc. v. McCarthy, 914 F.2d 6, 9 n.6 (1st Cir. 1990) (equating the manifest disregard test with the "completely irrational" test).
364. See supra note 340 and accompanying text (discussing the fact that arbitrators do not have to write opinions giving reasons for their decisions).
365. 70 F.3d 418 (6th Cir. 1995).
366. See id. at 421 (noting that Jaros did not bring his claim within the one-year statute of limitations for federal securities claims).
367. See id.
368. Id. at 422 (noting that there is room for reasonable debate concerning the timeliness of both the federal and state claims).
369. W.R. Grace & Co. v. Local 359, Int'l Union of United Rubber Workers, 461 U.S. 757, 766 (1983) (quoting Muschany v. United States, 324 U.S. 49, 66 (1945)); see also United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 43 (1987) (noting in the labor context that a court may vacate an arbitration award if the award violates an "explicit . . . well defined and dominant public policy" (quoting W.R. Grace & Co., 461 U.S. at 766)).
370. See, e.g., Iowa Elec. Light & Power Co. v. Local Union 204, Int'l Brotherhood of Elec. Workers, 834 F.2d 1424, 1427 (8th Cir. 1987) (vacating an award reinstating a worker who had compromised the interlock system in a nuclear power plant); Amalgamated Meat Cutters Union 540 v. Great W. Food Co., 712 F.2d 122 (5th Cir. 1983) (vacating award reinstating truck driver who drank excessively).
371. See, e.g., Diapulse Corp. v. Carba, Ltd., 626 F.2d 1108, 1110 (2d Cir. 1980) (remanding matter to arbitration for clarification of award arguably violating antitrust law).
372. 628 F.2d 81 (D.C. Cir. 1980).
373. See id. at 83 (rejecting the public policy defense because the misinterpretation of a contract does not violate a well-defined and dominant public policy).
374. 845 F.2d 184 (8th Cir. 1988).
375. See id. at 189.
376. ARBITRATOR'S MANUAL, supra note 277, at 31. The Manual goes onto provide a summary of what an award should contain. See id. at 31-32. The Manual does not state that the arbitrator must reveal the reasoning for the decision. See id. (indicating that the award should state names, dates, a summary of the issues, the amount requested, and the amount awarded).
377. See, e.g., Keating v. Superior Court of Alameda County, 645 P.2d 1192, 1197 (Cal. 1982) (en banc) (noting that a contract of adhesion "which does not fall within the reasonable expectations of the weaker or 'adhering' party will not be enforced"); Corgatelli v. Globe Life & Accident Ins. Co., 533 P.2d 740 (Idaho 1975) (applying the doctrine of reasonable expectations, to insurance agreements because they are adhesion contracts); see also supra notes 129-50 and accompanying text (discussing unconscionability).
378. Pierson v. Dean, Witter, Reynolds, Inc., 742 F.2d 334, 339 (7th Cir. 1984) (defining unconscionability in the context of a broker-customer arbitration clause).
379. See, e.g., Hoffman v. Aaron Kamhi, Inc., 927 F. Supp. 640, 643 (S.D.N.Y. 1996) (noting that a court must find pressure tactics or fraud to vacate an award for unconscionability).
380. 482 U.S. 483 (1987).
381. See id. at 484.
382. See id. at 485.
383. See id. at 486.
384. See id. at 490-91.
385. See id. at 491 (stating that "§ 2 of the Act [is] in unmistakable conflict with California's § 229 requirement").
386. See id. at 489 n.6 (contending that "the arbitration provision constitutes an unconscionable, unenforceable contract of adhesion").
387. See id.
388. Id. at 492 n.9 (quoting 9 U.S.C. § 2 (1994)).
389. Id. at 493 n.9. In Allied-Bruce Termina Cos. v. Dobson, 513 U.S. 265 (1995), the Court held the reach of the FAA to be coextensive with that of the Commerce Clause. Allied-Bruce v. Terminix Cos., 513 U.S. at 281. The case turned on § 2 of the FAA, see id. at 277-81, which applies to "a contract evidencing a transaction involving commerce." FAA, 9 U.S.C. § 2 (1994). This language might be interpreted to limit application of the FAA to cases in which the parties actually contemplated substantial interstate activity. Allied-Bruce v. Terminix Cos., 513 U.S. at 277. An amicus curiae argued for this restrictive interpretation, seeking to prevent businesses from binding consumers to standard form contracts containing arbitration clauses. See id. at 280. The Court found this argument unpersuasive, noting that arbitration benefits consumers by providing an economical forum for relatively small claims. See id. at 280-81. The Court then commented that state law adequately protects consumers from "unfair pressure" exerted by business. Id. at 281 (noting that "[s]tates may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause upon such grounds as exist at law or in equity for the revocation of any contract"). The Court added: What states may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on equal 'footing,' directly contrary to the Act's language and Congress' intent. Id.
390. Perry, 482 U.S. at 493 n.9.
391. Id. In the most recent FAA preemption case, the Supreme Court quoted this passage from Perry and reaffirmed the preemptive effect of the FAA. See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 686 (1996) (quoting Perry, 482 U.S. at 493 n.9). Doctor's Associates, the national franchisor of Subway Sandwich Shops, entered into a franchise agreement with Casarotto, authorizing him to operate a Subway shop in Great Falls, Montana. See id. at 683. The agreement contained an arbitration clause. See id. When a dispute arose between the parties Casarotto sued in state court. In response, Doctor's Associates moved to stay the action based on the arbitration clause. See id. Casarotto argued that the arbitration clause was unenforceable because it did not comply with Montana law, which required arbitration clauses to appear in underlined capital letters on the first page of a contract. See id. at 684. Doctor's Associates countered that the Montana statute conflicted with the FAA by imposing unique limitations on arbitration agreements as opposed to other agreements. See id. The Montana Supreme Court concluded that the statute did not impair the enforceability of arbitration agreements, but rather assured that such agreements were entered into knowingly. See id. at 685. Therefore, the FAA did not preempt the statute. See id. The United States Supreme Court reversed. See id. at 686. While acknowledging that "fraud, duress or unconscionability" may invalidate arbitration agreements without offending § 2, see id. at 687, the Court hastened to add that the FAA preempts state law that targets only arbitration agreements. See id. at 687, 688.
392. See D.H. Overmyer Co. v. Frick Co., 405 U.S. 174, 186 (1972) (sustaining a cognovit provision under due process because corporate attorneys negotiated the provision without either party having an unfair bargaining advantage); see also William B. Feldman, Judgments - A Cognovit Clause is Not Per Se Violative of the Fourteenth Amendment Due Process: D.H. Overmyer Co. v. Frick Co., 405 U.S. 174 (1972), 41 U. CIN. L. REV. 741, 745 (supporting the D.H. Overmyer decision).
393. See CALAMARI v. PERILLO, supra note 129, § 22-1 at 780 ("Public policy has been the announced rationale for striking down contracts or contract clauses on grounds of immorality, unconscionability, economic policy, unprofessional conduct and diverse other criteria"); see CORBIN, supra note 177, § 1375 at 1160 ("In thousands of cases contracts have been declared to be illegal on the ground that they are contrary to public policy.").
394. See FAA, 9 U.S.C. § 2 (1994) ("[A]n agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law for the revocation of any contract.").
395. See, e.g., CALAMARI v. PERILLO, supra note 129, §§ 9-38, at 318-25 (describing the long history of unconscionability as a bar to contract enforcement).
396. U.C.C. § 2-207 (1972).
397. See id. § 2-207(2) ("additional terms are to be construed as proposals for additions . . . [and] [b]etween merchants . . . become part of the contract," with some exceptions).
398. See id. § 2-207(2)(b) (excluding additional terms that "materially alter" the contract).
399. 396 F. Supp. 1239 (E.D.N.Y. 1975).
400. See id. at 1240.
401. See id.
402. See id.
403. See id.
404. See id. at 1239-40 (stating the parties' claims).
405. See id. at 1241-42.
406. See U.C.C. § 2-207(2).
407. See id.
408. Thallon, 396 F. Supp. at 1243.
409. Id. (quoting Application of Doughboy Industries, Inc., 233 N.Y.S.2d 488, 492 (N.Y. App. Div. 1962).
410. See id.
411. See id. at 1243-44.
412. 570 A.2d 549 (Pa. Super. Ct. 1990).
413. See id. at 549-50.
414. See id. at 51. The court held, however, that the inclusion of a clause in the invoice assessing attorneys' fees in the amount of 25% of any balance overdue materially altered the contract. See id. at 551-52. The court, therefore, did not enforce the provision assessing attorneys' fees. See id.
415. See supra note 252-340 and accompanying text (discussing the substantive and procedural rights a claimant relinquishes by submitting a claim to arbitration rather than to the courts).
416. In a recent experiment, the author telephoned three of the most prominent brokerage houses. Speaking to account executives, the author requested simply to open an account. In all three cases, account agreements containing arbitration clauses arrived in the mail. But see Letter from Philip J. Hoblin, Jr., Counsel to Parker, Chapin, Flattau & Klimpl, to Kenneth R. Davis, Associate Professor of Legal and Ethical Studies, Fordham University Graduate School of Business Administration 1 (May 22, 1996) (on file with author) (contending that many retail brokerage customers do not enter into arbitration agreements).
417. The SEC conducted a study in 1988 revealing that brokerage firms inserted mandatory arbitration clauses in 95% of all customer option accounts, 94% of all customer margin accounts, and 39% of all customer cash accounts. See Constantine N. Katsoris, SICA: The First Twenty Years, 23 FORDHAM URB. L.J. 483, 486 n.9 (1996). These figures have undoubtedly risen since the Supreme Court decided Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987), which held § 10(b) claims arbitrable. See McMahon, 482 U.S. at 237-38. By overruling Wilko, the Court assured the arbitrability of virtually all federal statutory
418. See McMahon, 482 U.S. at 237-38.
419. See supra notes 276-94 and accompanying text (discussing arbitrators' power to ignore the law); see supra notes 295-343 and accompanying text (discussing judicial review of arbitration awards).
420. See Jaksich v. Thompson McKinnon Sec. Int., 582 F. Supp. 485, 502 (S.D.N.Y. 1984) (holding that a stock broker is a fiduciary of his customer). See also Theresa Maynard, McMahon: The Next Ten Years, 62 BROOK. L. REV. 1533, 1553-56 (1996) (emphasizing the importance of fiduciary duties that brokers owe customers, and criticizing arbitration for failing to apply and develop standards of fiduciary responsibility). But see A. Ronald Sirna, Jr., P.C. Profit Sharing Plan v. Prudential Securities, Inc., 964 F. Supp. 147, 152 (S.D.N.Y. 1997) (citing New York law for the proposition that brokers do not ordinarily owe fiduciary duties to their customers). See generally Jonathan D. Polkes and Jennifer A.N. White, Broker-Dealers and Fiduciary Relationships, N.Y. L.J., Apr. 13, 1998, at 1 col. 1 (discussing various positions regarding fiduciary duties owed by brokers to customers).
421. See Jaksich v. Thompson McKinnon Sec. Int., 582 F. Supp. 485, 502 (S.D.N.Y. 1984) (holding that a stock broker is a fiduciary of his customer). See also Theresa Maynard, McMahon: The Next Ten Years, 62 BROOK. L. REV. 1533, 1553-56 (1996) (emphasizing the importance of fiduciary duties that brokers owe customers, and criticizing arbitration for failing to apply and develop standards of fiduciary responsibility). But see A. Ronald Sirna, Jr., P.C. Profit Sharing Plan v. Prudential Securities, Inc., 964 F. Supp. 147, 152 (S.D.N.Y. 1997) (citing New York law for the proposition that brokers do not ordinarily owe fiduciary duties to their customers). See generally Jonathan D. Polkes and Jennifer A.N. White, Broker-Dealers and Fiduciary Relationships, N.Y. L.J., Apr. 13, 1998, at 1 col. 1 (discussing various positions regarding fiduciary duties owed by brokers to customers).
422. See Woodyard v. Merrill Lynch, Pierce, Fenner & Smith Inc., 640 F. Supp. 760 (S.D. Tex. 1986).
423. Id.
424. See id. at 767 (denying the brokerage firm's motion to compel arbitration).
425. Id. at 766.
426. See Securities Act of 1933, 15 U.S.C. § 77v(a) (1994) (providing for federal jurisdiction over claims under the Act); Securities Exchange Act of 1934, id. § 78aa (providing for exclusive federal jurisdiction over Exchange Act claims).
427. See, e.g., Service Group, Inc. v. Essex Int'l, Inc., 74 F.R.D. 379, 382 (D. Del. 1977) (sustaining the right to jury trial in action asserting § 10(b) claim under the Exchange Act); cf. Ross v. Bernhard, 396 U.S. 531, 542 (1970) (upholding the right to a jury trial in a shareholder's derivative suit under the Investment Company Act).
428. See Securities Act of 1933, 12 U.S.C. § 771 (1994) (stating that the offeror or seller cannot escape liability by proving he did not know and could not reasonably have known that he was making a material misstatement or omitting material facts); see also Jack E. Karns at al., Accountant and Attorney Liability as "Sellers" of Securities Under § 12(2) of the Securities Act of 1933: Judicial Rejection of the Statutory Collateral Participation Status Cause of Action, 74 NEB. L. REV. 1, 3 (1995) (commenting that a claim under § 12(2) deprives the defendant of various defenses, including due diligence, reliance on expert opinion, and lack of causation).
429. The expertise of arbitrators in the securities fields does not insure legally correct decisions. But see Mitsubishi Motors Corp. v. Soler-Chrysler Plymouth, Inc. 473 U.S. 614, 633 (1984) ("Adaptability and access to expertise are hallmarks of arbitration. The anticipated subject matter of the dispute may be taken into account when the arbitrators are appointed.").
430. See supra note 340 and accompanying text (discussing the fact that arbitrators do not have to explain the reasoning for their decisions).
431. See supra notes 295-343 and accompanying text (discussing judicial review of arbitration awards).
432. See supra notesand accompanying text (discussing reasonable expectations).
433. See, e.g., Adams v. Merrill Lynch, Pierce, Fenner & Smith, 888 F.2d 696, 700 (10th Cir. 1989) (holding that a mandatory customer account arbitration agreement was neither an adhesion contract, nor unconscionable); Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 286 (9th Cir. 1988) (finding that mandatory arbitration agreements in customer contracts are not unconscionable because the SEC oversees securities arbitration and because federal policy favors arbitration); Driscoll v. Smith Barney, Harris, Upham & Co., 815 F.2d 655, 658-59 (11th Cir. 1987) (rejecting customer's claim that he lacked a meaningful choice in deciding whether to arbitrate and that the arbitration agreement was unfair and oppressive); Coleman v. Prudential-Bache Sec., Inc., 802 F.2d 1350, 1352 (11th Cir. 1986) (denying that a mandatory customer arbitration agreement is a contract of adhesion because arbitration is neither unfair, oppressive, nor fraudulently induced); Pierson v. Dean, Witter, Reynolds, Inc., 742 F.2d 334, 339 (7th Cir. 1984) (sustaining a mandatory arbitration clause in a customer account agreement because customers offered no evidence of lack of sophistication or of the absence of the opportunity to have understood the account agreement before signing it); Surman v. Merrill Lynch, Pierce, Fenner & Smith, 733 F.2d 59, 61 n.2 (9th Cir. 1984) (stating that mandatory arbitration clauses in customer accounts are neither unfair nor unconscionable); but see Woodyard v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 640 F. Supp. 760, 766 (S.D. Tex. 1986) (refusing to enforce an arbitration clause in customer account agreement because the "relationship of trust" with the account executive had "lulled" the unsophisticated investor into acceptance); see generally William A. Gregory & William J. Schneider, Securities Arbitration: A Need for Continued Reform, 17 NOVA L. REV. 1223, 1238-40 (1993) (discussing the courts' unreceptive attitude toward arguments that mandatory arbitration clauses in securities account agreements are unconscionable); Richard E. Speidel, Contract Theory and Securities Arbitration: Whither Consent?, 62 BROOK. L. REV. 1335, 1349 (1996) (observing that most arbitration agreements in the securities industry are contracts of adhesion, id. at 1354, and concluding that absent "unfair surprise or oppression," courts enforce mandatory arbitration agreements); Deborah B. Oliver, Comment, Arbitration of Securities Claims: Policy Considerations for Keeping Investor-Broker Disputes Out of Court, 1987 COLUM. BUS. L. REV. 527, 545-47 (arguing that although investor-broker arbitration agreements are contracts of adhesion, they are not unconscionable because of SEC oversight, and because of SRO rules of arbitration).
434. See, e.g., Adams v. Merrill Lynch, Pierce, Fenner & Smith, 888 F.2d 696, 700 (10th Cir. 1989) (holding that a mandatory customer account arbitration agreement was neither an adhesion contract, nor unconscionable); Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 286 (9th Cir. 1988) (finding that mandatory arbitration agreements in customer contracts are not unconscionable because the SEC oversees securities arbitration and because federal policy favors arbitration); Driscoll v. Smith Barney, Harris, Upham & Co., 815 F.2d 655, 658-59 (11th Cir. 1987) (rejecting customer's claim that he lacked a meaningful choice in deciding whether to arbitrate and that the arbitration agreement was unfair and oppressive); Coleman v. Prudential-Bache Sec., Inc., 802 F.2d 1350, 1352 (11th Cir. 1986) (denying that a mandatory customer arbitration agreement is a contract of adhesion because arbitration is neither unfair, oppressive, nor fraudulently induced); Pierson v. Dean, Witter, Reynolds, Inc., 742 F.2d 334, 339 (7th Cir. 1984) (sustaining a mandatory arbitration clause in a customer account agreement because customers offered no evidence of lack of sophistication or of the absence of the opportunity to have understood the account agreement before signing it); Surman v. Merrill Lynch, Pierce, Fenner & Smith, 733 F.2d 59, 61 n.2 (9th Cir. 1984) (stating that mandatory arbitration clauses in customer accounts are neither unfair nor unconscionable); but see Woodyard v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 640 F. Supp. 760, 766 (S.D. Tex. 1986) (refusing to enforce an arbitration clause in customer account agreement because the "relationship of trust" with the account executive had "lulled" the unsophisticated investor into acceptance); see generally William A. Gregory & William J. Schneider, Securities Arbitration: A Need for Continued Reform, 17 NOVA L. REV. 1223, 1238-40 (1993) (discussing the courts' unreceptive attitude toward arguments that mandatory arbitration clauses in securities account agreements are unconscionable); Richard E. Speidel, Contract Theory and Securities Arbitration: Whither Consent?, 62 BROOK. L. REV. 1335, 1349 (1996) (observing that most arbitration agreements in the securities industry are contracts of adhesion, id. at 1354, and concluding that absent "unfair surprise or oppression," courts enforce mandatory arbitration agreements); Deborah B. Oliver, Comment, Arbitration of Securities Claims: Policy Considerations for Keeping Investor-Broker Disputes Out of Court, 1987 COLUM. BUS. L. REV. 527, 545-47 (arguing that although investor-broker arbitration agreements are contracts of adhesion, they are not unconscionable because of SEC oversight, and because of SRO rules of arbitration).
435. See, e.g., Adams v. Merrill Lynch, Pierce, Fenner & Smith, 888 F.2d 696, 700 (10th Cir. 1989) (holding that a mandatory customer account arbitration agreement was neither an adhesion contract, nor unconscionable); Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 286 (9th Cir. 1988) (finding that mandatory arbitration agreements in customer contracts are not unconscionable because the SEC oversees securities arbitration and because federal policy favors arbitration); Driscoll v. Smith Barney, Harris, Upham & Co., 815 F.2d 655, 658-59 (11th Cir. 1987) (rejecting customer's claim that he lacked a meaningful choice in deciding whether to arbitrate and that the arbitration agreement was unfair and oppressive); Coleman v. Prudential-Bache Sec., Inc., 802 F.2d 1350, 1352 (11th Cir. 1986) (denying that a mandatory customer arbitration agreement is a contract of adhesion because arbitration is neither unfair, oppressive, nor fraudulently induced); Pierson v. Dean, Witter, Reynolds, Inc., 742 F.2d 334, 339 (7th Cir. 1984) (sustaining a mandatory arbitration clause in a customer account agreement because customers offered no evidence of lack of sophistication or of the absence of the opportunity to have understood the account agreement before signing it); Surman v. Merrill Lynch, Pierce, Fenner & Smith, 733 F.2d 59, 61 n.2 (9th Cir. 1984) (stating that mandatory arbitration clauses in customer accounts are neither unfair nor unconscionable); but see Woodyard v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 640 F. Supp. 760, 766 (S.D. Tex. 1986) (refusing to enforce an arbitration clause in customer account agreement because the "relationship of trust" with the account executive had "lulled" the unsophisticated investor into acceptance); see generally William A. Gregory & William J. Schneider, Securities Arbitration: A Need for Continued Reform, 17 NOVA L. REV. 1223, 1238-40 (1993) (discussing the courts' unreceptive attitude toward arguments that mandatory arbitration clauses in securities account agreements are unconscionable); Richard E. Speidel, Contract Theory and Securities Arbitration: Whither Consent?, 62 BROOK. L. REV. 1335, 1349 (1996) (observing that most arbitration agreements in the securities industry are contracts of adhesion, id. at 1354, and concluding that absent "unfair surprise or oppression," courts enforce mandatory arbitration agreements); Deborah B. Oliver, Comment, Arbitration of Securities Claims: Policy Considerations for Keeping Investor-Broker Disputes Out of Court, 1987 COLUM. BUS. L. REV. 527, 545-47 (arguing that although investor-broker arbitration agreements are contracts of adhesion, they are not unconscionable because of SEC oversight, and because of SRO rules of arbitration).
436. 841 F.2d 282 (9th Cir. 1988).
437. See id. at 286.
438. Id. at 286.
439. See id. (explaining the court's reasoning for rejecting the unconscionability claim).
440. 733 F.2d 59 (8th Cir. 1984).
441. See id. at 61 n.2 (noting that the arbitration clauses were fair).
442. Id. at 61 n.2.
443. See supra note 271-75 and accompanying text (discussing the symmetry issue, and arguing that mutuality of the arbitration agreement does not necessarily result in fairness).
444. 482 U.S. 220 (1986).
445. See id. at 230 (arguing that "arbitration clauses in securities sales agreements generally are not freely negotiated").
446. See id. at 230-31 (agreeing that if brokers "maneuver customers into an agreement," the customers have grounds for revocation).
447. See id. at 230 (concluding that § 29(a) is concerned with "whether the agreement 'weakens the ability to recover under the Exchange Act'").
448. See id. (outlining the Court's analysis).
449. See id. at 231-32 ("It is difficult to reconcile Wilko's mistrust of the arbitral process with this Court's subsequent decisions involving the Arbitration Act.").
450. See id. at 232 ("[T]he streamlined procedures of arbitration do not entail any consequential restriction on substantive rights").
451. Id. at 232.
452. See supra notes 295-304 and accompanying text (discussing the limited grounds for judicial review of arbitration awards).
453. See supra notes 305-40 and accompanying text (discussing the various grounds for judicial review and exploring their inadequacies).
454. 514 U.S. 938 (1995).
455. Id. at 942. The First Options Court held that circuit courts should not use a "special standard in reviewing a district court's decision to uphold or vacate an arbitration award; creating a more deferential standard for circuit courts would unnecessarily complicate the law." See id. at 948. The Court also analogized arbitration law to administrative law. See id. District courts grant considerable deference to agency determinations, but circuit courts do not accord additional deference to district court confirmations or reversals of agency determinations. The same standard applies in both the district court and the circuit court. See id. Both district courts and circuit courts should similarly apply a single standard when reviewing arbitration awards. See id.
456. Zeno argued that motion is impossible. See EUGENE P. NORTHROP, RIDDLES IN MATHEMATICS 119 (1944). He reached this startling conclusion as follows: to move from any Point A to any Point B, one must pass an intermediate Point C. See id. But to move from the original Point A to the intermediate Point C, one must pass through another intermediate Point D, and so on. See id. There is always an intermediate point that one must pass before one can move from any point to any other point. See id. Because there is always an intermediate point, it is impossible to move from any point to any other point. See id. Hence, motion is impossible. See id.
457. 742 F.2d 334 (7th Cir. 1984).
458. See id. at 336.
459. See id. (discussing the terms in the agreement).
460. See id. at 337. The Piersons alleged, among other things, that Dean Witter had engaged in unauthorized trades and destroyed account documents. See id. at 337 n.3. They sued for common law breach of fiduciary duty, fraud, gross negligence, and negligence, and sought punitive damages on all counts except the negligence count. See id. at 337. They also asserted a claim under Rule 10b-5. See id.
461. See id. at 337.
462. See id. at 339 (noting that the contract is "unconscionable and one-sided in favor of Dean Witter").
463. See id.
464. See id. at 339.
465. Id. at 338.
466. Id.
467. See id.
468. Id.
469. See id. ("The Piersons cannot use their failure to inquire . . . to avoid the consequences of agreed to arbitration").
470. 640 F. Supp. 760 (S.D. Tex. 1986).
471. See id. at 764-65 ("Defendants . . . argue that standardized contracts . . . though admittedly contracts of adhesion, are nevertheless enforceable.").
472. See id. at 766 (rejecting the unconscionability argument).
473. Id.
474. Id. at 767. In Woodyard, the plaintiff alleged a claim under § 10(b) of the Exchange Act. See id. at 763. Woodyard was decided before the Supreme Court had held in the McMahon case that § 10(b) claims are arbitrable. See id. at 760 (stating the date of decision as July 10, 1986); Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 220 (1987) (stating the date of decision as June 8, 1987). However, the Woodyard court stated that "even if incursions are made into the Wilko rationale, and causes of action arising under the 1934 Act are ultimately arbitrable, it does not follow that pre-dispute agreements between brokers and their public customers should be automatically enforced." Woodyard, 640 F. Supp. at 766.
475. See supra notes 237, 276-79 and accompanying text (discussing the expertise of SRO arbitrators).
476. The NASD conducts employment law training sessions. Although informative, these training sessions are too brief to educate arbitrators on the complexities of employment law, particularly federal civil rights law. See NASD Training Session Materials, Dec. 5, 1997 (on file with author). In addition, the NASD cannot guarantee that any arbitrators on a panel hearing a civil rights claim will have attended an employment law training session. Interview with Shari Sturm, NASD Senior Staff Attorney, Dec. 5, 1997.
477. See supra notes 252-340 and accompanying text (discussing the rights the claimant sacrifices by arbitrating rather than litigating).
478. See UNIFORM CODE OF ARBITRATION (Sec. Ind. Conf. on Arbitration 1996) (detailing arbitration procedures); see supra notes 239-44 and accompanying text (mentioning cases in which courts stressed the procedural fairness of arbitration).
479. See supra notes 252-340 and accompanying text (discussing the rights the claimant sacrifices by arbitrating rather than litigating).
480. See supra notes 305-40 and accompanying text (discussing the grounds for judicial review of arbitration awards).
481. See Edward Brunet, Toward Changing Models of Securities Arbitration, 62 BROOK. L. REV. 1459, 1488 (1996) (noting that short written opinions should be mandatory in securities arbitration). Brunet criticizes typical minimalist awards, because they insult the losing party by offering no explanation for the decision. See id. at 488. Written opinions would accomplish numerous benefits: they would dispel the aura of secrecy that shrouds securities arbitration, and thus foster public confidence in the forum; they would sharpen the reasoning process leading to the award; and they would aid judges reviewing awards on motions to vacate. See id. at 1488-89. Brunet also suggests that SROs require arbitrators to apply appropriate substantive law. See id. at 1491. Such a rule would lend predictability to outcomes and therefore enhance the probability of settlement. See id. It would also comport with the intent of the investor who expects the arbitrators to decide claims under applicable law. See id. at 1491-92.
482. See supra note 4 and accompanying text (discussing NASD's proposed rule).
483. See G. Richard Shell, Fair Play, Consent and Securities Arbitration: A Comment on Speidel, 62 BROOK. L. REV. 1365, 1376 (1996) (proposing that arbitration become an optional feature in customer brokerage account agreements).
484. See supra note 4 and accompanying text (discussing NASD's proposed rule).
485. See supra note 3 (discussing proposed legislation that would curb the use of mandatory arbitration). See supra note 5 (explaining that brokerage houses have already announced their intent individually to require mandatory arbitration).
486. In a letter to the SEC, three members of the House, Edward Markey (D-Ma.), Jesse L. Jackson (D-Ill.), and Anna G. Eshoo (D-Ca.), urged the SEC to eliminate the mandatory arbitration of employment discrimination claims in the securities industry. See Political Pressure, supra note 3, at 9. The letter stressed that SROs do not instruct arbitrators to apply federal discrimination law, a practice that "raises serious questions about the impartiality of arbitration of such claims." Id. (quoting the letter). Chairman Arthur Levitt responded in a letter dated March 17, 1997, that he would consider the matter. See id. In the meantime, the Securities Industry Association, a trade organization of broker-dealers, has written to the NASD urging that mandatory arbitration continue unabated in employment discrimination cases. See SIA Expresses Vigorous Support for Continuing NASD Employment Arbitration, 8 SEC. ARB. COMMENTATOR, at 9-10 (Aug. 8, 1997).